Following the footsteps of many other Wall Street giants,
Bank of America Corp.
) is also reducing its exposure to the Chinese economy. BofA sold
nearly 2 billion shares that it held in Beijing-based China
Construction Bank (CCB). With this, the company completes its
final stake sale in CCB.
BofA commenced the sale of 2 billion shares of CCB at a price
range of HK$5.63-5.81 (73-75 cents) per share for $1.5 billion.
Notably, this represented a 2-5% discount to the closing price of
CCB on Sep 3, 2013.
The deal is expected to generate a pre-tax gain of roughly $750
million during the third quarter. This will partially offset the
negative fair value option (FVO) adjustments and debit valuation
adjustments (DVA) in case BofA's credit spreads remain at the
Nevertheless, the Strategic Assistance Agreement (SAA) between
BofA and CCB (recently extended to 2016) will not be impacted.
Under the SAA, the company offers advice and assistance to CCB in
certain business areas, which mainly focus on processes and
systems such as customer service and sales models.
In 2005, BofA had paid $3 billion for a 9.9% stake in CCB, before
CCB's initial public offering (IPO). The company further
increased its stake by exercising the option to purchase an
additional 11% for $9.2 billion.
BofA has been selling its stake in CCB at regular intervals,
liquidating its investments and reaping profits. In Jan 2009, the
company sold 2.5% holdings in CCB, with a profit of $1.1 billion.
Further, in May 2009, the company sold another 9.9% stake leading
to a pre-tax profit of $7.3 billion.
Moreover, in 2010, BofA sold its right to buy another 1.79
billion shares in CCB to Temasek Holdings Pte, Singapore's state
investment company. Furthermore, in Aug 2011, the company sold
13.1 billion shares (50% of its stake in CCB) for approximately
$8.3 billion, resulting in a pre-tax gain of $3.6 billion.
Over the last several years, many banks have been selling their
stakes in Chinese banks either to raise additional capital or to
lower volatility in earnings. Also, with the Chinese economy
showing signs of sluggishness, many banks are exiting from the
nation. Hence, BofA joined the bandwagon consisting of
The Goldman Sachs Group Inc.
), Royal Bank of Scotland Group PLC and
) in reducing holdings in China.
BofA sold its shares in CCB so as to further lower its non-core
business exposure, garner profit and reduce the risks posed by
the asset quality of Chinese banks. Regulatory pressure to
strengthen its capital ratios also compelled BofA to go for the
BofA currently carries a Zacks Rank #3 (Hold).
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