Bank of America Corp. (BAC:US) expects to end an eight-year investment in China Construction Bank Corp. (939) by posting a $750 million pretax gain from the sale of its remaining stake in the Chinese lender.
Bank of America agreed to sell its 2 billion Construction Bank shares, equal to 1 percent of the Chinese company’s stock, according to a statement yesterday from the Charlotte, North Carolina-based lender. The profit from selling the shares in the open market will be included in third-quarter results and could be reduced by accounting adjustments, Bank of America said.
Goldman Sachs Group Inc. (GS:US), HSBC Holdings Plc (HSBA) and Citigroup Inc. have sold their shares in Chinese financial institutions as new international rules make it more expensive to hold minority stakes in lenders. Bank of America previously reaped at least $15 billion in sales proceeds and dividends, according to Bloomberg calculations from regulatory filings.
“They’re still trying to right the ship, and I think the management team has done a great job given the ship that they’ve got,” said Paul Miller, an analyst at FBR Capital Markets who has a hold rating on the shares. “By righting the ship, you’re giving up opportunities, but it’s more important to get a lot of this stuff behind them.”
Shares of Beijing-based CCB, the second-largest Chinese lender by market value, closed 1.4 percent lower at HK$5.85 in Hong Kong, the biggest drop in a week.
Bank of America sold the stock for HK$5.70 in an open market transaction that raised $1.47 billion, according to a term sheet obtained by Bloomberg News. The transaction was expected to settle in two days, Jerry Dubrowski, a company spokesman, said in an interview.
“We’ve been progressively selling the shares down and these were the last of the shares that were still restricted,” Dubrowski said.
The projected gain could be cut by negative fair value option adjustments and debit valuation adjustments “if the company’s credit spreads, which have improved significantly during the third quarter of 2013, remain at current levels,” Bank of America said.
The two banks will continue their strategic assistance agreement, in which the second-biggest U.S. lender helps CCB with tasks including customer service and sales models. Bank of America, led by Chief Executive Officer Brian T. Moynihan, said it gets brand recognition in China and international experience for its staff.
About 3,100 Bank of America employees and 5,000 CCB employees have participated in exchanges since 2005, according to the statement. The accord lasts until 2016.
The lender sold Construction Bank shares four times before the latest transaction. It paid $3 billion for a 9.9 percent stake in Construction Bank before its initial public offering in 2005, and later exercised an option to buy another 11 percent for about $9.2 billion.
Not including Bank of America’s CCB sale, foreign institutions have raised at least $14 billion from divesting shares in Chinese financial firms since the start of 2012, according to data compiled by Bloomberg.
New rules set by the Basel Committee on Banking Supervision require capital deductions for holding minority investments in other financial institutions. U.S. regulators are also pushing for bigger cushions against potential losses, proposing in July that lenders’ leverage ratios, or capital as a percentage of total assets, be pegged at 5 percent for holding companies, 2 percentage points more than the international minimum.
“Bank of America indicated that they have to sell the CCB stake to replenish capital as U.S. regulators imposed more stringent capital rules,” the Chinese lender said in a statement today. Bank of America said in July its leverage ratio was between 4.9 percent and 5 percent.
Goldman Sachs sold its remaining stake in Industrial & Commercial Bank of China Ltd. (601398) in May for $1.1 billion, capping a $2.58 billion, seven-year investment in the nation’s largest lender by garnering about $12 billion in sales proceeds and dividends. Citigroup sold its stake in Shanghai Pudong Development Bank in March 2012, nine years after buying it, for an after-tax gain of $349 million. In February, HSBC completed a $9.4 billion sale of shares in Ping An Insurance (Group) Co.
Global financial firms including Temasek Holdings Pte, Singapore’s state-owned investment company, invested $33 billion in Chinese lenders from 2001 to 2009, according to the country’s banking regulator. They still own at least $30 billion of shares in local banks, data compiled by Bloomberg show.
Temasek, which isn’t subject to the same capital requirements as European and U.S. firms, held 7.15 percent of Construction Bank’s outstanding shares as of March 31 after buying 3.77 billion shares from Bank of America on Nov. 11, 2011.
The Singaporean institution has accumulated about $20 billion of holdings in Construction Bank, Industrial & Commercial Bank (1398) and Bank of China Ltd. (3988) over the past two years, according to data compiled by Bloomberg.
China’s government is the largest shareholder in the nation’s four biggest banks, owning an average 68.8 percent of their stock at the end of March, according to the lenders’ earnings statements. Some 57.22 percent of Construction Bank’s shares were state-owned, according to its first-quarter profit statement released April 26.
Chinese bank profits may decline in the next three years as a government crackdown on industrial overcapacity curbs lending and sours loans, Josh Klaczek, an analyst at JPMorgan Securities (Asia Pacific) Ltd., said on July 31.
Slumping stock prices have pushed valuations of Construction Bank and its closest rivals close to record lows. Construction Bank, which lost 4.7 percent this year in Hong Kong before Bank of America’s announcement, was valued at about 5.6 times estimated 2013 earnings, down from 14 times in November 2009, data compiled by Bloomberg show.
The lender had a 9.7 percent increase in second-quarter net income, based on figures announced Aug. 25, the slowest growth in five quarters as bad-loan charges rose amid the nation’s economic slowdown.
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