Bank of America sell-down of CCB seen as win-win

China Construction Bank (CCB), the mainland's second-largest bank by market capitalisation, may see further share price weakness following reports that Bank of America (BofA) plans to sell some of its equity in the lender. But analysts say such a sale could end up benefiting both parties.

The New York Times reported yesterday that BofA, which owns 10.64 per cent of CCB, intended to halve its stake as early as this week, and was in talks with Asian and Middle Eastern sovereign wealth funds. BofA declined to comment.

The sale would net BofA nearly US$10 billion, the Times said. The news comes days after Warren Buffett's Berkshire Hathaway made a US$5 billion investment in BofA.

CCB president Zhang Jianguo said during the bank's interim results briefing last week that BofA had said nothing about divesting its stake. Zhang said BofA had confirmed that it would hold no less than five per cent of the mainland lender's shares.

BofA had paid US$2.5 billion for a nine per cent stake in CCB ahead of the lender's initial public offering in August 2005. The purchase was subject to a lock-up period, which expires tomorrow. BofA had pledged not to sell any of its CCB shares during the period. Of the nearly 25.6 billion CCB shares that BofA owns, the expiration of the lock-up period will affect about 23.6 billion.

Analysts said if BofA was selling down its stake in CCB, that had more to do with its own capital needs than CCB's operations. However, investors have been worried about the asset quality of mainland banks because of their loan exposure to local government-backed projects of doubtful commercial merit.

'Given that BofA has basically sold off all its identified list of non-core assets, holding on to at least five per cent of CCB's stake seems to show its sense of confidence in the bank,' said Michael Werner, senior analyst at Sanford Bernstein.

BofA had the lowest ratio of tier one common capital among United States banks at the end of last year - 8.6 per cent.

As part of an effort to boost capital adequacy levels, BofA sold its holdings in several companies last year, including asset management firm BlackRock and Spanish bank Banco Santander.

Werner said an early sell-down of BofA's stake in CCB would benefit all the parties involved, as both banks' share prices had been under pressure.

CCB shares have fallen about 28 per cent since May 31, partly due to Singapore sovereign wealth fund Temasek Holdings' divestment of 1.5 billion shares in July, and speculation that BofA would sell some of its stake.

Stanley Li, an analyst at Mirae Asset Securities in Hong Kong, said CCB's share price would probably fall once BofA announces a sale. 'This is mainly because BofA's stake will likely be traded at a discount to the market price,' he said.

However, investors would likely respond positively if BofA sells the shares to a buyer that is willing to hold them for a long time, such as a sovereign wealth fund, Li said.

On Friday, BofA's share price rose 1.44 per cent, or 11 cents, to US$7.76.

1.03%

China Construction Bank's non-performing loan ratio

- It has narrowed from 1.14 per cent at the start of the year.