Temasek sale jolts top China lenders

Shares in China Construction Bank (CCB) and Bank of China became two of the most shorted stocks on the Hong Kong stock exchange yesterday, a day after Singaporean sovereign wealth fund Temasek sold down its stake in the two banks.

Analysts said more divestment could continue, as Temasek still owns 3.38 per cent of Bank of China's H-shares and 8.76 per cent of CCB's H-shares.

CCB's shares fell 3.08 per cent, or 19 cents, to HK$5.97 yesterday, the largest dip in more than four weeks. BOC's shares fell 3.07 per cent, or 10 cents, to HK$3.16, the largest decline in more than four months. The benchmark Hang Seng Index fell 0.28 per cent.

The sell-down comes on the heels of relatively weak first-quarter results from both banks.

While some analysts said Temasek was engaging in 'purely speculative profit-taking', others said it was more than a short-term tactic.

'This looks like a vote of less than full confidence in the growth prospects for both banks,' said Jim Antos, a senior analyst at Mizuho Securities. 'It can't be accidental that the sale comes on the heels of weak first-quarter results for both banks.'

Earnings growth for mainland banks slowed last quarter due to margin compression because of higher funding costs. This marked the first sequential decline in lending profitability since the first quarter of 2010.

Also while many analysts expect mainland banks' non-performing loans and credit quality to remain stable, the possibility of a surge in bad debts from loans issued after the global financial crisis continues to cast a pall on the Chinese lenders.

Last October, Temasek took up the largest chunk of the CCB stake that was sold by Bank of America. The deal helped avoid the market turbulence that could have resulted if BofA had simply unloaded its CCB shares on the open market.

While some observers praised Temasek for absorbing most of BofA's shares in CCB, critics say the Singaporean fund is no stranger to short-term buying and selling of mainland bank shares, and that Wednesday's sale would increase near-term price volatility, because of a knee-jerk reaction to the sale.

In July last year, Temasek sold 1.5 billion CCB shares at HK$6.26 each. Less than two months later, it bought 4.4 billion shares at HK$4.94 each - a 21 per cent discount to its previous selling price, raising its stake to 8.1 per cent in the process.

Temasek bought the shares the same day BofA sold 13.1 billion to raise capital.

On Wednesday, Temasek sold US$2.4 billion worth of shares in the two banks. It sold US$1.2 billion, or 1.6 billion CCB shares at HK$5.99 to HK$6.10 each, a discount of 1 per cent to 2.8 per cent to the stock's close of HK$6.16, to raise as much as US$1.2 billion, according to term sheets.

It sold US$1.2 billion worth of BOC shares at HK$3.13 to HK$3.18 each, a discount of 2.5 per cent to 4 per cent to Wednesday's close at HK$3.26.

Morgan Stanley and Bank of America Merrill Lynch were the bookrunners in both deals.

Jeffrey Fang, a spokesman for Temasek in Singapore, said the fund was 'rebalancing' its position after buying a US$2.3 billion stake in Industrial and Commercial Bank of China, the country's biggest lender, last month.