Goldman Sachs Sells ICBC Stake to Raise Cash, Reduce Earnings Volatility

Goldman Sachs (NYSE: GS) seems to be getting ready to sell a chunk of its stake in Industrial and Commercial Bank of China (ICBC) in an attempt to raise some quick cash. The global investment bank, which reported a rare quarterly loss a few weeks ago, held nearly 7.6 billion common shares of ICBC at the end of 2010 and will cut down this stake by nearly a third with the sale of 2.4 billion shares. ^[1] The sale should bring in about $1.5 billion in cash for the bank. ICBC President Yang Kaisheng has acknowledged Goldman’s decision, while adding that the sale does not in any way reflect Goldman’s lack of confidence in the world’s largest bank by market capitalization. This move continues the trend of banks selling off non-core assets in order to improve capital positions, following similar moves by Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and RBS (NYSE:RBS).

See our full analysis for Goldman Sachs

Continuing trend of banks’ selling off non-core assets

The sizable investment for Goldman in ICBC makes it necessary for the investment bank to report its profit or loss from this investment at the end of every quarter. The weak global economic conditions in Q3 2011 led to Goldman having to incur a $1.05 billion loss due to the fall in ICBC’s share price. We capture the effect of the ICBC investment in our analysis for Goldman as a part of the security services & other investments division.

While we understand the reasoning behind it, we believe that the decision to sell such a huge stake in ICBC at a time when stock prices across global markets are repressed may not be a very good one for Goldman in the long run. But the decision also highlights the recent trend of financial institutions raising quick capital through the sale of equity stakes, likely at depressed prices.

In light of the near-term outlook for the global economy and the string of lawsuits concerning the bank, we are reviewing our$137 price estimate for Goldman’s stock – which is about 30% above the current market price.

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1. ICBC President: respects Goldman’s move to sell shares, Reuters, Nov 9 2011 [↩]