Bottom line: Goldman’s bet on Minsheng Bank could auger a new wave of foreign investment in depressed Chinese bank shares, on belief that Beijing will rescue the group before their bad debt becomes too heavy.
After dumping shares of major Chinese lenders in droves after the global financial crisis, at least one major foreign investor is testing the waters again, with word that Goldman Sachs (NYSE: GS) has quietly built up a large stake in Minsheng Bank (HKEx: 1988; Shanghai: 600016). But this time Goldman’s move, which has seen it quietly buy 11 percent of Minsheng’s Hong Kong-listed shares, looks likely a pure investment play rather than a strategic tie-up.
The call is a bit gutsy, since most Chinese banks are sitting on huge volumes of bad loans made under Beijing’s massive 4 trillion yuan ($600 billion) economic stimulus plan during the global financial crisis. But that gloomy outlook has been factored into Chinese stock prices for a while now, pushing their valuations to extremely low levels. So it’s possible Goldman sees a buying opportunity now and has chosen Minsheng as its bet for the play.
Goldman has been slowly building up its Minsheng stake over the past week, and held 758 million shares in the bank, equal to about 11 percent of its total Hong Kong-listed shares as of last week, according to a new filing to the stock exchange. (HKEx announcement) We should note that the majority of Minsheng’s shares are listed in Shanghai, so this particular holding represents a more modest 2.5 percent of the bank’s total shares.
Based on previous reports, Goldman appears to have started buying its Minsheng shares back in May, and has been quietly building up the stake since then. At the stock’s current price, the stake is worth about $700 million, which isn’t huge but also isn’t small potatoes.
China’s banks are currently a mess, after embarking on a lending binge that saw them make billions of dollars of questionable loans under Beijing’s economic stimulus plan as they transformed back to their old role as policy lenders. The precarious state of their balance sheets was on display this week, when big 4 lender Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) disclosed its bad loan volume jumped nearly 50 percent between 2013 and 2015 to 124 billion yuan ($19 billion) at the end of 2015.
Minsheng is China’s oldest privately owned bank, and for that reason tends to act more commercially than most of its state-run peers and is thus considered a better investment by many. Despite that, its current price-to-earnings (PE) ratio of 4.8 is roughly equivalent to that of China’s 4 biggest state-run banks, including Agricultural Bank’s current 4.6.
Goldman is no stranger to Chinese banks, having previously held a larger stake in ICBC (HKEx: 1398; Shanghai: 601398) that it acquired around the time China’s big 4 banks all went public starting around a decade ago. Others including Bank of America (NYSE: BAC) and Citibank (NYSE: C) purchased similar stakes in big Chinese banks, hoping such tie-ups could give them better access to China’s lucrative banking market.
But the foreign banks soon discovered their Chinese partners couldn’t give them much, if any, advantage in China’s highly restricted banking market. As a result most of the foreigners dumped the stakes in their Chinese partners shortly after the financial crisis, when they also needed capital to boost their balance sheets. Goldman sold its ICBC stake in stages, and ended the investment in 2013. (previous post)
This time around Goldman’s investment in Minsheng looks purely aimed at making some profits on the belief the stock is undervalued and could soon rise. Minsheng has been relatively attractive for mainland investors also due to its relatively commercial focus, and thus Goldman may be following that lead. From a broader perspective, Goldman’s move could also auger a pick-up in foreign interest towards Chinese banking stocks, on belief they are currently undervalued and Beijing will rescue them before their bad loan burdens become too heavy.
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