Goldman Trims Stake in ICBC - Analyst Blog

By Zacks | January 30, 2013 AAA

Earlier this week, Reuters reported that The Goldman Sachs Group Inc. (GS) is lowering its exposure in the Chinese economy yet again. The company is selling nearly $1 billion worth of shares that it holds in Beijing-based Industrial & Commercial Bank of China Ltd. (ICBC).

According to the source, Goldman commenced the sale of 1.35 billion shares of ICBC at HK$5.77 (74 cents) per share for $1.0 billion. Notably, the shares will be sold at a 3% discount to the closing price of ICBC on Jan 28.

Prior to ICBC's initial public offering (IPO), Goldman had made investments in the company, back in 2006. The company invested $2.6 billion to own 4.9% stake in ICBC. The investment was possible for Goldman as during that time the Chinese government permitted foreign banks to hold stake in state-owned banks even before their IPO.

Every quarter, Goldman reports profit or loss from its investment in ICBC separately as it has substantial investment in that firm. In the third quarter of 2011, Goldman reported a loss of $1.05 billion from the ICBC investment, due to deterioration in ICBC's share price. This led to an overall loss of $517 million from the investment in 2011.

In 2011, Chinese bank stocks performed poorly, which reflected in the slowing Chinese economy. However, the share prices of ICBC have been showing an uptrend since the beginning of 2012, indicating potential profits on the investments. Therefore, in 2012, Goldman recorded $408 million as gains from its investments in ICBC.

Prior to this sale, in Apr 2012, Goldman sold nearly $2.5 billion worth of shares in ICBC. The company sold 3.55 billion shares at HK$5.05 (65 cents) per share to Singapore state investor, Temasek Holdings Pte for $2.3 billion. The remaining $200 million worth of shares were sold to other institutional investors.

This is the fifth time that Goldman is slashing its stake in ICBC. Through these sale transactions, the company has raised about $8.6 billion. After the latest sale, the company is now left with 2.95 billion shares in ICBC, approximately 3.4% of ICBC's Hong Kong-listed shares and 0.8% of its total share base.

Over the last few years, several banks including Goldman and Bank of America Corp. (BAC) have been selling off their stakes in Chinese banks either to raise additional capital or to lower the volatility of the earnings.

Our Viewpoint

Though it appears that Goldman has been selling its stake to reduce its non-core business exposure and to book profit, we believe that the increasing concerns regarding the asset quality of Chinese banks is one of the reasons for the stake sale. Moreover, regulatory pressure to strengthen its capital ratios is forcing the company to undertake such measures.

Goldman currently retains a Zacks Rank #3 (Hold). Among peers, the companies with a Zacks Rank #1 (Strong Buy) include Evercore Partners Inc. (EVR) and Greenhill & Co. Inc. (GHL).

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