China Construction Bank

CCB exit is end of era for overseas lenders

Bank of America last foreign player to retreat from China's Big Four state-owned lenders, amid slumping growth and regulatory reform

PUBLISHED : Thursday, 05 September, 2013, 12:00am
UPDATED : Thursday, 05 September, 2013, 3:22am

Bank of America's complete exit from China Construction Bank, the mainland's second-largest bank by assets, marks the end of major foreign banks' investment in the Big Four state-owned lenders after Beijing kicked off industry reforms about a decade ago, with the exit process having started a few years ago.

The US bank's sale of its holdings in CCB came just about four months after Goldman Sachs sold its remaining shares in Industrial and Commercial Bank of China, the nation's biggest bank.

Softening economic growth in China had dragged down the potential returns on the country's banks, and harmed their asset quality, analysts said. This pushed foreign banks, faced with tough capital requirements, towards the exits.

"Concerns about the magnitude of the mainland economic slowdown and massive write-offs from bad loans add to pressure on the foreign firms to reduce the investment in mainland banks," said Liu Ligang, the chief economist at Australia's ANZ Bank.

Liu said the foreign banks might also need to raise money to boost capital for home-market operations.

Bank of America sold the stock because of the increasingly stringent capital requirements in the United States, CCB said in a statement.

"BofA has to offload the shares to refill its own capital," it said, noting the sale was completely unrelated to any concerns about CCB's outlook.

"The BofA-CCB relationship continues to bring substantial benefits to each company," Bank of America's chief executive Brian Moynihan said.

"We have built a strategic partnership based on shared operational expertise, and our clients in China and Asia recognise BofA's ongoing association with one of the world's leading financial institutions."

The US bank said the transaction would generate a pre-tax gain of about US$750 million in the third quarter.

The profits at China's banks are already under pressure, with interest rate deregulation set to invite competition in the long term, and the potential insolvency of many local-government financing vehicles possibly leading to more soured loans in the near term.

Profit growth might slow to single-digit percentages in coming years, and non-performing loan ratios might almost double this year to 3 per cent, Standard & Poor's said last month.

Some analysts say the golden days for China's banks appear to be over, but others do not expect much of an impact on share prices in the short term, with investors such as Singapore's state-owned Temasek picking up the shares sold by foreign banks.

After Bank of America's exit from CCB and Goldman's exit from ICBC, HSBC and Citigroup are the two major foreign banks retaining key interests in Chinese banks, albeit much smaller ones than the Big Four. HSBC still holds 19.03 per cent of Bank of Communications, and Citigroup owns about 20 per cent of China Guangfa Bank.