Hang Seng Bank is selling a 5% stake in Industrial Bank for 12.73 billion renminbi (US$2.03 billion), a transaction that will boost its regulatory capital position.

The transaction, announced on February 10, involved the sale of about 952.62 million ordinary shares in Industrial Bank at 13.36 renminbi apiece, representing a discount of about 7% to the closing price of Industrial Bank's shares on the Shanghai Stock Exchange (SSE) on the same day. The sale pared Hang Seng's holding in Industrial Bank down to 5.87%.

It is estimated that Hang Seng will realize a net gain of about HK$2.8 billion (US$359 million) from the share sale, representing the difference between the consideration and its carrying value as at December 31 2014 in Hang Seng and group's financial statements. This, together with the reclassification of the related cumulative foreign exchange and revaluation reserve, less any tax effect and expenses on the transaction.

Hang Seng initially acquired shares in Industrial Bank in 2004 for 1.7 billion renminbi and at that time, Hang Seng held a 15.98% stake in the mainland bank's enlarged capital. This was then diluted when Industrial Bank was listed on the SSE.

Hang Seng subsequently acquired further shares in Industrial Bank for 2.3 billion renminbi in 2010 by subscribing in its rights issue, but was once again diluted as a result of a private placement by Industrial Bank in early 2013.

The total gross cash dividends received from Industrial Bank since Hang Seng's investment amounted to HK$4.4 billion.

The transaction is estimated to raise the group's common equity tier 1 (CET1) and tier 1 capital ratios by about 2.3 percentage points and the total capital ratio by 3.8 percentage points on the group's published financial statements for the period ended June 30 2014.

The group's CET1 and tier 1 capital ratios, as of June 30 last year, were both 11.8% and the total capital ratio was 14.2%. The deal is estimated to increase the group's Basel III end point basis pro forma CET1 capital ratio by 4.1 percentage points.

Hang Seng, in its stock exchange filing, says the sale represents an opportunity to realize part of its investment in Industrial Bank, taking into account the current market conditions in the A-share market and Hang Seng's long-term strategic objectives. This is also aimed at strengthening the bank's regulatory capital position and its ability to meet future regulatory requirements.

The bank expects to use the net sale proceeds principally to support future business expansion and for other purposes. It says it will regularly review its remaining shareholding in Industrial Bank as part of its investment strategy and capital management processes, taking into account its planned future business growth, regulatory requirements, market conditions and delivery of sustainable long-term value to shareholders.

Goldman Sachs Gao Hua Securities Company arranged the share sale.