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Lockerbie (I-Newswire) January 8, 2012 - Keizai Group has learnt on Monday that the Bank of America plans to sell the majority of its stake in the China Construction Bank for an expected $6.6 billion, realizing an expected post tax net profit of $1.8 billion for the struggling bank. Bank of America will retain approximately a 1 per cent stake in the Chinese bank.
Bank of America, the second largest bank in the U.S. by asset value, had already unloaded around 5 per cent of its 10 per cent stake back in August for some $8.3 billion. There was no disclosure either by Bank of America or China Construction Bank about who was taking up the stake.
"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," Chief Financial Officer Bruce Thompson said in a statement Monday. "We expect this action, supplemented by the related realization of deferred tax assets, will generate approximately $2.9 billion in additional Tier 1 common capital and further strengthen our Tier 1 common capital ratio by approximately 24 basis points under Basel I."
The bank said the strategic assistance agreement between Bank of America and CCB, which includes cooperation in specific business areas, remains in place.
Bank of America Chief Executive Brian Moynihan has been ridding the Charlotte bank of assets and businesses he doesn't consider to be core to its businesses, and shoring up capital and tightening Bank of America's operations to focus more on traditional banking as it struggles with the cost of soured mortgages.
Since Moynihan took over as CEO in early 2010, the bank has generated gross proceeds of more than $47 billion through such divestitures, including Balboa Insurance and its stakes in asset manager BlackRock Inc. (BLK) and in Pizza Hut. More private equity stakes and mortgage servicing rights are likely on the block.
BofA started investing in CCB in 2005, as a way to enter the lucrative Chinese market. At its peak in 2008, the US bank held 44.7bn shares, or a 19% stake in the Chinese lender. However the global financial crisis and a mass of faulty mortgages have seen BofA's balance sheet come under pressure.
New global regulations, known as Basel III, require banks to have a higher capital to assets ratio in their balance sheet. That has resulted in a change of strategy by the bank to dispose of non-core assets and streamline the banking operations.
The recovery from the financial crisis has proven a painful process for Bank of America, and new capital standards to be introduced by the Basel Committee on Banking made such investments a burden. However, Bank of America will continue its strategic cooperation with China Construction Bank that includes mutual exchange of expertise.
The sale of its first stake in China Construction Bank helped the bank earn a third-quarter profit even as its mortgage unit lost $1.1 billion.
Some investors were wondering why Bank of America hadn't sold its entire available stake in one swoop, but the bigger the stake on the market the lower the discount buyers usually are willing to pay - and would have put the share price of China Construction bank under pressure.
"We carefully considered all of our options," a Bank of America spokesman said Monday. "We determined that the sale in August and the sale announced today was in the best interest of our company and our shareholders."
China Construction Bank said in a statement it cooperated "fruitfully" with Bank of America and other strategic investors since its initial public offering.
Analysts at Keizai Group believe the move to be motivated by Bank of America’s need to build capital reserves to meet new global regulations and to cover mortgage related securities. Shares in Bank of America were down over 2.5 per cent, to $6.06. the bank’s stock has already plummeted by more than 50 per cent this year over market concerns about their capital.
BofA's sale comes just days after Goldman Sachs offloaded $1.1bn worth of shares in Industrial and Commercial Bank of China. It was the third time the investment bank has cut its holding in China's biggest lender. The sales also come at a time when there have been concerns about the health of China's banking sector.
Chinese banks have lent record sums of money in the past few years, raising concerns about the formation of asset bubbles. There are fears that a slump in property prices may see the value of assets dwindle and hurt the capacity of consumers to pay back their debts.
The fears have been fanned further by concerns of an overall slowdown in the Chinese economy amid an uncertain global economic environment. However analysts said sales by the US banks were driven by a change in strategy rather than growth fears.
Under new international banking regulations, brought about to counter the widespread undercapitalization of many banks which contributed to the 2008 crisis, banks are required to improve their debt to capital ratios and are prevented from classifying certain high risk assets as base capital. “Bank of America remains under a great deal of scrutiny and so are trying to raise as much capital as they can to ease concerns” according to a banking sector analyst at Keizai Group.
“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 September 30.
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