By William Patalon III
Money Morning/The Money Map Report
Bank of America Corp. (BAC) will almost double its stake in state-owned banking giant China Construction Bank Corp., and will control nearly 20% of China’s second-largest bank when the deal is finalized.
The official announcement yesterday (Monday) ends months of speculation that the Charlotte, N.C.-based BofA would dump part of its three-year-old investment the Beijing-based bank to offset the effects of the global financial crisis. In an article on Saturday, Money Morning reported that the deal was close, though noting that the actual timing was unknown.
Bank of America plans to be “a long-term and significant strategic investor in CCB,” the U.S. lender said in a statement. The shares to be acquired to carry a restriction, however: They can’t be sold before Aug. 29, 2011, unless the China bank provides special permission.
According to Caijing– the influential China business magazine that actually broke the story of the deal – BofA is paying about 36 cents a share (2.46 yuan), or 1.2 times the Beijing-based lender’s book value. Bank of America spokesman Scott Silvestri would not comment on that report, or a similar story circulated by Xinhua, the state-run China News Agency, that would represent about a 40% discount to where the bank’s Hong Kong-listed shares closed earlier today.
Following the purchase, Bank of America would own 44.7 billion of the Class “H” shares of China Construction Bank, worth roughly $24 billion, Reuters reported. The initial investment has been a major financial success for BofA. Shares of China Construction Bank have risen 75% since the bank's October 2005 initial public offering (IPO) –, Reuters said.
Bank of America, which last month raised $10 billion to help fund the purchase of Merrill Lynch & Co. Inc. (MER), is lifting its stake in China Construction Bank from 10.8% to 19.1% percent, Bloomberg News reported. Once the deal is finalized, BofA will hold 44.7 billion shares of the Beijing-based lender. In fact, to actually purchase the shares, BofA will exercise an existing option with China SAFE Investments Ltd. (Central Huijin Investment Co.), a state investment arm that is the Beijing bank's biggest stakeholder.
“China Construction Bank is tightly tied to the government and they are a preferred bank,” Richard Wottrich, managing director of Dresner Partners, a Chicago-based investment-banking firm, told Bloomberg. “China will probably return the favor someday by doing something for Bank of America if [it needs] help.'”
Bank of America received $15 billion from the U.S. government as part of a $250 billion banking-sector rescue package – which itself was part of the much-ballyhooed $700 billion bailout fund that’s being used to prop up banks, mortgage firms, insurance companies – and perhaps even the automakers.
BofA first invested in China Construction back in June 2005, taking a $3 billion stake months before the lender was taken public. The value of that holding had almost tripled, to $14.5 billion, as of Sept. 30, a regulatory filing showed. Though China Construction Bank's Hong Kong-listed shares have fallen sharply this year, along with the overall market slide, they are still trading at a price that’s significantly higher than their initial public offering (IPO) price, MarketWatch.com reported.
China Construction Bank shares have increased 73% since its initial public offering in October 2005. Bank of America's shares have declined 61% in that period and were trading at $15.88 each in New York Stock Exchange composite trading at 9:45 a.m., their lowest level since January 1996. By 2:30 p.m., they were trading even lower – at $15.45 each.
After BofA reported a 68% drop in third-quarter profit because of rising losses on consumer and business loans, Chief Executive Officer Kenneth D. Lewis slashed the bank’s dividend in half.
China Construction said last month that third-quarter profit rose 12% on higher interest income. Still, China's six largest listed banks will probably report declining profits next year as lower interest rates shrink margins and loan defaults increase, HSBC Holdings PLC (ADR: HBC) wrote in a Nov. 12 research note.
To smooth the way for the share purchase by Bank of America, Central Huijin Investment Co. Ltd. – the investment arm of the People’s Bank of China that’s run by the Ministry of Finance – asked China Construction Bank to audit its third quarter results using international accounting standards.
