Bloomberg News

BofA Divests China Construction Bank Stake to Boost Capital

November 16, 2011

(Updates with report of Temasek buying in sixth paragraph.)

Nov. 15 (Bloomberg) -- Bank of America Corp. plans to bolster capital by divesting most of its stake in China Construction Bank Corp., locking in investment gains as concern mounts that the Asian lender’s defaults may rise as China’s economy slows.

Bank of America will sell 10.4 billion shares this month in private transactions for a profit of about $1.8 billion, leaving the second-biggest U.S. lender with a 1 percent stake in Beijing-based Construction Bank, according to a statement yesterday. The Charlotte, North Carolina-based bank said the buyers were a group of investors, without providing names.

Chief Executive Officer Brian T. Moynihan, 52, is selling assets to replenish Bank of America’s capital and meet regulatory requirements for risk buffers after faulty mortgages led to about $40 billion of expenses. The lender joins Goldman Sachs Group Inc. in paring stakes in China’s two biggest banks by tapping the stocks’ biggest one-month rally in four years.

“We view this announcement positively for CCB as it removes a significant overhang from its shares,” Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in a research report. “This is especially true as the market was aware that BofA was seeking to improve its struggling capital adequacy ratios.”

October Rally

Shares of Construction Bank rose 0.4 percent to HK$5.55 in Hong Kong trading as of 2:20 p.m., curbing the lender’s decline this year to 21 percent. The stock rallied 21 percent last month, the most since October 2007. Industrial & Commercial Bank of China Ltd., the world’s biggest lender by market value, gained 29 percent in October, helping curtail its drop this year to 17 percent.

Temasek Holdings Pte, Singapore’s state-owned investment company, and Chinese institutional investors are among the buyers, Dow Jones reported, citing people familiar with the transaction it didn’t identify.

Stephen Forshaw, a spokesman for Temasek, declined to comment on “market speculation.”

China’s four biggest banks have declined an average 19 percent this year on concern that loans to developers, small companies and local governments may sour as the economy slows.

“The impact of the recent sharp credit expansion on banks’ asset quality” is one of four “main near-term domestic risks” to China’s banking system, the International Monetary Fund said in a report today. The IMF called on the government to expand oversight of banks as risks increase from off-balance-sheet lending and a surge in property prices.

Goldman Sells ICBC

Goldman Sachs, the fifth-biggest U.S. bank by assets, raised $1.1 billion selling shares of ICBC, two people with knowledge of the matter said last week. It was the third time that New York-based Goldman Sachs trimmed its investment in ICBC, which has generated $2.65 billion of gains for the U.S. bank since the fourth quarter of 2006.

Bank of America Chief Financial Officer Bruce Thompson said the sale would strengthen the firm’s Tier 1 common capital ratio by about 24 basis points under so-called Basel I international requirements.

“Our decision to sell the bulk of our remaining shares in China Construction Bank is consistent with our stated objective of continuing to build a strong balance sheet,” Thompson said in the statement. “This action, supplemented by the related realization of deferred tax assets, will generate approximately $2.9 billion in additional Tier 1 common capital.”

Shares of Bank of America, which sold about half of its stake in Construction Bank last quarter, fell 2.6 percent to $6.05 in New York trading. The lender has plunged more than 50 percent this year amid investor concern that it may sell shares to replenish capital.

Earning Capacity

“They are building capital every way they can,” Frederick Cannon, director of research at New York-based KBW Inc., said in a Bloomberg Television interview. “Bank of America continues to do a lot of things to fix their capital issue, but everything has reduced the capacity for the company to earn money.”

Construction Bank remains optimistic about cooperation between the lenders, a press officer for the Chinese bank said yesterday, declining to be identified due to company policy. Construction Bank knew of Bank of America’s decision and the sale won’t affect the Chinese firm, the press officer said.

Bank of America said this month in a regulatory filing that it “remains a significant shareholder in CCB and intends to continue the important long-term strategic alliance with CCB originally entered into in 2005.”

Sales of about 2 billion shares in Construction Bank are restricted until August 2013, Bank of America said. About 10.5 billion shares were classified as “available for sale” as of Sept. 30.

‘High’ Volatility

The Goldman Sachs sale took place after the firm lost $1.22 billion on the ICBC holding in the six months ended Sept. 30, as the Chinese bank’s market value dropped. Ha Jiming, chief investment strategist at Goldman Sachs’s money-management division for China, told reporters at a conference in Beijing on Nov. 12 that there’s no room for “big” gains in Chinese stocks next year and volatility will remain “high.”

“The U.S. banks’ stake sales are negative for the Chinese banks as this suggests that institutional lenders are no longer as bullish on the sector,” Ronald Wan, a managing director at China Merchants Securities (Hong Kong) Co., said by telephone. “We’re not sure who the buyers are and whether more shares of CCB will be offloaded.”

--With assistance from Feiwen Rong in Beijing, Christine Harper in New York and Linus Chua in Singapore. Editors: Chitra Somayaji, Nathaniel Espino

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Rick Green at rgreen18@bloomberg.net


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