Goldman Sachs has committed to keep at least 80% of its 4.93% stake in Industrial and Commercial Bank of China (ICBC) until the end of April next year, according to a joint statement by the two firms last night. This agreement comes after widespread speculation that the US investment bank may be about to sell half its stake next month and use the funds to pay back the money received under the US government's Trouble Asset Relief Program (Tarp).
In fact, ICBC's Hong Kong-listed shares have underperformed both the benchmark index and the other state-owned Chinese banks that trade in Hong Kong this year, partly because a potential sale by Goldman has acted as an overhang on the stock. Under the original lock-up agreement, Goldman would be free to sell half of its investment in ICBC, which it made before the initial public offering in October 2006, from April 28 this year and the other half from October 20.
At current market prices, the entire stake is valued at approximately HK$58.9 billion ($7.6 billion), and half of that would no doubt have been a welcome cash infusion in the current environment. However, even though Goldman paid only $2.58 billion for the entire stake in April 2006, it would not have be able to book a profit at current levels since the position is held on a mark-to-market basis. In fact, Goldman has been booking losses on the position as ICBC's share price has halved from its peak in October 2007.
Goldman reluctantly accepted a capital injection of $10 billion from the US government under Tarp in October last year. As part of the deal, the government received perpetual preferred shares that pay a 5% annual dividend until November 2013 and 9% thereafter - interest costs that Goldman would most likely rather be without. But Goldman says the two issues aren't related and because the ICBC shares are mark-to-market a sale will not create new capital that could be used to balance out a repayment of the Tarp funds.
While the new agreement prevents Goldman from selling 80% of its 16.48 billion shares before April 28, 2010, it does leave the door open for a potential sale of up to 20%, which could fetch as much as $1.5 billion at today's prices.
If Goldman pursues a sale of those shares, it will "explore all potential methods of sale that would maximise value and minimise market impact, with a preference for a private sale to investors", Goldman and ICBC said in the joint release.
However, Goldman's Asia chairman Michael Evans was quoted by various media last night as saying that the US bank is "in no rush to sell any ICBC shares" and that it has "no need to raise cash". In the joint press release, Goldman's group chairman and CEO Lloyd Blankfein said the decision to retain the bulk of the ICBC shares for another year underscores the firm's confidence in ICBC and Goldman's commitment to China.
Aside from the shareholding, Goldman also has a strategic cooperation with ICBC, which under the existing agreement will remain in place until January 2011. The cooperation with China's largest lender is focused on the sharing of global best practices in areas such as credit, market and operational risk management; corporate governance; corporate and investment banking; and asset management. Goldman also has one seat on the ICBC board.
Allianz Group and American Express, which also bought shares in ICBC as a part of the Goldman Sachs consortium in 2006 and are bound by the same lock-up arrangements, have not revised their earlier agreements and consequently will be able to sell half their stakes from April 28. In separate statements issued jointly with ICBC, the two firms, however, reiterated their commitments to the strategic cooperative relationships they have with the Chinese bank, and said that in case they decided to sell they will attempt to do so in a manner that will have a minimum market impact. The fact that their holdings are much smaller -- Allianz owns 1.93% and American Express holds 0.38% -- makes this less of an issue though.
The possibility that Goldman and its two consortium partners might sell began to attract attention in early January after UBS and Royal Bank of Scotland both sold their entire stakes in Bank of China following the expiry of a lock-up at the end of December, and Bank of America offloaded part of its stake in China Construction Bank. And the speculation has gathered pace as Goldman executives have been outspoken about their wish to repay the Tarp funds. It is not surprising, therefore, that ICBC's share price has remained under pressure.
Year-to-date, the stock is down 12.3%, which compares with a 14% gain for Bank of China and a 4% rise in China Construction Bank. Bank of Communications has fallen 4.8% and the benchmark Hang Seng Index is down 5.3%.
Goldman's share price finished 2.1% higher in New York trading over night after rallying 6.3% in the final hour. The recovery was in line with the broader market trend.
Separately, ICBC yesterday said that its net profit rose 35.2% in 2008 to Rmb111.2 billion ($16.3 billion), supported by a drop both in non-performing loans and its cost-to-income ratio. Its total assets increased by 12.4% to Rmb9.75 trillion, its return on average assets improved to 1.21% and the return on weighted average equity increased by 3.2 percentage points to 19.4%. The bank said it strengthened its position as the world's largest bank by market value during 2008 and also became the most profitable bank in the world. Over the past six years it has achieved a compound annual growth rate of 37.5% in net profit.
