After a decade-long investment, Citi is selling its Guangfa stake for Rmb6.39 a share, or a total of Rmb19.684 billion, according to a stock exchange filing by China Life on Monday.
The cash deal comes as banks globally reassess their equity holdings in the light of new capital rules, which are making it more expensive for banks to own minority stakes in other banks.
But Basel III is only part of the story as Citi looks to recalibrate its banking strategy globally.
“This transaction is consistent with the simplification of Citi and allows us to focus our resources in China on growing our core franchise further,” Francisco Aristeguieta, chief executive officer of Citi Asia Pacific, said.
In recent years Citi has zoomed in more on affluent consumer banking clients living in cities, selling them a mix of financial products via bank branches and digital platforms. It is a global strategy for the New York-headquartered bank and one it wants implemented in China too.
In 2007 Citi was among the first international banks to locally incorporate in China. In 2012, Citi became the first global bank to launch a sole-branded credit card in China. Citi has operations across 13 cities in China.
Citi first bought into Guangfa in 2006 for about $620 million when it was known as Guangdong Development Bank, leading a consortium that acquired 85% of the lender. The investment provided Citi with knowledge of the China market.
IBM, which formed part of that consortium along with China Life Insurance, Citic Trust, and State Grid, is selling its 3.686% stake to China Life concurrently with Citi for $553.6 million.
IPO route closed
The sale price for the 20% stake of Rmb6.39 per share represents a multiple of 1.01 times its book value per share, based on Guangfa's net asset book value on December 31 of Rmb97.54 billion. That is broadly in line with other recent bank deals in China, which have closed at a median price-to-book-value ratio of 1.14 times.
The agreed price also represents a 15% premium to the average book-price-to-share-price multiple of China A-share-listed commercial banks and a 60% premium over H-share-listed commercial banks, which currently trade at a share price multiple of 0.63 times book value.
The Guangfa stake sale is expected to close in the second half of 2016, subject to regulatory approvals. UBS advised China Life while Citi advised itself on the transaction.
Citi had hoped to spin off Guangfa via an initial public offering but choppy Chinese stock markets made a trade sale a more viable option.
Chinese bank price-to-book ratios – a measure of market price relative to net asset value – are trading at around their lowest levels since the Asian financial crisis of 1998. The ratio, Bloomberg data shows, rose to as high as 3.5 times in early 2000 and barely touched 1.1 times during the global financial crisis of 2008.
Price-to-book ratios are a widely tracked valuation measure for banks and insurance companies alike because they provide some indication of a financial group's ability to use its capital to create value. They also reflect its underlying financial condition relative to its market price.
Chinese banking stocks have been hit particularly hard for some time in Hong Kong, trading well below book value due to worries over slowing Chinese economic growth and rising non-performing loans.
Guangzhou City-headquartered Guangfa, which has 759 outlets across the PRC and the Macau Special Administrative Region, lost about $300 million in the year before Citi got involved but made roughly $700 million in the first year after the consortium began running it.
"It was a very challenging period, and probably one of the hardest jobs I've ever had," Michael Zink, Citi’s head of Asean told FinanceAsia when he announced his retirement. Zink was president and executive director of China Guangfa Bank between 2006 and 2010. "Citi learned a lot about operating in China and we made a contribution to turning the bank around."
Since then Citi has grown its China business and now employs more than 8,000 people in the country. China is also one of the eight markets in Asia where Citi generates in excess of $1 billion in revenues.
The US bank has generated over $2 billion of profit from its investment in Guangfa, but was carrying the stake at book value, so the sale will not be material to earnings.
Citi is due to announce its first quarter results on April 15.