As stakes go, these ones are well done. Western banks which bought positions in Chinese lenders are now sitting on almost ridiculous capital gains. The nine biggest listed stakes by value are now worth an estimated $81bn, compared with a cost of $11bn. The implied profits exceed the $50bn-odd of subprime write-offs that global banks have announced so far. One bubble, it seems, could help plug the balance sheet hole created by the collapse of another.
The case for selling is strong. China’s big four banks trade on forward price/earnings multiples in the mid-20s. Accounting treatments vary – HSBC carries its investments at cost, while broker-dealer Goldman Sachs must mark its position to market. But for most banks, the stakes would have to be sold before their Tier 1 capital ratios would benefit, as Bank of America indicated last week.
Such considerations are unlikely to sway those with genuinely strategic positions. Privileged Citigroup has operational control of unlisted Guangdong Development Bank. HSBC will likely hang on to its influential equity stakes, although it is hedging its bets by expanding its own mainland branch network. The other western banks typically face lock-ups that expire in 2008-2010, although these may be circumventable with a little imagination. But most also insist that selling their small stakes would forfeit big strategic advantages.
This is not an unusual argument – Vodafone, sitting on a $10bn profit from its China Mobile stake shows no inclination of selling. And there is some evidence of tangible commercial benefits – Goldman Sachs advised ICBC on its recent deal with South Africa’s Standard Bank. But the reality is that western banks should be considering selling out, particularly since their shareholders can now buy into Chinese banks directly. Such realism does have precedents. Exxon, Shell and BP, having “anchored” Sinopec’s floatation, had exited by 2005. Alcoa, meanwhile, has just uncerimoniously offloaded its $2bn position in Chinese counterpart Chalco – so much for the “long term strategic partnership” envisioned back in 2001.
|-||-||Current stake (%)||Current value ($bn)||Cost ($bn)|
|Bank of America*||CCB||9||19.6||3.0|
|HSBC||Bank of Comms||19||16.8||1.7|
|RBS||Bank of China||4||6.5||1.6|
|ING||Bank of Beijing||16||2.7||0.2|
|UBS||Bank of China||1||2.0||0.5|
|*Excludes theoretical gain on option to buy up to 19.9%|
|**Diversified insurance company|
|***Estimate of Goldman’s proprietary position only|