Following the footsteps of many other Wall Street giants, Bank of America Corp. (BAC - Analyst Report) is also reducing its exposure to the Chinese economy. BofA sold nearly 2 billion shares that it held in Beijing-based China Construction Bank (CCB). With this, the company completes its final stake sale in CCB.
BofA commenced the sale of 2 billion shares of CCB at a price range of HK$5.63–5.81 (73–75 cents) per share for $1.5 billion. Notably, this represented a 2–5% discount to the closing price of CCB on Sep 3, 2013.
The deal is expected to generate a pre-tax gain of roughly $750 million during the third quarter. This will partially offset the negative fair value option (FVO) adjustments and debit valuation adjustments (DVA) in case BofA’s credit spreads remain at the present level.
Nevertheless, the Strategic Assistance Agreement (SAA) between BofA and CCB (recently extended to 2016) will not be impacted. Under the SAA, the company offers advice and assistance to CCB in certain business areas, which mainly focus on processes and systems such as customer service and sales models.
In 2005, BofA had paid $3 billion for a 9.9% stake in CCB, before CCB’s initial public offering (IPO). The company further increased its stake by exercising the option to purchase an additional 11% for $9.2 billion.
BofA has been selling its stake in CCB at regular intervals, liquidating its investments and reaping profits. In Jan 2009, the company sold 2.5% holdings in CCB, with 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.
Moreover, in 2010, BofA sold its right to buy another 1.79 billion shares in CCB to Temasek Holdings Pte, Singapore’s state investment company. Furthermore, in Aug 2011, the company sold 13.1 billion shares (50% of its stake in CCB) for approximately $8.3 billion, resulting in a pre-tax gain of $3.6 billion.
Over the last several years, many banks have been selling their stakes in Chinese banks either to raise additional capital or to lower volatility in earnings. Also, with the Chinese economy showing signs of sluggishness, many banks are exiting from the nation. Hence, BofA joined the bandwagon consisting of Citigroup Inc. (C - Analyst Report) , The Goldman Sachs Group Inc. (GS - Analyst Report) , Royal Bank of Scotland Group PLC and UBS AG (UBS - Analyst Report) in reducing holdings in China.
BofA sold its shares in CCB so as to further lower its non-core business exposure, garner profit and reduce the risks posed by the asset quality of Chinese banks. Regulatory pressure to strengthen its capital ratios also compelled BofA to go for the stake sale.
BofA currently carries a Zacks Rank #3 (Hold).