Goldman trumps HSBC in financial Chinese chequers
By John Foley
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
Who’s the smarter investor in China – HSBC or Goldman Sachs? The UK lender’s business in China has grown impressively. But based on their recent sale of stakes in two of China’s biggest financial groups, the Wall Street investment bank has the edge.
Goldman just sold its remaining stake in ICBC for around $1.1 billion, seven years after first buying shares in the Chinese megabank. By holding on through ICBC’s stock-market listing and selling its shares in slices, Goldman has turned an initial investment of $2.6 billion – split between the bank, its clients and some employees – into $9.9 billion. Add dividends of $1.7 billion, according to public filings, and Goldman’s profit is 3.5 times what it put in.
On that basis, HSBC’s exit from insurer Ping An in February was a bigger triumph. It first invested ten years ago, so it has had more time to ride the upward trajectory of China’s insurance sector. Selling out for $9.4 billion, and factoring in around $550 million of cumulative dividends, HSBC’s $1.8 billion investment looks to have made a 4.5 times return.
Such multiples, though, don’t reflect the length of the investment. Try another measure: internal rate of return, which weights cash flows by how long they took to come to fruition. On that basis, Goldman’s investment in ICBC, excluding the effect of taxes, created an annual gain of 36 percent. HSBC’s was a lesser – but still impressive – 23 percent.
Why the difference? It might be to do with expectations. Both banks ploughed resources into beefing up their partners’ systems and risk management. But Goldman never had a prayer of owning ICBC, which is many times the Wall Street firm’s size. It invested once, and sat tight. The stake may have earned some goodwill, but the benefits were largely financial.
HSBC, by contrast, went back for more, tripling its initial investment in Ping An by the end of 2005. It hoped China would one day let foreign financial groups buy even more – or that it would develop a partnership with Ping An. Instead, China’s financial sector remains effectively closed.
Still, shareholders in both can feel content. HSBC’s average pre-tax return on equity since 2002 has been 16 percent; Goldman’s 22 percent. While Goldman comes out better, both can claim their Chinese investments were their best features.