Bank of America finally exits CCB

Reasons differ over time of deal that netted $1.47 billion for US firm

The sale of a stake in China Construction Bank Co Ltd held by Bank of America Corp was prompted by the latter's capital shortage rather than concerns over the Chinese finance house's profitability, said its spokesperson on Wednesday, one day after the US bank cleared 2 billion Hong Kong-listed shares of CCB for about HK$11.7 billion ($1.47 billion).

Bank of America told CCB that it has been downsizing the Chinese bank's H-shares to pump up its assets because of stricter requirements on capital quality by US banking regulators, said the spokesperson.

The two banks will continue their partnership based on a strategic agreement renewed in 2011 until 2016.

Bank of America sold the H-shares in a range from HK$5.63 to HK$5.81 each, representing a discount of 2 to 5.1 percent on Tuesday's closing price of HK$5.93, reported The Wall Street Journal. That puts an end to the bank's eight-year investment in the Chinese lender.

The American bank has been reducing its shares in CCB since 2009, gaining nearly HK$210 billion, 1.2 times its purchase costs.

CCB's H-shares fell by 1.35 percent at the close of trading on Wednesday. Other major commercial banks were hardly affected by the sell-out. Bank of China Ltd, Agricultural Bank of China Ltd and Bank of Communications Co Ltd saw increases of 0.29 percent, 0.58 percent and 0.19 percent respectively.

Bank of America's move did not come as a surprise, said Guo Tianyong, a professor at the Central University of Finance and Economics.

"Foreign capital in China's banking sector has been receding for quite a while because the economic slowdown and financial reforms have hampered the growth potential of China's State-backed banks."

CCB held 80.3 billion yuan of non-performing loans by the end of June, increasing by 5.7 billion yuan from the end of last year, in contrast with the 3.7 billion increase in bad loans throughout 2012, according to its interim results released last week.

Wang Hongzhang, chairman of CCB, said at the half-year earnings news conference that Bank of America's consecutive selling of its stocks was to cushion the effect of the subprime lending crisis.

Experts cited other possible reasons for the US bank's exit.

"The investment bank probably believes that CCB's performance has reached its peak," said Zhou Kunping, an analyst with Bank of Communications. "In that case, now would be the best time to clear the stake."

Bank of America, as an investment bank, may not have aimed for long-term investment when it bought CCB's shares in 2005, Zhou added, particularly when it is unlikely to have a dominant share in the bank since stakeholders in banks throughout the world are usually highly diversified.

Bank of America's exit from CCB marks the end of an era when foreign stakeholders held a prominent presence in major Chinese banks.

A host of overseas banks, including Goldman Sachs, Citigroup Inc, Morgan Stanley, UBS AG among others bought into Chinese banks before they went public. However, Basel III, the latest standard for bank capital, risk management and liquidity, which will come into effect in the next few years, has made holding small banking shares highly costly, which has reduced the attraction of Chinese banks for overseas capital.