Corporate China
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Bank of America ends Construction Bank marriage

BofA's sale of its remaining stake in China Construction Bank marks the end of an era of investment in big Chinese lenders by their western peers

PUBLISHED : Wednesday, 04 September, 2013, 2:56pm
UPDATED : Wednesday, 04 September, 2013, 2:59pm

A chapter in the courtship of China's top 4 banks by western rivals is finally about to close, with word that Bank of America (NYSE: BAC) is looking to sell its remaining stake in China Construction Bank (0939.HK; Shanghai: 601939), China's second largest lender. This looming divorce shouldn't come as a surprise to anyone, as it's really just the final break-up between big western banks that once held out big hopes of entering China's banking market through tie-ups with major state-run lenders. In an interesting twist to the story, we're actually seeing some of the big Chinese banks make their own recent international tie-ups as they look to perhaps someday challenge the big western lenders on the global stage.

Frankly speaking, I'm surprised that Bank of America (BofA) didn't dump its remaining stake in China Construction Bank (CCB) sooner, as I personally think CCB is one of the least interesting among China's big four state-run banks. Top lender ICBC (1398.HK; Shanghai: 601398) looks far more dynamic in terms of its global strategy, and traditionally foreign-focused Bank of China (3988.HK; Shanghai: 601988) has also looked more interesting recently.

According to the latest media reports, BofA is offering to sell its remaining two billion shares of CCB's Hong Kong-listed stock for HK$5.63 to HK$5.81 each. That range represented a discount of up to 5 per cent off CCB's most recent share price before news of the sale came out. CCB shares fell nearly 3 per cent to HK$5.77 in early trade on Wednesday, putting them in the range of BofA sale price. The shares are actually about flat over the last two years, underperforming a 10 per cent gain for the broader market, as investors worry about a looming bad debt crisis for China's major state-run lenders.

BofA will still make a tidy $750 million (HK$5.8 billion) pre-tax profit from its sale of the shares, which it acquired in 2005 when it paid $3 billion (HK$23.3 billion) for 10 per cent of CCB shortly before the bank's IPOs in Hong Kong and Shanghai. BofA's total gains from the CCB investment should total about $18 billion (HK$140 billion) before taxes, certainly not a bad return for the amount of money it invested over the years. BofA's sale follows a similar sell-down of ICBC shares previously held by Goldman Sachs (NYSE: GS) earlier this year.  

ICBC has found a new global buyer for many of the shares sold by Goldman in Singaporean sovereign wealth fund Temasek, whose recent purchases look like a vote of confidence in ICBC's future prospects. But no major buyer has stepped forward yet to purchase BofA's stake in CCB, and I suspect we won't see any major western institutional investors show any interest in this stake since CCB has been one of the least aggressive of China's big four banks. The only potential big buyer we might see would be a major state-backed player like insurance giant China Life (2628.HK; Shanghai: 601628), which would be acting at least partly under orders from Beijing.

Goldman, BofA and other big western names like Citibank (NYSE: C) and RBS (London: RBS) once held big hopes for their investments in the big Chinese lenders, envisioning partnerships that would help them tap the massive local banking market. But time has shown that the Chinese banks were still mostly policy lenders that take their orders from Beijing, and had little or no interest in forming partnerships with the big western players.

While the western players have now mostly dumped their shares, ICBC has become quite aggressive in its own global M&A, picking up stakes in banks in Africa, South America and North America in the last few years. Bank of China has also shown some interest in global tie-ups, including a recent alliance with South Africa's Nedbank. Look for an acceleration in these global tie-ups in the next couple of years, marking the start of a new phase of global partnerships following the failed romance between the major Chinese banks and their western counterparts.

Bottom line: BofA's sale of its remaining stake in China Construction Bank marks the end of an era of investment in big Chinese lenders by their western peers.

To read more commentaries from Doug Young, visit youngchinabiz.com