Bank of America Corp has decided to sell off its $8 billion of China Construction Bank Corp. (CCB) stock to a group of investors. The portfolio includes Singapore state investment company Temasek Holdings Pte. Ltd. and its wholly owned hedge fund, Seatown. The two funds were part of a group of buyers that included a Chinese investment fund.
Before CCB’s IPO in 2005, Bank of America paid $3 billion for a 9.9 percent stake in the Chinese bank. The partnership was designed to give the bank access to about 1.3 billion Chinese consumers, while CCB would benefit from Bank of America’s U.S. retail banking experience.
The sale is the latest step to shed some of the bank’s 2008 purchase of Countrywide Financial Corp., a California-based lender with several bad mortgages.
The Chief Executive of the bank, Brian Moynihan, had been driving the bank to sell non-core assets to bolster the bank’s capital position and investor concerns.
Under the deal, Bank of America will continue to hold 5% of the stake in China Construction Bank, which is about 12.1 billion CCB shares, worth nearly $9 billion. CCB President, Zhang Jianguo, told Reuters the two companies were in talks to extend their partnership agreement for another five years.
Warren Buffett’s Berkshire Hathaway Inc. agreed to invest in $5 billion worth of Bank of America stock, after which the share price rose to 8%. Mr. Buffett will get it in the form of cash dividends and the right to buy more stock near its two-year low; a move which could turn him into the bank’s largest shareholder.
Bank of America has been trying to sell off its non-core assets to meet the global regulatory standards, which would come into effect in coming years. Issuance of new shares had forced the stock price to hit the bottom earlier in the month. Mr. Moynihan spent the early part of August on a campaign to calm investors, board members and employees about the bank’s ability to handle the crisis.
The bank had made several strategic moves in the past to conciliate those concerns, including selling its Canadian and European card operation, and insurance unit in Balboa. It also completed a restructuring of its consumer units that may eliminate at least 10,000 jobs.
The deal has shown a positive effect on its capital levels. Bruce R. Thompson, the bank?s chief financial officer, said in the statement that the deal would increase the Tier 1 capital of the bank by $3.5 billion.
Under the Basel Committee recommendation for the minimum capital requirements, Bank of America must retain a Tier 1 capital ratio of 3.5 percent, and gradually increase to more than 9 percent over the next decade. After the prescribed sale, Bank of America will record a $3.3 billion gain in the third quarter, and a $3.5 billion increase in the core capital under current rules, a spokesman said. The sale will generate an $8.3 billion gain for Bank of America.
The deal adds 0.3% to the bank’s core capital as per the current industry rules and 0.2% under proposed Basel III rules, according to David George, Robert W. Baird & Co bank analyst, in a research note to clients.
For Basel III, the bank’s tier one capital levels after the deal are about 5.7%, while the bank is targeting somewhere around 6.75?7 % by 2013, George said. In the last six quarters, Bank of America has generated some $30 billion of proceeds from asset sales.
Sources: Wall Street Journal, dealbook.nytimes.com, Reuters