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Bank of America last night announced that it has sold the majority of its remaining H-shares in China Construction Bank through privately negotiated transactions, reducing its stake to approximately 1%, the US bank said in a press release.
It didn’t disclose the size of the transactions, except to say that it sold 10.4 billion shares, but based on yesterday’s closing price, the stake is valued at about $7.4 billion. It is unlikely that BoA would have been able to walk away with that amount, however, as a transaction of this size would have required a significant discount. According to the press release, BoA expects to generate an after-tax capital gain of $1.8 billion from the sale.
The divestment, which accounts for about 4.1% of CCB’s outstanding share capital and 4.3% of its H-share capital, comes less than three months after BoA raised $8.3 billion from the sale of about 13.1 billion shares through another private transaction. That deal was priced at an 11% discount to the latest close and resulted in an after-tax gain of approximately $3.3 billion, the bank said at the time.
CCB’s H-shares closed at HK$5.53 yesterday after rising 1.1% during the session. This is only two Hong Kong cents below where it traded when BoA sold its shares in August, although the stock fell to as low as HK$4.44 in early October before rebounding together with the wider market. If BoA were able to sell these latest shares at the same price as last time, namely HK$4.94 per share, it could have raised about $6.6 billion from the deal. However, the size of the after-tax gain suggests that it had to accept a lower price per share.
There had been speculation that the US bank would sell another batch of CCB shares as part of efforts to improve its capital ratios. The sale of assets deemed non-core to its operations has been a big part of those efforts and the bank has recently also sold its Canadian credit-card unit and its stakes in First Republic Bank and BlackRock. However, CCB is likely to be disappointed with the latest sale, particularly the fact that it comes so soon after the previous transaction.
In its third-quarter earnings report that was published on October 28, CCB said that following the August sale, BoA had “expressed that it had no plan to increase or decrease its shareholdings [in CCB] in the following 12 months”. And the week before the August sale CCB president Zhang Jianguo was reported to have told reporters in Beijing that the US lender has committed to keep at least 5% of its shares over the longer term.
BoA made no mention of this in its press release, but said that the strategic assistance agreement between Bank of America and CCB, which includes cooperation in specific business areas, remains in place.
“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,” BoA chief financial officer Bruce Thompson said in the release. “We expect this action, supplemented by the related realisation 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 initial reaction in the market wasn’t positive, however, and by the end of the New York trading session last night, BoA’s share price had fallen 2.6% to $6.05. According to analysts, there is some concern about the asset divestments since they do also mean in a reduction in earnings. Under the leadership of CEO Brian Moynihan, BoA has been adamant that it won’t increase its capital by issuing new shares, and hence the only way to improve its capital ratios is to shed more assets.
In the third quarter alone, the bank said it had reduced the size of its balance sheet by $42 billion. At the end of September, its tier-1 common equity ratio amounted to 8.65% and its common equity ratio was 9.5%.
There was no information last night about who may have bought the CCB shares, but ahead of the previous sale BoA was said to have held discussions with several sovereign wealth funds in Asia and the Middle East and it would be reasonable to assume that some of those may have participated in the deal. Temasek bought about one-third of the August sale, or approximately $2.8 billion worth of shares, increasing its stake in the Chinese bank to about 7.8%. Other rumoured buyers at that time included a Chinese consortium made up of the State Administration of Foreign Exchange (Safe), the National Social Security Fund and Citic Securities, as well as a Qatar sovereign investment fund. Neither of those names has disclosed a purchase. Safe is the biggest holder of CCB’s H-shares with a 70.7% stake.
Bank of America bought an initial 9% in CCB for $3 billion in connection with the Chinese lender’s IPO in October 2005 and increased its stake to 19.1% in mid-November 2008 by exercising a series of options. Since then, however, the US bank has been monetising its holdings through several large transactions.
Aside from the $8.3 billion sale in August, BoA also raised $2.8 billion by selling 5.62 billion shares through a block trade in January 2009 and in May 2009 it raised $7.3 billion from the sale of 13.5 billion shares to a Hopu-led investor group. In November last year, it sold its entire entitlement of new shares in China Construction Bank’s continuing rights issue to Temasek.
The latest sale was arranged by BoA’s investment banking arm, BoA Merrill Lynch. The transactions are expected to close later this month.
