HONG KONG Goldman Sachs Group Inc (GS.N) is selling up to $1.54 billion worth of Industrial & Commercial Bank of China Ltd. (1398.HK) stock, the Wall Street firm's third sell-down of the world's largest bank by value.
Sharp declines in the value of such investments caused Goldman to post its second quarterly loss as a public company less than a month ago. The bank booked a $1.05 billion paper loss on its ICBC (601398.SS) stake alone.
Foreign banks selling shares in China's banks is a sensitive issue in Beijing, which has not taken the sales lightly since they began in 2009.
Bank of America (BAC.N), RBS (RBS.L) and UBS (UBS.N) are among the foreign banks that have sold large stakes in Chinese banks over the past few years. Such sales have been an attractive way to raise capital or reduce earnings volatility.
Goldman made a point to express its commitment to ICBC last year when it was first authorized to sell the shares. Goldman had agreed to hold onto the position for a set amount of time when acquiring the ICBC stake in 2006.
Goldman's latest sell down came with ICBC's support, and the New York bank told the Chinese lender the transaction was coming, according to a source familiar with the matter.
Sources familiar with matter told Reuters on Wednesday that Goldman was selling 2.4 billion shares, or 2.8 percent of ICBC's Hong Kong listed stock. ICBC, officially known as Industrial and Commercial Bank of China Ltd, is one of China's Big Four state-backed banks. All four banks were technically insolvent roughly five years ago, crippled by bad loans built up over many years.
Goldman invested in ICBC before its 2006 dual listing in Hong Kong and Shanghai. China's Big Four are now among the largest banks in the world by market value.
IFR, a Thomson Reuters publication, was first to report the sale, which comes at a time when ICBC shares have recovered about 50 percent from October lows.
A source said Goldman was executing the sale to reduce its market exposure to the stake. The Wall Street bank notified the Chinese bank about the impending sale, another source said.
"It's likely a reflection of Goldman's own desire to book some profit and hedge their risk rather than a negative view on Chinese banks," said Warren Blight, lead analyst for Chinese bank research at Keefe, Bruyette & Woods in Hong Kong.
The sale also comes at a time when several European and U.S. banks are under pressure to raise capital. In August, Bank of America sold a $8.3 billion stake in China Construction Bank (601939.SS) and a Wall Street Journal report this week said BofA was considering cutting the stake further.
Goldman first bought 4.9 percent of ICBC for about $2.6 billion before the 2006 IPO, which was then the world's biggest public offering. Goldman has raised a total of $5.9 billion through its three sell-downs and its stake, still worth around $5 billion after the sell down, is worth twice the original investment.
Yet as equity markets have swung wildly in recent years, Goldman's ICBC stake has led to big paper gains and losses that add volatility to its quarterly earnings.
So far this year, Goldman has lost $905 million on the ICBC investment, including a $316 million gain in the first quarter, followed by two much-larger losses. In 2010, the bank earned $747 million on the stake.
Goldman is offering the shares in a range of HK$4.88-5.00 each, a discount of between 3.7 and 6 percent to the last traded price, a term sheet seen by IFR showed.
ICBC President Yang Kaisheng said that he respects Goldman Sachs decision to sell the stake.
"Goldman Sachs have told us that they still recognize the investment value of ICBC (shares)," Yang said.
Goldman Sachs is the sole book runner for the deal. The bank declined to comment on the transaction.
(Reporting by Fiona Lau and Kelvin Soh in Hong Kong; Additional reporting by Charlie Zhu, Kelvin Soh and Terril Jones in Hong Kong and Lauren Tara LaCapra in New York; writing by Denny Thomas; Editing by Chris Lewis, Muralikumar Anantharaman, Michael Flaherty and Bernard Orr)