Goldman’s ICBC Sale: Good For China Banks

Temasek boosts ICBC stake

Investors are still pondering Goldman Sachs’ (NYSE: GS) sale this week of its remaining stake in Chinese banking giant ICBC (HKEx: 1398; NYSE: 601398), trying to figure out if the move is a positive or negative for China’s wobbly banking sector. My view is that the move is indeed positive, which is being supported by the latest word that a big portion of Goldman’s stake was purchased by Temasek, the massive Singaporean sovereign wealth fund. Before we go any further, it’s worth repeating what I’ve said before about the buying spree by western banks in their Chinese counterparts that took place about a decade ago. That spree saw Goldman, along with other major names including Bank of America (NYSE: BAC), HSBC (HKEx: 5; London: HSBA) and Citigroup (NYSE: C), all buy major stakes in Chinese lenders as many of those banks cleaned up their books and ultimately went public.

Most of the western banks saw their investments not only as financial plays, but also as a chance to find strong local partners to help them tap the huge China banking market that was starting to open up to foreign investment. But in the years that followed, most of these big western players found they had little in common with their Chinese partners, most of which were massive state-run lenders that still took their orders from Beijing.

The failure to get any strategic advantage from the partnerships, combined with a sudden need for cash after the financial crisis of 2008, thus led many of the major western banks to dump their shares over the last 3-4 years. Goldman is the latest to join that trend, selling its remaining shares in ICBC earlier this week for $1.1 billion. (English article) The sale completed an official divorce between the 2 sides, which had been happening over the last 3 years as Goldman gradually sold down its ICBC stake purchased in 2006.

While Goldman has expressed its clear lack of interest in Chinese banks for now, the opposite is true for Temasek, which picked up about 280 million ICBC shares from Goldman sale, according to a Chinese media report. (Chinese article) Temasek also purchased another larger chunk of ICBC shares that Goldman sold about a year ago, meaning the Singaporean wealth fund now holds about 7 percent of ICBC shares, according to the report.

This changeover from Goldman to Temasek looks like a good sign to me, as it shows that ICBC is still attractive as a pure investment play to foreign institutional buyers, even if it looks unattractive to foreign banks. Personally speaking, I would never consider any of China’s big 4 state-run lenders as a good strategic investment partner, since all are still too closely associated with the central government.

Instead, I would recommend the big foreign banks look for China partnerships with smaller, more commercially-driven local lenders like Shanghai-based Bank of Communications (HKEx: 3328; Shanghai: 601328) and Pudong Development Bank (Shanghai: 600000). That’s exactly what the big foreign lenders have done, leaving shares of the so-called big 4 lenders for institutional buyers like Temasek who are only want good returns on their investments.

Some observers have pointed out that Chinese banking shares currently trade at very low multiples due to bad loan concerns, and thus may make very attractive investments right now. I personally am not a big fan of these banks, but I do see the logic in this argument and might consider such an investment if I bought Chinese stocks. These banks may indeed be looking at a looming bad loan crisis; but history has shown that Beijing will bail them out if and when such a crisis occurs, significantly minimizing the risk to minority foreign investors.

Bottom line: Temasek’s boosting of its stake in ICBC is a positive signal for Chinese banks, reinforcing the view that their shares are currently undervalued.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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