Bloomberg News

BofA Said to Plan Sale of China Construction Bank Stake

June 21, 2011

(Adds analyst’s comment in 21st paragraph.)

June 21 (Bloomberg) -- Bank of America Corp. may sell some of its $21 billion stake in China Construction Bank Corp. to bolster capital before new international standards take effect, said three people briefed on the plans.

Bank of America, the biggest U.S. lender by assets, wants to keep about half its CCB shares so it can remain a strategic investor in the world’s second-biggest bank by market value, said two of the people, who declined to be identified because the plans are private. CCB led declines among Hong Kong-listed Chinese banks today.

“This is obviously a forced sale -- it’s a big chunk of a valued enterprise in an attractive place in the world,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management, with $465 million in assets, including Bank of America shares. “It’s a relatively poor time to be selling because the Chinese stock market hasn’t done well recently.”

Selling the shares could help Bank of America raise capital to comply with tougher minimums that may be imposed by regulators as they try to prevent a repeat of the 2008 financial crisis. The Basel Committee on Banking Supervision is considering plans that may include a surcharge on the largest lenders, people briefed on those talks have said.

Ties That Bind

Shares of CCB dropped 3 percent in Hong Kong as of midday trading break, extending its decline this year to 8.3 percent. Still, that values the Beijing-based company at about $205 billion, a more than threefold increase from its market capitalization at the time of its October 2005 initial public offering in Hong Kong.

Bank of America, which began investing in CCB before the IPO, owned 25.6 billion shares valued at $21 billion as of March 31, the Charlotte, North Carolina-based lender said in a May regulatory filing. The stake, which is the U.S. bank’s largest holding by market value, equals about 10.6 percent of CCB’s Hong Kong-listed shares, according to Bloomberg data. A lockup period in which Bank of America is prohibited from selling most of its shares expires in August.

“It’s a strategic relationship and it will continue to be one for a long time,” said Larry DiRita, a spokesman for Bank of America. Yu Baoyue, a spokesman for CCB, declined to comment.

The U.S. bank may decide to divest more holdings, with the sale taking place later this year, the people said.

Asset Sales

Bank of America has been selling assets including its Balboa insurance unit, First Republic Bank and holdings in BlackRock Inc. to boost capital and focus on core clients. The firm can build capital through earnings and doesn’t need to issue stock, Chief Executive Officer Brian T. Moynihan, 51, said last week. Capital surcharges on the largest banks may crimp lending and drive off investors from financial firms, he said.

China Construction Bank had annual profit growth of 33 percent since 2007 and is forecast to increase net income by 23 percent this year, according to analysts surveyed by Bloomberg.

Bank of America was the second-biggest shareholder in CCB at year-end, trailing only the Chinese government’s 59 percent stake in its Hong Kong shares, according to Bloomberg data. Temasek Holdings Pte is the third-largest investor with a 7 percent stake. CCB has 240.4 billion shares outstanding in Hong Kong and 9.6 billion yuan-denominated shares listed in Shanghai.

Bank of America fell 8 cents to $10.60 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have dropped 21 percent this year, the worst performance in the 24-company KBW Bank Index, as housing-related costs weighed on results.

‘Chunk of Gold’

“People are focused on Bank of America getting beyond its legacy issues, and this happens to be a nice chunk of gold they have that can help them get there,” said Jonathan Hatcher, a credit strategist at Jefferies & Co. in New York.

Potential buyers of the CCB stake may include sovereign wealth funds, particularly if the bank needs to sell all its holdings, said Charles W. Peabody, an analyst at Portales Partners LLC with a “buy” rating on Bank of America. The company would raise about $10 billion in regulatory capital if it sold all its CCB stock, he said.

Under former CEO Kenneth D. Lewis, Bank of America paid $3 billion for a 9.9 percent CCB stake in 2005 before the Chinese bank’s IPO. The U.S. lender later exercised an option to buy an additional 11 percent, paying $9.2 billion.

The firm sold its initial stake in CCB in May 2009, reaping a pretax gain of $7.3 billion, as loan losses mounted amid the recession. Last year, the bank sold rights to buy 1.79 billion CCB shares to Temasek, Singapore’s state investment company.

Foreign Investors

Investors including Bank of America, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc have trimmed about $20 billion in holdings in Chinese lenders since 2009. Chinese regulators consider a single foreign holding of at least 5 percent with a lockup period of at least three years a strategic investment.

A lockup on 12.4 billion Hong Kong-listed Agricultural Bank of China Ltd. shares held by investors including Standard Chartered Plc and Qatar Investment Authority expires next month. The Chinese bank’s listing raised $22.1 billion in the world’s largest initial public offering in July 2010.

Kuwait Investment Authority, which owns 1.9 billion Agricultural Bank shares, said in May it won’t sell its stake when the lockup ends, according to managing director Bader Al- Saad.

‘Overhang’

Agricultural Bank shares, which have gained 18 percent since listing, fell 3.5 percent to HK$3.85 in Hong Kong today.

“The overhang on lockup expiration, slower economic growth and tighter regulatory requirements are all uncertainties driving investors away from China banking shares,” said Patrick Pong, a Hong Kong-based analyst at Mirae Asset Securities HK Ltd., who rates CCB “hold”.

The central bank this week raised lenders’ reserve requirements to a record to drain cash from the economy after inflation rose to the highest in almost three years in May. The banking regulator is seeking to impose higher capital adequacy ratios on lenders and have them assign more risk-weighting to property and local government financing vehicles loans.

At Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, Goldman Sachs is the largest foreign investor with 10.1 billion shares held at the end of last year, according to ICBC’s annual report.

--Jun Luo. Editors: Rick Green, Chitra Somayaji

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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