Bank of America Raises Stake in China Construction Bank

Posted by: Frederik Balfour on November 18, 2008

At first glance, the decision by Bank of America to nearly double its stake in China Construction Bank [CCB]seems like a curious move. After all, China’s economy is just starting to cool and its property sector could be poised for a major downturn. And considering most banks in the U.S. are desperately trying to save cash, the roughly $7 billion B of A will spend boosting its ownership to 19.15% from 10.75% is a lot of money.

But the B of A purchase may prove to be quite savvy. The Charlotte, N.C. bank made out like a bandit with its initial stake in CCB in 2005 before it went public for about $3 billion. CCB’s shares soared, and the stake [including additional shares purchased in June this year for $1.9 billion] was worth about $14.9 billion on September 30. The lock up period on those shares is expired so B of A could realize a hefty profit any time it wishes, and by picking up additional shares in CCB, B of A could still maintain a significant strategic stake. B of A is locked into it new purchase of shares until 2011.


But the market didn’t welcome the news. CCB’s Hong Kong traded shares skidded 5.6% on Tuesday over uncertainty about whether B of A will eventually unload its initial stake or not. Still, one banking analyst I spoke to on background said the deal looks pretty attractive, priced at a more than 30% discount to its market price, thanks to an option agreed upon back in 2005, equal to about 1.2 times CCB’s book value on Sept. 30.

However she cautions that CCB could see earnings fall as much as 21% in 2009, as margins get squeezed by government administered interest rate cuts and non performing loans start to climb. CCB has the highest exposure to property loans among its peers, accounting for about 30% of its portfolio. Property developer loans are looking particularly vulnerable as housing sales volumes have nearly halved. At the end of the third quarter, CCB’s non performing loans as a portion of outstanding loans were just 2.17%—thanks to the carving out of bad loans back in 2005 before the company listed. However CCB’s ability to weather an economic downturn is yet untested, which is part of the reason why its shares are down more than 40%, this year.

Reader Comments

Andy

November 20, 2008 1:31 AM

China has again proved that it is open to trade and investment. Now I wonder if this can happen in the US. I doubt the Chinese can buy US banks without congress blocking the deals. Well, maybe they can now because the US banks have become so toxic that not even the Americans want them.

laosi

November 20, 2008 7:51 PM

The Charlotte, N.C. bank made out like a bandit with its initial stake in CCB in 2005. A hefty profit of 10 billion by
2008.

laosi

November 20, 2008 7:53 PM

The Charlotte, N.C. bank made out like a BANDIT with its initial stake in CCB in 2005. A hefty profit of 10 billion by
2008.

Ron Chapman Jr.

December 7, 2008 2:58 PM

I think there is a good chance this will be seen as a bad idea in a couple of years...

www.ronchapmanjr.com

Edward Eng

September 30, 2009 2:20 AM

Ron,

Why do you think this might be a bad idea in a couple of years? What is your reasoning?

-Ed
http://www.getchee.com
http://blog.getchee.com

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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