Goldman Sachs (NYSE:GS) raised $1 billion through an overnight sale of shares in Industrial & Commercial Bank of China (ICBC) this Monday, making this the fourth major stake sale by the U.S.-based investment bank in the world’s largest bank by market cap since it acquired a 4.9% stake in August 2006. 
With this deal, Goldman’s stake in ICBC has fallen to under 1%, with its equity portfolio left with less than 3 billion shares of the Chinese bank. Interestingly, this is the first instance in which Goldman has sold a stake in ICBC without any immediate need to raise capital – something that points to a change in Goldman’s outlook for ICBC’s share price. Nonetheless, the ICBC investment has paid off handsomely for the bank, with Goldman raising $8.6 billion through these sales from a stake which cost it $2.6 billion in 2006.
We maintain a $146 price estimate for Goldman’s stock – slightly above current market prices.
The size and importance of Goldman’s investment in ICBC can be best understood by the fact that the investment bank reported its revenues from the stake as a separate item in its income statement. And the value lost due to a drastic fall in ICBC’s share price in mid-2011, can be quite easily deduced to be one of the biggest factors responsible for what was Goldman’s second ever quarterly loss in Q3 2011. We model the impact of ICBC’s stake on Goldman’s share price by including it as a part of the latter’s equities business shown in the chart above.
Goldman sold the first big chunk of its ICBC stake in June 2009, to raise capital towards returning the $10 billion aid it received from the government as a part of the Troubled Asset Relief Program (TARP).  The second sale came after two years in November 2011, when the bank was struggling to make money in an economy plagued by deteriorating debt conditions in Europe (see Goldman Sachs Sells ICBC Stake to Raise Cash, Reduce Earnings Volatility). The third stake sale came within months when Goldman offloaded a substantial chunk of its remaining shares to Temasek in April 2012 (see Goldman Raises $2.3 Billion From ICBC Stake Sale).
The recently completed fourth transaction brings Goldman’s stake in the Chinese banking giant to under 1%, and it is quite possible that Goldman may decide to discontinue the practice of reporting ICBC-related income separately from the rest of its equities business beginning next quarter. But while this is only a possibility, the sale would have some definite impacts on Goldman’s figures for this quarter and the whole year. While there will be a one-time boost to the bottom line from the sale, the size of the bank’s equity trading portfolio will also shrink by $1 billion. The chart below represents the trading assets held by Goldman’s equities business. You can see how a change in its forecast affect’s the bank’s share price by making changes to it.Notes:
- Goldman Raises $1 Billion in ICBC Share Sale, The Wall Street Journal, Jan 29 2012 [↩]
- Goldman Sachs Raises $1.91 Billion in ICBC Stock Sale, Bloomberg, Jun 2 2009 [↩]