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Cathy Chan & Linda Shen
Bank of America Corp., under pressure from U.S. regulators to raise $33.9 billion, sold part of a stake in China Construction Bank Corp. for about $7.3 billion, said two people with knowledge of the matter.
Hopu Investment Management Co., the private-equity fund run by Goldman Sachs Group Inc.’s China partner Fang Fenglei, led investors including Singapore’s state-owned Temasek Holdings Pte in buying 13.5 billion shares from Bank of America, the people said, speaking on condition of anonymity. Bank of America spokesman Robert Stickler declined to comment.
Bank of America’s second sale of Construction Bank stock in 2009 brings Chief Executive Officer Kenneth Lewis closer to the sum regulators say he needs after stress tests of U.S. banks. The Charlotte, North Carolina-based lender had about 17 percent of the Chinese bank’s common shares as of April 20, and Lewis said yesterday he intends to maintain a stake in the company.
“This is the equivalent of an aristocratic family that is forced to sell the family silver to pay the property taxes,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett, in an interview. “They’re doing this out of necessity and it’s definitely not occurring from a position of strength.”
China Life Insurance Asset Management Co. bought $1.5 billion worth of Construction Bank shares on behalf of its state-owned parent and other affiliates, the people said.
Bank of America sold the shares for HK$4.20 apiece, 14 percent below yesterday’s closing price, one of the people said. Bank of America sold $2.8 billion of Construction Bank shares in January for HK$3.92 each. The latest sale is for a 5.8 percent stake in Construction Bank, they said.
Construction Bank, the nation’s second-biggest lender, rose 1.6 percent to HK$4.98 today in Hong Kong. Bank of America dropped 6 cents to $12.88 at 9:42 a.m. in New York Stock Exchange composite trading. Bank of America has plunged about 66 percent in the past 12 months, compared with the 27 percent slide at Construction Bank.
The deal marks the biggest divestment of shares in a Chinese lender by an overseas investor. Financial firms outside the country have this year sold $15.2 billion of shares in Chinese lenders that they bought in the past four years, after the credit crisis forced them to repair balance sheets.
Speculation about a Construction Bank sale heated up over the past week as a lockup on Bank of America’s stake expired May 7. The U.S. bank owns another 25.6 billion shares it can’t sell until Aug. 29, 2011.
Bank of America considers Construction Bank a “strategic partner” and plans to “always” have a stake, Lewis told investors yesterday in a conference call, declining to say how large a stake he intends to keep.
“We think it’s the best-run bank in China and feel very good about our investment,” he said.
Construction Bank’s Beijing-based spokesman Yu Baoyue said he wasn’t aware of the sale. A Temasek spokeswoman, who declined to be identified, said she had no comment.
“I’m surprised such a big chunk of shares could be absorbed by a small group of investors, and the share price is still holding up well,” said Danny Yan, a portfolio manager at Taifook Asset Management Ltd. in Hong Kong, which oversees about $600 million. “It’s certainly positive news because it removes an overhang on the stock.”
Bank of China stake
Hopu, based in Beijing, and Temasek bought about 60 percent of the Construction Bank stake, one of the people said.
It was the third investment for Hopu, founded by Fang in 2007. The fund raised $2.5 billion from overseas investors including Goldman and Temasek last year. CEO Richard Ong, former co-head of Asia investment banking at Goldman, led talks with Bank of America about the stake purchase, one of the people said.
Hopu bought about 30 percent of a $2.3 billion Bank of China Ltd. stake sold by Royal Bank of Scotland in January, two people familiar with the deal said at the time. RBS sold the shares at HK$1.71 apiece. Bank of China closed at HK$2.88 yesterday.
Temasek, Singapore’s state-owned investment firm, owned 5.65 percent of Construction Bank before the deal and is one of the largest shareholders in Standard Chartered Plc and DBS Group Holdings Ltd. It also owns stakes in India’s ICICI Bank Ltd. and lenders in Indonesia, South Korea and Pakistan.
The Singaporean company earlier turned down an offer to buy Construction Bank stock from Bank of America, though changed its mind after the price was lowered, one of the people said.
Temasek invested about $5.9 billion in Merrill Lynch & Co., before it was acquired by Bank of America. The fund holds about 189 million shares in Bank of America after converting its Merrill stock. Along with China Development Bank Corp., Temasek paid 3.6 billion euros in 2007 for a 5.2 percent stake in Barclays Plc and added another 4.5 billion pounds in June.
The U.S. government’s stress test found that 10 lenders needed to raise a total of $74.6 billion in capital and that a deeper recession could lead to potential losses of $599.2 billion in 2009 and 2010 for the 19 lenders examined. Bank of America was judged to have the biggest funding shortfall, followed by Wells Fargo & Co. at $13.7 billion.
U.S. banks are raising $37 billion to fill capital shortfalls or repay the Treasury’s bailout fund after getting the results of the stress tests. The KBW Bank Index, which includes 24 of the biggest U.S. lenders, has jumped 20 percent in the past month as concern subsided that banks will have to be nationalized.
‘Selling the goose’
Davis said the sale is a “gain that drops into the book value, it goes to the common equity” and is a step toward gathering the $33.9 billion required by regulators.
“What the United States was to the 20th century, China will be to the 21st,” he said. Bank of America is “selling the goose that’s going to lay golden eggs.”
Capital One Financial Corp., U.S. Bancorp and BB&T Corp. have said they’ll sell shares to repay government bailout funds after the tests showed the companies can weather a worsening recession without additional aid.