BBVA sells China Citic Bank stake for $1.7b

The latest step in its long-running divorce of China's 7th biggest bank. The buyer of the 4.9% stake is Chinese property firm Xinhu Zhongbao.

Spain's Banco Bilbao Vizcaya Argentaria has agreed to sell 4.9% of China Citic Bank Corp. to Chinese real estate firm Xinhu Zhongbao for HK$13.136 billion ($1.69 billion) to help bolster its balance sheet, the latest step in its divorce with China's seventh-largest bank by assets.

The deal announced on Friday follows BBVA's December sale to China Citic of a 29.68% stake in Citic International Financial Holdings, which is China Citic's unlisted Hong Kong-based unit, for about €845 million ($948 million). In 2013, BBVA trimmed its stake in China Citic to just below 10%. 

BBVA's remaining 4.7% looks earmarked for sale as soon as feasible, said a person familiar with the situation.

Other Chinese banks have been ditched by undercapitalised US or European financial institutions. In 2013 Goldman Sachs exited Industrial and Commercial Bank of China and Bank of America Merrill Lynch sold its remaining stake in China Construction Bank

New Basel III rules makes holding minority investments in other banks less attractive because it ties up capital. Also alliances with Chinese banks have broadly failed to deliver; generating paper profits but not material dividends or operating cash flow.

BBVA earlier sold another 5.1% stake in China Citic for $1.27 billion. In that sale in October 2013 Citic, the state-owned parent group, bought China Citic’s H shares. BBVA and China Citic Bank also agreed to modify their strategic agreement to release the European bank from an exclusivity obligation restricting it to cooperating with China Citic in China. 

BBVA, Spain’s second-biggest bank by market value, is reversing a decision made in 2006 to build a significant presence in the Asia-Pacific region due to its more limited capital resources following the eurozone debt crisis. China's more uncertain economic outlook is another influencing factor.

Its latest stake sale will mean a net gain for BBVA of about €400 million and will improve its common equity tier 1 fully loaded capital ratio by more than 20 basis points, equivalent to about €800 million, helping it better weather financial turmoil in Europe. 

"We see this as a strategically sensible step, which builds on the Q4 disposals. While we welcome BBVA’s move, we also note that the financial impact is not material in the context of the group," said Jernej Omahen, an analyst at Goldman that follows BBVA.

Growth has been slowing at China Citic as the bank has started to de-lever and build up provisions. Third quarter net profit fell 2% year on year. Non performing loans are rising particularly from wholesale and retail loans especially from commodity and manufacturing sectors. 

UBS was the financial advisor to BBVA and helped them find the buyer.

Middleman

The deal is structured so that UBS’s London Branch initially buys the shares for HK$13.136 billion, or HK$5.73 per share. UBS will then transfer the China Citic shares to Xinhu Zhongbao. China Citic is listed in both Shanghai and Hong Kong.  

At HK$5.73 a share, the sale was at a 3% discount to China Citic's closing price in Hong Kong at HK$5.91. 

Discussions have been ongoing for more than a year, according to a person familiar with the negotiations. In the end, BBVA chose this exit route because it maximised value and would be favoured by regulators and the parent Citic Group since the new owner is a mainland Chinese firm. A trade sale also has less of an impact on China Citic’s share price than a series of block sales on the open market would, the person said.

To be sure, BBVA still has a 4.7% stake in China Citic which could also be divested, an eventuality that could weigh on the share price going forward.

There were other interested parties at various points that fell away leaving BBVA and Xinhu Zhongbao to enter bilateral negotiations. 

The sale still needs official regulatory approval but the parties have already sounded out the China Banking Regulatory Commission for its blessing, the person familiar with the situation said. CBRC was comforted by the fact that besides property, Xinhu Zhongbao also has financial interests. 

In a statement, BBVA said it expects the sale to complete in the first three months of this year.

¬ Haymarket Media Limited. All rights reserved.