New York/Hong Kong/Tokyo: Bank of America Corp agreed to sell about half its stake in China Construction Bank for a $3.3 billion (Dh12 billion) gain as the biggest US lender bolsters capital ahead of new international standards.
A group of investors will buy 13.1 billion shares this quarter in a private transaction that will generate $8.3 billion in cash proceeds, Bank of America said on Monday in a statement, without identifying the buyers. The companies are also discussing an expansion of strategic ties.
Construction Bank shares jumped, heading for their biggest two-day gain in more than two years, after the US firm said it would keep a 5 per cent stake in the world's second-biggest lender by market value.
The partnership has been "mutually beneficial," Bank of America Chief Executive Officer Brian T. Moynihan, 51, said in the statement.
"The sale has removed concern that BoA's shares would be dumped into the market," said Danny Yan, a Hong Kong-based portfolio manager at Haitong International Asset Management, which oversees $600 million.
"A few investors were able to buy the shares, so it reduced market uncertainty about an oversupply."
Moynihan has been selling businesses and assets as the firm seeks to comply with international capital standards set by the Basel Committee on Banking Supervision.
The bank, the largest in the US by assets, has slid 37 per cent this year in New York trading amid investor concern that it may need to issue stock as mortgage-related losses deplete capital.
Tougher capital rules
Selling the shares helps 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 CCB deal will generate about $3.5 billion in additional Tier 1 common capital and reduce risk-weighted assets by $7.3 billion under Basel I, Chief Financial Officer Bruce Thompson said in the statement.
The stake is being sold at a discount of about 11 per cent, based on CCB's closing price on Monday in Hong Kong. It has returned 77 per cent since the shares were acquired in 2008, according to Jerry Dubrowski, a Bank of America spokesman.
Construction Bank advanced 4.1 per cent yesterday to HK$5.78 in Hong Kong, stemming its drop this year to 17 per cent. Bank of America climbed 8.1 per cent to close at $8.39 on the New York Stock Exchange on Monday, leading the 4.5 per cent advance of the 24-company KBW Bank Index.
The cost to protect debt issued by the US firm fell for a fourth straight day, dropping 38 basis points to 295 basis points on Monday in New York, according to data provider CMA. JPMorgan Chase & Co data show the contracts have fallen from a record 445 basis points last week, after Warren Buffett's Berkshire Hathaway agreed to invest $5 billion in Bank of America. A basis point is 0.01 percentage point.
Paul Miller, an analyst at FBR Capital Markets, said he's keeping his rating of "market perform" on Bank of America shares as the sale doesn't alleviate balance sheet "problems" mainly stemming from the 2008 purchase of subprime lender Countrywide Financial.
"It all goes back to the Countrywide acquisition," Miller said in an interview on Bloomberg Television's "Surveillance Midday" with Tom Keene.
"I don't think the bank itself has any more clarity on what those overall costs are going to be."
CCB said earlier this month that it was in talks to extend an agreement allowing the firms to work together on retail and corporate operations, as well as wealth management and investment banking.
The US bank's decision to sell the stake will remove a "major overhang" on CCB's stock and drive it higher, Nan Sheng, a Shanghai-based analyst at UOB Kayhian Investment, said yesterday.
Bank of America, which began investing in CCB before the Chinese bank's 2005 initial public offering, owned 25.6 billion shares at the end of June, the firm said in a regulatory filing. The stake equaled about 10.6 per cent of CCB's Hong Kong-listed shares, according to data compiled by Bloomberg.
Bank of America was the second-biggest shareholder in CCB at year-end, the data show.
