Despite repeated reassurances that it doesn’t need capital, Bank of America Merrill Lynch last night announced that it had sold slightly more than half its stake in China Construction Bank to raise $8.3 billion.
The sale, which was done in a private transaction with an undisclosed group of investors, came on the very day that the lockup on BoA Merrill’s CCB shares expired, suggesting a certain amount of urgency. It also came just days after Warren Buffett agreed to make a $5 billion investment in BoA Merrill in a move that helped boost confidence in the US lender, which lost $8.8 billion in the second quarter as charges related to legacy mortgage issues at its Countrywide unit weighed on the bottom line.
Buffett’s investment sent BoA Merrill’s share price 11% higher on Thursday and Friday last week, and yesterday’s divestment led to another 8.1% gain.
The US bank said in a press release that it will generate an after-tax gain of approximately $3.3 billion from the CCB sale. However, the transaction was also intended to reduce the company’s risk-weighted assets and to lower its stake in CCB below 10%. By doing so, it will avoid the restrictions that the proposed Basel III guidelines place on capital that represents an ownership greater than 10% in other financial institutions. Yesterday’s sale accounted for about 5.2% of CCB’s total share capital and will reduce BoA Merrill’s stake in the Chinese bank to about 5%.
“This sale ... is expected to generate about $3.5 billion in additional tier-1 common capital and reduce our risk-weighted assets by $7.3 billion under Basel I,” chief financial officer Bruce Thompson said in the release. “This month alone, through non-core asset sales and other actions, we expect to generate approximately $5.8 billion in additional tier-1 common capital and reduce risk-weighted assets by approximately $16.1 billion under Basel I.”
According to the release, BoA Merrill sold about 13.1 billion H-shares. Based on the gross proceeds of $8.3 billion, this indicates a price per share of about HK$4.94, or an approximate 11% discount to CCB’s closing price of HK$5.55. This is a fairly generous discount and might reflect the fact that CCB’s share price has gained 8.6% since last Wednesday, partly on the back of better-than-expected earnings.
However, it is also a large transaction that exceeds the $7.3 billion BoA Merrill raised by selling shares to four investors in another privately negotiated deal in May 2009. That deal was done at a 14.3% discount to the latest close. The buyers at that time were led by China-based Hopu Investment Management and also included Singapore investment company Temasek Holdings, China Life Insurance and BOC International.
There was no mention of who bought this time, although there has been speculation that Temasek would be interested again. However, Temasek sold $1.2 billion worth of shares in CCB through a block trade in July this year and a source has said that the firm doesn’t like to make short-term purchases or sales that could appear confusing to the market.
BoA Merrill is said to have held discussions with several sovereign wealth funds in Asia and the Middle East about the sale.
There was also no information about lockups, either with regard to BoA Merrill’s remaining stake, or for the buyers. The latter may not have needed to accept a lockup since they are each buying less than 5% of the company. However, if any of the buyers hold shares in CCB already, they might need to disclose the acquisition of additional shares.
Prior to this sale, BoA Merrill was CCB’s second-biggest shareholder, after the Chinese government, with about 10.2% of the share capital. It will now drop to third, behind Temasek, which still owns about 6.2%. However, the bank said it is discussing a potential expansion and extension of its existing strategic agreement with CCB, which suggests that it has no intention to sell its remaining stake in the short term.
“Our partnership with China Construction Bank has been mutually beneficial,” BoA Merrill’s CEO, Brian Moynihan, was quoted as saying in the press release.
Meanwhile, CCB president Zhang Jianguo told reporters in Beijing last week that the US lender has committed to keep at least 5% of its shares over the longer term. Whether there is an actual lockup is not clear, however.
Bank of America bought an initial 9% in CCB for $3 billion in connection with the Chinese lender’s IPO in October 2005 and increased its stake to 19.1% in mid-November 2008 by exercising a series of options. Since then, however, the US bank has been monetising part of its holdings through a couple of large transactions.
Aside from the $7.3 billion sale of 13.5 billion shares to the Hopu-led investor group in May 2009, it also raised $2.8 billion by selling 5.62 billion shares through a block trade in January 2009. And in November last year, it sold its entire entitlement of new shares in China Construction Bank’s continuing rights issue to Temasek.
This latest sale was first flagged in a media report in mid-June and the possibility of such a large sell-down — at the time, half of BoA Merrill’s stake was valued at about $10 billion — has put CCB’s share price under pressure since then. Before the turnaround last week it was down close to 27% from mid-June and as of last night it was still off 20%. But CCB had been losing ground even before a BoA Merrill sell-down started to be priced in, as investors shunned Chinese lenders amid fears that the exuberant loan growth during the past couple of years might result in significant loan losses as economic growth slows. Investors are particularly concerned about the potential credit risk related to local government borrowings.
But so far, so good. CCB beat forecasts with a 31% increase in net profit during the first six months of this year, driven by a 41.7% increase in net fee and commission income. The non-performing loan ratio narrowed to 1.03% from 1.14% at the end of 2010, and its capital adequacy ratio stood at 12.5% at the end of June. The core capital ratio was largely flat at about 10.4%.
Bank of America has been selling non-core assets, including its Canadian credit-card unit, First Republic Bank and holdings in BlackRock to boost its capital. It has also announced that it intends to exit its credit card businesses in the UK and Ireland.
The deal was arranged by BoA Merrill on a sole basis and is expected to close in the third quarter.
