Goldman Sachs bought a stake in the Industrial and Commercial Bank of China before it was cool — before it had the 2nd largest IPO in the history of the world in 2006, and before it was the largest bank in the world by market cap.
Initially, Goldman owned 4.9% of the bank, whose stock is up 22% over the year. The stock's up 57.95% since its listing on exchanges in Shanghai and Hong Kong. And adding to that good news, last month, despite signs of a slowdown throughout China, ICBC reported a 12% increase in Q1 profit, according to Bloomberg.
But not even love like that lasts forever. Goldman has been unwinding its position in this stock for years, and today the Wall Street Journal reported that the affair is officially over. Goldman could raise $9.7 billion selling its remaining ICBC shares.
It sounds like a lovely goodbye, but the relationship between Goldman and ICBC has been rocky. Goldman sold stakes in the bank five times since 2006, each time analysts have pointed to a variety of reasons — simply raising cash being one of them.
Another was that ICBC is a volatile stock — in 2010 the Goldman made $747 million on its stake. Then by late November of 2011, it had lost $905 million on the stock and was selling $1.54 billion of its stake, Reuters reported.
From a Reuters piece in 2011:
"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.
That's definitely what the Chinese government wanted to hear, but those are just words. What matters is what the government saw — banks like Bank of America and RBS selling stakes in their massive state-owned banks.
For a clue as to how much China didn't (and doesn't) like this, know that Goldman's lock-up period for selling its ICBC stake was, initially, that the stock would become free in equal installments on April 28, 2009 and October 20, 2009.
That was then changed to an agreement in which Goldman would not be able to sell 80% of its ICBC holding until April 2010.
"Today's announcement underscores our firm’s confidence in ICBC and our commitment to China. We look forward to working closely with ICBC, one of the most important financial institutions in the world, and further developing our strategic cooperation,” said Goldman CEO Lloyd Blankfein in a release at the time.
But again, those are just words, and even as the ICBC outperformed, Goldman carried on with its sales. As equities around the world have surged, Goldman hasn't needed ICBC to make a tidy sum in its investing and lending portfolio.
In Q4 2012, ICBC stock made up 42% of Goldman's equity securities revenue — all told, the bank made $1.9 billion in investing in lending.
Then, in Q1 2013, ICBC contributed just 2% of Goldman's equity securities revenue — all told, the bank made $2.1 billion in investing and lending.
You can check it out from the table below from Goldman's quarterly report.
Goldman Sachs
All that said: It's hard to argue, as analysts have before, that these sales don't mean that Goldman is seeing serious issues with China's banking system. Yes, ICBC can point to positive earnings numbers in its last report, but China bears like hedge fund manager Jim Chanos think that's all smoke and mirrors anyway.
The real question at hand, he believes, is the health of Chinese credit — are loans being made, and how are they performing?
When you ask that question, you get a different story than you do by just looking at Chinese bank earnings numbers. Non-performing loans rose by 64.7 billion yuan ($10.4 billion) to 492.9 billion yuan at the end of 2012.
Meanwhile, even as credit expands, it's getting more expensive to get a loan in China, GDP growth is slowing, and the shadow banking sector is growing as well, making it hard to track where everyone's money is going and how its performing.
That's why usually stoic government officials are actually speaking out about how worried they are.
From an FT story last month:
A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.
Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns...
“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
The government will prop up banks if everything goes wrong, but FT's Jamil Anderlini points out that a Lehman-style run isn't the only way the Chinese banking sector could go down.
There are a lot of ways to skin a cat, and in this instance, Anderlini says that a banking crisis in China could come the same way it did in the 1990s (but bigger and badder). Banks will be bogged down with tons of non-performing loans but the government will force them to lend anyway. They'll expand the country's credit without contributing to real growth.
The banks, in essence, will become zombies.
So it's possible the Goldman got out before ICBC ate its brains.
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