March 19, 2012

Citigoup has sold its stake in Chinese lender Shanghai Pudong Development Bank , booking a profit of around $349 million as the U.S. lender looks to shore up its balance sheet after failing a U.S. Federal Reserve stress test.

Citibank sold 506 million shares, or 2.71 percent, of Pudong Development Bank to institutional investors, the Shanghai-based lender said in a statement to the Shanghai Stock Exchange.

Based on Pudong Bank's closing share price of 9.28 yuan on Monday, that stake would have been worth around $743 million based on current exchange rates.

Citi said it expected total proceeds of $668 million before tax, suggesting it sold the shares at around a 10 percent discount.

"Citi's move is surprising, but reasonable," said Jin Lin, analyst at Orient Securities, adding the U.S. bank was likely focusing on its investment in China Guangfa Bank, in which it has a 20 percent stake.

Citigroup and MetLife were among those which led a list of financial institutions that failed the Federal Reserve's latest round of stress testing, a shock result for two companies that were widely expected to return billions of dollars in extra capital to shareholders soon.

The Fed said Citigroup was among one of the banks which fared worst under a hypothetical shock, sending its minimum Tier 1 common capital ratio as low as 4.9 percent, below the Fed's 5 percent threshold.

Citi's result was a substantial setback, as going into the tests some analysts felt it had a better chance of a positive surprise than any other financial institution.

Other banks that have held or hold stakes in major Chinese lenders include Bank of America, RBS and UBS . All of them have sold or watered down their investments over the years, mostly to deal with trouble back home.

Bank of America Corp said in November that it plans to sell most of its remaining stake in China Construction Bank Corp for $6.6 billion cash in the ailing bank's latest move to boost capital levels.

Andrew Au, Chief Executive Officer of Citi China, said China remains a top priority for the bank and cooperation with Pudong Bank will continue.

Citi, which has branches in 13 cities in China, said last month it had received regulatory approval to issue credit cards in China, the first non-Asian bank to receive permission.

It also signed an agreement with Shanghai-based Orient Securities in June to launch a securities joint venture in the country.

About 40 foreign banks have locally incorporated units in China, allowing them to carry out yuan-related business, since 2007 when the first batch of banks were approved. ($1=6.3227 Chinese yuan) (Reporting by Samuel Shen, Chen Yixin, Jason Subler and Kazunori Takada; Editing by Mike Nesbit)

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