The Goldman Sachs Group Inc. (GS) has become the latest U.S. bank to sell its stake in a Chinese company in the recent months. The company has sold 1.75 billion shares of Industrial & Commercial Bank of China Ltd. (ICBC) at HK$4.88 (63 cents), Bloomberg reported on Wednesday after communicating with people familiar with the matter. The deal helped the company raise nearly $1.1 billion in proceeds.
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. This was possible for Goldman as the Chinese government used to allow foreign banks to hold stake in state-owned banks even before their IPO during that time.
The considerable investment in ICBC makes it necessary for Goldman to report its profit or loss from this investment, at the end of every quarter. Since the fourth quarter of 2006, Goldman has made a profit of about $2.65 billion from its investment in ICBC. However, during the third quarter of 2011, the company reported a loss of $1.05 billion from that investment due to deterioration in ICBC’s share price.
This is the third time Goldman is slashing its stake in ICBC. Earlier in June 2009, the company had sold 20% of its stake for $1.91 billion and further in September 2010, it sold another 23% for $2.25 billion.
The latest stake sale by Goldman was not at all a matter of surprise for ICBC‘s management. According to the source, the company had informed ICBC about the impending deal, in advance.
Apart from Goldman, in August, Bank of America Corp. (BAC) had also divested 50% of its stake in China Construction Bank, in a deal with a group of investors, for approximately $8.3 billion. This has resulted in a pre-tax gain of $3.6 billion.
Our Viewpoint
Though it seems that Goldman has been selling its stake to reduce its non-core business exposure and book profit, we believe that the increasing concern regarding asset quality of Chinese banks along with regulatory pressure to bolster its capital ratios has been forcing it take such actions.
Goldman currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
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