Image credit: Remko Tanis.
On Monday, Goldman Sachs sold its remaining 6.7 billion yuan ($1.1bn) stake in the Industrial and Commercial Bank of China (ICBC) for 2.5 percent less than market value per share. Why?
ICBC is the world’s largest bank by market value and its most profitable lender. Goldman first bought shares in the bank seven years ago.
According to Bloomberg, Goldman, along with Citigroup and Bank of America, are rushing to offload Chinese banking holdings due to new rules known as Basel III, which make it more expensive to hold minority stakes in a bank.
“Many foreign banks are facing capital shortages with the new Basel requirement, so I’m not surprised that they dumped holdings in Chinese banks on which they’ve already made massive returns,” Chen Xingyu, an analyst at Phillip Securities Group, told Bloomberg. “The exit strategy has been on the table for these foreign investors since the very beginning because they know these aren’t real strategic investments.”
As Quartz reports however, the new Basel requirement might not be the only reason Goldman wants to get out of Chinese banking.
Goldman’s initial 4.9% stake in ICBC, which it bought in 2006, was seen as a strategic move. Charles Geisst, a finance academic, told the Wall Street Journal that “American banks wanted to get a piece of Chinese banks because they knew the Chinese were quite capable of avoiding Wall Street to raise capital. This was a way of getting in.”
But in reality, it hasn’t panned out that way. Goldman’s fees in China for services such as underwriting have been lackluster at best, and it has been steadily selling off bits of its ICBC stake. It isn’t alone—UBS, Royal Bank of Scotland, Bank of America, Citigroup and HSBC have all divested stakes in Chinese banks recently.
Although Goldman has made almost triple its initial $2.58 billion investment in its six ICBC sell-offs, the investment has at times been volatile. In 2010, Goldman made $747 million on its ICBC stake and then lost $905 million in the following year.
Quartz also identifies risky loans, particularly the growing local government debt bubble, as a potential factor in the sale. Goldman, which has proved adept in recent decades at making huge profits while helping to inflate bubbles and then even more money when they pop, may know something we don’t.