Bank of America Corp, coping with tough economic conditions, raised $2.83 billion by selling part of its stake in China Construction Bank Corp, and Hong Kong's richest tycoon sold a $500 million stake in rival Bank of China. Shares in China's big banks skidded on Wednesday after the sale by the largest US bank by assets.
Investors expected further sales in the face of slowing earnings growth at mainland lenders and the lapse of lock-up provisions restricting sales. China's three largest banks had attracted big strategic investments from Western financial groups at the time of their initial public offerings. Some of those banks, including Royal Bank of Scotland Plc, are now under pressure to sell as the global financial crisis ravages the banking industry.
Bank of America sold more than 5.62 billion Construction Bank shares at HK$3.92 apiece, according to a term sheet obtained by Reuters. The sale reduces the bank's stake in the Beijing-controlled lender to 16.6 percent from 19.1 percent. The terms represented a 12 percent discount to Construction Bank's Tuesday closing stock price. Bank of America realised a profit of about $1.13 billion, based on Construction Bank's IPO price in 2005. The US bank acquired its initial stake ahead of the IPO.
"The news has been expected, but investors will still take it hard because (Bank of America) will most definitely sell more," said Francis Lun, general manager with Fulbright Securities in Hong Kong. "They need the money." Bank of America is raising money amid a broad downturn for US banks and as it absorbs Merrill Lynch & Co, which it bought on January 1.
The bank and Merrill were awarded a $25 billion infusion as part of the US government's $700 billion banking industry bailout, but some analysts believe more capital may be needed. "Bank of America is reducing its China Construction Bank shares due to its consideration of its own financial conditions under the current severe turbulence of the international financial crisis," Construction Bank said in a statement. "Construction Bank expresses its understanding."
Bob Stickler, a Bank of America spokesman, said the bank will remain Construction Bank's second-largest shareholder and a "long-term strategic partner." "We simply took a little money off the table," he said. A foundation controlled by tycoon Li Ka-shing was later on Wednesday selling Bank of China shares worth up to $524 million.
Li, the chairman of conglomerate Hutchison Whampoa Ltd and property developer Cheung Kong (Holdings), was selling 2 billion shares at HK$1.98 to HK$2.03 each, according to a term sheet. The shares were sold at a discount of 5 percent to 7.5 percent to their HK$2.14 Wednesday closing price in Hong Kong. Bank of China shares trade below their HK$2.95 IPO price.
Li's foundation will still hold 3 billion shares in Bank of China, which it plans to hold for the long term, foundation spokeswoman Laura Cheung said. Given the high barriers to foreign entry to China's fast-growing financial industry, overseas institutions are reluctant to relinquish any of their hard-won access. On the other hand, earnings growth is slowing at mainland lenders as the economy cools amid the global downturn.
Warren Blight, an analyst at Fox-Pitt Kelton in Hong Kong, said Bank of America may look to sell a further stake but did not expect a complete sell-out. "Even putting lockups aside on the later holdings, I think they want to maintain a close relationship with CCB," he said. Construction Bank shares closed down 8.8 percent at HK$4.06, helping drag the Hang Seng Index 3.4 percent lower. Shares of Construction Bank trade at less than half their all-time high, reached in late 2007.
In another Chinese sale by a western bank, Switzerland's embattled UBS AG recently unloaded its holding in Bank of China. Citigroup said Bank of China might see further stake sales this year by RBS, which holds 8.3 percent, and Singapore state investment agency Temasek Holdings, which owns 4.1 percent. Lockups on those stakes lapsed last month, it said.