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On Monday, Bloomberg reported that Bank of America Corporation ( BAC - Analyst Report ) would sell a part of its holdings in China Construction Bank (CCB) later this year, in order to strengthen its capital. However, the company will continue to be a strategic investor in CCB, the world’s second largest bank by value.
As of March 31, 2011, BofA owned 25.6 billion shares of CCB worth $21 billion. This equaled a 10.6% stake in CCB’s Hong Kong listed shares. Further, the lockup-period, wherein BofA is not allowed to sell its stake, would expire in August this year.
According to Bloomberg data, BofA is the second biggest stake holder in CCB after the Chinese government, which holds 59%. CCB has 240.4 billion shares listed in Hong Kong and has 9.6 billion yuan-denominated shares in Shanghai.
The potential buyers of BofA’s stake could also include sovereign wealth funds. 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.
However, this is not the first time that BofA is planning to sell its stake in CCB. In January 2009, the company had sold 2.5% holdings in CCB, reaping a profit of $1.1 billion. Further, 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.
BofA’s plan to sell a portion of its stake in CCB is a part of its long-term strategy to remove non-core assets from its balance sheet. The company also looks to concentrate more on businesses that directly serve customers, as well as fortify its balance sheet. The endeavor would aid the company to comply with new regulatory rules that are being imposed on various large U.S. banks to prevent another financial crisis.
Earlier this month, BofA announced the completion of the spin-off of its last largest private equity (PE) fund, which has led to the creation of a new company named North Cove Partners. In the same month, BofA also completed the sale of its insurance subsidiary Balboa Insurance Company and affiliated entities to QBE Insurance Group. The company had inherited Balboa from Countrywide Financial, which it acquired in 2008.
Furthermore, in 2010, BofA undertook several non-core asset shedding actions. Among others, in November, the company sold 43.6 million of its BlackRock Inc. ( BLK - Analyst Report ) shares and also sold an additional 2.5 million shares of BlackRock to Japan’s third-biggest bank Mizuho Financial Group Inc. Also, in July 2010, BofA completed the sale of First Republic Bank ( FRC - Snapshot Report ) for $1.86 billion to a group of investors led by Colony Financial Inc. ( CLNY - Snapshot Report ) and General Atlantic LCC.
With BofA’s plan to boost dividend in the second half of 2011 being turned down by the Federal Reserve in March, the company will likely continue with its non-core asset shedding activities until its capital strength improves and balance sheet fortifies. Additionally, the company is also required to comply with regulatory provisions.
Currently, BofA retains a Zacks # 5 Rank, which translates into a short-term ‘Strong Sell’ rating. Also, considering the fundamentals, we maintain a long-term “Underperform” recommendation on the stock.
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