Citigroup (NYSE:C) announced that it will sell its 20% stake in Chinese regional bank China Guangfa Bank for $3 billion to China Life Insurance Company. The bank had been trying to unload this stake for several months, as China Guangfa bank abandoned its plans to go public in Hong Kong. The deal is expected to close in the second half of 2016, and is the latest development in an ongoing effort by Citigroup to simplify its operations. Citigroup originally paid $610 million for the stake in 2006, so the deal represents a pretty nice $2.4 billion return on its investment.
IBM (NYSE: IBM) is also unloading its stake in the Chinese bank, although IBM's stake is considerably smaller at a still-significant $554 million. When this is combined with Citigroup's sale, China Life will own 43.7% of the bank, making them the lender's largest shareholder.
Does it matter?
Aside from the obvious investment profits, the sale benefits Citigroup in a few ways. First, it frees up a significant amount of capital that Citigroup can now use to expand its core business in China, which it plans to do with the proceeds, according to a statement by the bank. Also, Basel III rules make it disadvantageous for banks to keep minority stakes in other lenders, as they are treated unfavorably when calculating capital ratios. So, this sale allows Citigroup to put this money to work in a manner that's more beneficial to its capital structure.
Finally, and perhaps most significantly, it helps to mitigate one of Citigroup's largest risks: foreign uncertainty. Citigroup has the most international exposure of the "big four" banks, with about $280 billion in international loans out of the bank's $645 billion loan portfolio. This adds another layer of risk to the bank's operations, as it makes the bank more vulnerable to currency fluctuations as well as political and economic uncertainty.
Earlier in February, Citigroup announced that it was exiting its retail banking operations in Brazil, Argentina, and Colombia, so this is another step in the right direction. Yes, Citigroup plans to use the proceeds in China, but it's certainly less risky to invest in Citi's core Chinese businesses than it is to maintain a large stake in a bank whose operations it doesn't control.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.