Bank Of America Raises Its Stake With Bank In China
Bank of America stated this week that he would be raising the stakes in China Construction Bank Corp to close to $1.86 billion. This is a reflection of the initial investment that they made three years ago and is a signal that they have confidence in the bank prospects in China.
The increased stake also squashes rumors that Bank of America was in a rush to sell its stake to offset woes back home. Bank of America has posted dismal results for three quarters running, hammered last year by bad trading bets and this year by ballooning losses on home-equity loans and other credit exposure. The bank posted a 77% plunge in first-quarter profit and has given a bleak outlook for the rest of this year.
Bank of America, the biggest U.S. bank by market value and deposits, says that it has readily raised capital in recent months, bolstering its liquidity. The company said it views this investment as the next step in a long relationship with CCB, China’s second-largest lender by assets after Industrial & Commercial Bank of China Ltd.
“We’ve always been pretty confident in the position of the company long-term,” said Robert L. Stickler, Bank of America spokesman. “We’re in a position to do this.”
Bank of America paid $3 billion for a 9% stake in CCB in June 2005 and retained the option to gradually increase that stake to 19.9%. The value of the investment ballooned, and Bank of America said late last year that it had a paper gain of about $30 billion. Over time, an increase in CCB shares brought Bank of America’s relative stake down to about 8.2%.
The new investment would bring that stake to 10.75%. Bank of America is buying six billion shares at HK$2.42, or about 31 U.S. cents, set under a formula in the existing agreement. CCB shares closed at HK$6.65 Tuesday.
BofA Chairman and Chief Executive Kenneth D. Lewis, who has made major domestic acquisitions in his seven-year tenure, has shied away from buying foreign banks, saying instead that he prefers to partner with big local players on strategic investments as he has in China, Mexico and Brazil.
Last month, Mr. Lewis said the bank would likely raise its stake in CCB this year. At the same time, he said the bank was in careful discussions on whether to sell some of its initial investment when a lock-in period expires in the fourth quarter. Bank of America plans to pay cash for the new stake. The bank will have to put capital behind the investment, but Mr. Stickler dismissed the necessary build as a “negligible amount.”
While the initial investment has been profitable, other aspects of the company’s relationship have been slow to develop. Bank of America has 60 employees working with CCB on dozens of projects, from revamping CCB’s technology systems to updating branches. But the companies’ announced joint ventures in credit cards and equipment leasing are yet to get off the ground.