NEW YORK (Reuters) – Bank of America Corp (BAC.N: Quote, Profile, Research) said on Tuesday it would exercise part of an option to buy shares of China Construction Bank (0939.HK: Quote, Profile, Research), investing HK$14.52 billion (US$1.86 billion) and raising its stake in China's second-largest bank to 10.75 percent.
Bank of America, the No. 2 U.S. bank by assets, said it intended to buy 6 billion of CCB's Hong Kong-listed shares around June 5 for about HK$2.42 each under a formula set when it first agreed to buy a 9 percent stake in CCB investment in June 2005 for US$3 billion.
With CCB shares closing at HK$6.65 in Tuesday trading, Bank of America is getting the stake at a 64 percent discount.
The new shares are currently worth about HK$39.9 billion (US$5.11 billion), offering some good news for a U.S. retail banking giant that has been hit by rising consumer credit losses and a weakening economy.
Bank of America earlier this year raised more than $12 billion to boost capital required by bank regulators. Some analysts have forecast that BofA will cut its dividend in the second half.
The investment in one of the world's hottest markets has paid off handsomely for the North Carolina bank. CCB stock has surged 83 percent since the bank's October 2005 IPO.
After the latest transaction, Bank of America said it would hold about 25.1 billion shares, which means US$4.86 billion of investments by the bank currently have a paper value of US$21.4 billion.
Bank of America spokesman Bob Stickler said the bank would not record any gain from the transaction because the new shares cannot be sold until August 2011 without CCB's consent. The shares will be carried at cost.
SHARES FOR SALE?
Last month, several press reports said BofA was looking to shed part of its CCB stake to raise capital needed to cope with a weakening U.S. economy. BofA is also preparing to take over Countrywide Financial (CFC.N: Quote, Profile, Research), the largest U.S. home lender slammed by the mortgage slump.
Stickler declined to comment on speculation that BofA was considering selling CCB shares, though the latest transaction will likely do nothing to end the market talk.
“We've been in talks with the Chinese government for a number of months. Anything we do is in consultation with them” and with the management of CCB, Stickler said.
The shares acquired in 2005 have a three-year lock-up that expires October 2008.
By exercising the call option now, BofA “starts the clock” and increases its flexibility to sell the new shares down the road, Stickler said.
Bank of America had talks with CCB and SAFE Investment Ltd (Huijin), the Chinese government body that controls CCB, about exercising a portion of its call option. BofA will purchase its new shares from Huijin.
Under the 2005 stock purchase agreement, BofA can increase its stake to just under 20 percent. CCB currently has a market value of nearly US$200 billion, or one-fourth more than that of BofA.
Last month BofA Chief Financial Officer Joe Price told Reuters the bank would likely raise its stake first before considering any share sales.
Bank of America shares were unchanged at $33.94 on the New York Stock Exchange early Tuesday afternoon.
By Joseph A. Giannone