In an attempt to streamline its operations in China, Citigroup Inc. C announced a deal to sell its minority stake in China Guangfa Bank, which it acquired for roughly $620 million in 2006. The 20% equity stake will be sold to China Life Insurance Company Ltd for 19.68 billion yuan ($3 billion).
Citigroup first acquired its stake in China Guangfa Bank through a consortium investment in 2006, which included China Life Insurance Company. The transaction, which is expected to close in the second half of 2016, is subject to regulatory approvals and other customary closing conditions.
However, the financial terms of the transaction are not material to Citigroup’s earnings.
Francisco Aristeguieta, CEO of Citi Asia Pacific said, “While we are proud of our decade-long partnership with China Guangfa Bank, this transaction is consistent with the simplification of Citi and allows us to focus our resources in China on growing our core franchise further.”
Citigroup is exiting the stake to continue building its own network in China that extends across 13 cities. Further, deteriorating profitability at Guangfa Bank probably encouraged the company to exit the stake. Additionally, the cooling Chinese economy has likely driven the company’s decision.
In recent years, a number of U.S. firms have reduced their ownership in Chinese holdings. In 2013, Bank of America Corporation BAC sold its remaining 1% stake in China Construction Bank Corp. while The Goldman Sachs Group, Inc. GS divested its remaining $1.1 billion worth of stake in Beijing-based Industrial and Commercial Bank of China Ltd.
In Dec 2015, Deutsche Bank AG DB also inked a deal to sell its entire stake in China-based Hua Xia Bank. Such retreats are triggered by a dismal earnings picture and rising bad loans.
Moreover, restrictions imposed on foreign holdings in Chinese banks, with no individual entity allowed to hold more than 20% stake, make divestitures like these a feasible option for global banks looking to free up capital resources.
China Life will own 43.7% in China Guangfa Bank after the deal, according to the company’s statement. The Chinese insurer purchased a 20% stake in China Guangfa Bank as part of the 2006 deal.
Currently, Citigroup holds a Zacks Rank #4 (Sell).
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