On Monday, The South China Morning Post reported that Bank of America Corp. (BAC) is planning to further lower its stake in China Construction Bank (“CCB”). Though the officials at BofA and CCB declined to comment, persons familiar with the matter stated that BofA officials had conveyed to CCB that the company is planning to sell a part of its remaining 5% stake.
BofA’s primary intention behind continuously reducing CCB stake is to boost its capital position and strengthen its balance sheet in order to reinstate dividend hike and meet Basel III capital requirements.
Earlier on August 29, 2011, BofA had announced the divestiture of 13.1 billion of CCB common shares (50% of its stake in CCB) in a deal with a group of investors for approximately $8.3 billion, resulting in a pre-tax gain of $3.6 billion. This stake reduction had helped 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 investments. Moreover, in January 2009, BofA had also sold 2.5% holdings in CCB, reaping a profit of $1.1 billion. Furthermore, 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 another 1.79 billion shares in CCB to Temasek Holdings Pte, Singapore’s state investment company.
In 2005, BofA had paid $3 billion for a 9.9% stake in CCB, before CCB’s IPO. The company further raised its stake by exercising the option to purchase an additional 11% for $9.2 billion.
Our Viewpoint
Although BofA is hopeful of fulfilling the regulatory capital requirement through organic means, aided by the sustained paring of non-core assets, we anticipate that the company would need to issue some shares to meet the capital requirement.
Besides fulfilling the capital requirements, BofA’s plan to sell its stake in CCB is a part of its long-term strategy to concentrate more 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. With BofA’s plan to boost dividend in the second half of 2011 being turned down by the Federal Reserve in March, the company sees this as an inevitable way 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. However, one of the company’s competitors, JPMorgan Chase & Co. (JPM) retains a Zacks #4 Rank (a short-term ‘Sell’ rating).
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