Caijing, an influential Chinese-language business-news publication, said that when BofA struck the strategic-investment agreement with Construction Bank, BofA was granted the option of increasing its stake in the China bank at the agreed-upon rate of 1.2 times the China commercial bank’s book value, Caijing reported.
Construction Bank’s level of net assets per share jumped 13.26% from a year earlier, reaching 30 cents (2.05 yuan) a share during the first nine months, according to the lender’s unaudited third quarter results.
China Construction Bank (CCB) is a state-owned, full-service. Additionally, the group offers wealth-management, credit-card and stock-brokerage services. It focuses on two key areas:
- Individual banking services, including deposit services, personal loan, long-credit-card services, long card services, housing system reform finance, foreign-exchange services, securities agent and gold business related services.
- And corporate-banking services, which include corporate e-banking, deposits, credit business, services for government agencies, services for non-banking financial institutions, international settlement, international financing, fund settlement and fund custody services.
With its headquarters in Beijing, CCB employs about 298,000 people. It recorded revenue of about $19.07 billion in the fiscal year that ended in Dec. 2006, a jump of 17.8% from 2005. The net profit was $5.83 billion in fiscal 2006, a decrease of 1.6% from 2005.
Central Huijin Investment Co., established in 2003, is the investment company owned by the Chinese government. Central Huijin was created to act as the centralizing structure through which the government of China can operate as a majority shareholder of the country’s so-called "Big Four" banks, all of which, obviously, are state owned.
However, Central Huijin does not own shares in the smaller joint-stock commercial banks, as those are largely owned by China’s local governments. The "Big Four" in China are:
- China Construction Bank Corp.
- Industrial and Commercial Bank of China.
- Bank of China Ltd.
- Agricultural Bank of China (PINK: ABGEF, ABGEY).
Central Huijin Investment Co. was acquired from China’s State Administration of Foreign Exchange (SAFE) by the state-operated China Investment Corp. (CIC) for roughly $67 billion. A so-called "sovereign wealth fund" (SWF), CIC is responsible for managing part of China’s record $2 trillion in foreign-exchange reserves. With $200 billion in assets under management, CIC is actually the fourth-largest sovereign fund in the world.
China Investment Corp. officially began operations in Sept. 2007. However, it actually bought a $3 billion stake in U.S. private equity player The Blackstone Group LP. (BX) in June 2007. And it bought a 9.9% stake in Morgan Stanley (MS), worth about $5.5 billion at the time, in December 2007.
Caijing, the independent, Beijing-based magazine that broke the BofA story, is a financial publication in that’s devoted to coverage of companies in China. The title actually means "Finance and Economics Magazine." Caijing says its mission is to have an "independent standpoint, exclusive coverage and unique perspective."
By most accounts, it’s been succeeding.
The Wall Street Journal called Caijing "The Leading Finance Publication in China," while Wikipedia said the magazine’s "unique perspective and sharp writing have led to it receive enthusiastic responses from financial industry experts and casual individual investors alike."
The magazine’s knack for exposing the dark side of the financial world has helped it to establish itself as an independent, "must-read" publication. Other publications have tried to copy its approach and style – and have fallen short. Caijingis China’s only magazine that has continued to strengthen its reputation solely through investigative reporting.
News and Related Story Links:
- Money Morning News:
Bank of America Seeks to Boost Stake in China Construction Bank, Influential China Biz Magazine Reports.
- Bloomberg News:
Bank of America Plans to Double China Construction Bank Stake.
Bank of America expanding stake in China Construction Bank.
Bank of America may raise stake in CCB – Caijing.
- MarketWatch.com: .
- SWF Institute:
China Sovereign Wealth Funds.
China Construction Bank – SWOT Analysis – New Research Report on Companies and Markets.
- Money Morning Week Ahead Column:
U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts.
Central Huijin Investment Co.
- Money Morning Investigative Series:
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis.
- Money Morning Outlook 2008 Series:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.