BBVA sells down Citic Bank stake

Spanish lender offloads a 5.1% stake in its Chinese counterpart for $1.27 billion, the latest western bank to cut back its China exposure in an effort to raise funds.
BBVA and Citic Bank have agreed to modify their strategic agreement to release the European bank from an exclusivity obligation.
BBVA and Citic Bank have agreed to modify their strategic agreement to release the European bank from an exclusivity obligation.

BBVA, Spain’s second-biggest bank, has sold a 5.1% stake in China Citic Bank for $1.27 billion in an effort to improve its balance sheet, marking another selldown of a Chinese bank by under-capitalised US and European lenders.

Citic, the parent and the controlling shareholder, has bought Citic Bank’s H shares. After the sale, Citic will increase its interest in the bank from 61.85% to 66.95%, while the Spanish bank will hold 9.9%, compared to 15% previously.

Shares of Citic Bank rose as much as 5.3% to HK$4.37 yesterday upon the news. Analysts said the news is positive and shows the parent company’s support by injecting capital to the bank.

“The transaction shows that Citic Bank is backed by, and continues to be a safe and stable business to, its parent,” said Chen Xingyu, a director of the research department with Phillip Financial Advisory, a Shanghai subsidiary of Hong Kong-based Phillip Capital Group.

The deal is latest example of a western bank cutting its stake in a Chinese counterpart after Goldman Sachs exited Industrial and Commercial Bank of China and Bank of America Merrill Lynch sold its stake in China Construction Bank.  

Based on Wednesday’s closing prices, the deal of 2.39 billion H-shares was valued at HK$9.9 billion ($1.27 billion). Given the fact that BBVA increased its stake in Citic Bank by 5% with HK$12.4 billion from Citic Group in November 2009, the Spanish lender lost HK$2.5 billion through the deals, if currency fluctuations are discounted.

BBVA, as with the rest of the European banking industry, is under capital pressure as new international capital rules increase the costs for banks holding minority stakes in financial groups and it is difficult for the region’s banks to raise funds in their home markets.

Meanwhile, the Spanish banking industry is under particular pressure because of the country’s economic slowdown and the squeeze on the banks’ lending capability, according to a September report by the European Commission and European Central Bank.

"This transaction suggests BBVA is revisiting a strategic decision made back in 2006 to build a significant presence in Asia-Pacific," said analysts at Societe Generale, given the bank's more limited capital resources, the effects of the crisis on top of less attractive economic prospects in China. 

The analysts also noted the difficulties of minority investments in other banks: "They tie up significant economic capital, typically fail to generate expected synergies due to lack of notable influence on the affiliates and generate earnings on paper but do not generate material dividends or operating cash flow."

In addition to the sale, BBVA and Citic Bank have also agreed to modify their strategic agreement to release the European bank from an exclusivity obligation restricting it to cooperating with Citic Bank in China.  

The sale is expected to complete by year-end, according to a statement on BBVA’s website. The deal and the revision of the agreement are subject to required regulatory approval.

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