Once again, Bank of America Corp. (BAC) has announced that it will reduce its stake in China Construction Bank (“CCB”). This time, the company would sell most of its remaining holdings (about 10.4 billion shares) in CCB to a group of investors for nearly $6.6 billion.
Like before, the divestiture is backed by the intention to boost BofA’s capital position and strengthen its balance sheet in order to reinstate dividend hike and meet Basel III capital requirements, without diluting shareholder value.
The deal, which is expected to close later this month, is likely to generate an after-tax gain of approximately $1.8 billion. The transaction is also likely to help BofA generate about $2.9 billion in additional Tier 1 common capital and bolster its Tier 1 common capital ratio by approximately 24 basis points under Basel I.
Post completion, BofA will still have 2.1 billion shares or about 1% stake in CCB. The sale of the remaining stake is restricted till the end of August 2013.
Further, the share sale will not put an end to the strategic-assistance agreement between BofA and CCB. This agreement, effective to 2016, requires BofA to provide strategic help to CCB in consumer and private banking, corporate and institutional banking, as well as business training.
In the September quarter, BofA divested 13.1 billion CBB common shares or 50% of its stake to a group of investors for approximately $8.3 billion, bringing home a pre-tax gain of $3.6 billion. This stake reduction aided BofA to readily comply with the proposed Basel III requirements as the standards set a ceiling of less than 10% stake in any financial institution.
BofA has been selling its stake in CCB at regular intervals, liquidating its non-core assets. The first stake sale occurred in January 2009, when BofA had sold a 2.5% holding in CCB, reaping a profit of $1.1 billion.
In May 2009, the company sold another 9.9% stake, leading to a pre-tax profit of $7.3 billion. Also, in 2010, the company sold its right to buy 1.79 billion additional shares in CCB to Temasek Holdings Pte, Singapore’s state investment company.
In 2005, before CCB’s IPO, BofA had paid $3 billion to buy a 9.9% stake in the latter. The company further raised its stake by exercising the option to purchase an additional 11% for $9.2 billion.
Similarly, last week, The Goldman Sachs Group Inc. (GS) sold 1.75 billion shares of Industrial & Commercial Bank of China Ltd. (ICBC) at HK$4.88 (63 cents) per share. The deal helped the company raise nearly $1.1 billion in proceeds.
Our Viewpoint
BofA hopes to fulfill the regulatory capital requirement through organic means, aided by the sustained paring of non-core assets. However, we speculate that the company would need to issue some shares to meet its capital requirement.
Besides fulfilling the capital requirements, BofA’s plan to sell its stake in CCB is part of its long-term strategy to remove non-core assets from its balance sheet, as the company looks to concentrate on businesses that directly serve customers, as well as fortify its balance sheet.
We do not see an end to this non-core divestiture in the recent future. After BofA’s plan to boost dividend in the second half of 2011 was turned down by the Federal Reserve in March this year, it sees divestitures as ways to shore up capital strength and fortify its balance sheet.
Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral” recommendation on the stock.
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