Bank of America Corp, the second-biggest US lender, said it would pay $3 billion for a 9 percent stake in China Construction Bank in the largest single foreign investment in China's banking sector. Bank of America wants to expand beyond its home market where it has a 10 percent maximum share of deposits. Construction Bank, one of China's Big Four state banks and the country's top property lender, is eager to sign up a foreign investor ahead of a planned $5 billion IPO later this year.
The US bank has the option to increase its holding in Construction Bank over the next five and a half years to 19.9 percent, the maximum allowed under Chinese law.
Citigroup Inc, the world's biggest bank, was seen as the front-runner to invest in Construction Bank, but sources said its offer fell short.
Chinese state banks are seeking foreign investment to bring credibility and know-how to an industry tarnished by the legacy of decades of government-directed lending to bloated state firms.
In late 2003, Beijing gave Construction Bank a $22.5 billion bailout, part of a vast effort to revamp a creaky financial system that is regarded as a threat to China's growth.
China's allure is $1.5 trillon in personal savings and a culture that is only beginning to embrace credit. Few Chinese have a mortgage or credit card, but nearly double-digit economic growth has created an expanding class of borrowers.
"Most foreign banks in China would want a piece of the retail action," said ABN Amro analyst Simon Ho, who said the deal was not expensive for Bank of America, which posted net income of $4.7 billion in its first quarter alone.
Construction Bank, considered the healthiest of China's Big Four, has $472 billion in assets and 14,500 branches. Bank of America, with a market value of $187 billion, has $1.2 trillion in assets and 5,800 US branches.
The Chinese bank has had its share of problems. In March, former chairman Zhang Enzhao resigned from the bank amid corruption charges.
Bank of America, which will send 50 staff to Construction Bank to provide technical expertise, will not have much control over the Chinese lender as it will get only one board seat.
The two will join forces on credit cards and other consumer services, while Bank of America will also help its partner elevate its risk management and corporate governance practices.
Singapore state investment agency Temasek, meanwhile, was also in talks to buy a minority stake in Construction Bank, sources said on Friday. Temasek said it did not comment on market speculation.
Construction Bank said it was in talks to bring in other strategic investors. Charlotte, North Carolina-based Bank of America said it would initially invest $2.5 billion in Construction Bank, and buy a further $500 million when the Chinese bank lists in Hong Kong.
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