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BofA frees up capital with China Construction sale

by Michael Rudnick  |  Published August 29, 2011 at 3:52 PM ET
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As part of plans to provide itself with a capital buffer in preparation for the implementation of stricter bank capital standards under the Basel III regime, Bank of America Corp. on Monday, Aug. 29, announced a deal to sell about half of its roughly 10% stake in China Construction Bank Corp., or 13.1 billion shares, for approximately $8.3 billion to unnamed private investors.

The share sale appears to have further subdued earlier investor fears that BofA would have to raise tens of billions of dollars, if not more, in asset sales and a possible dilutive stock offering to cover mortgage-related losses and legal settlements. BofA's share price had fallen by more than half since the beginning of the year to close at $6.99 on Aug. 24 on concerns about its capital levels and future mortgage losses.

However, over the past week the bank took two major steps to restore investor confidence: securing a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc. on Aug. 25 and announcing the China Construction share sale. Since the Buffett investment was announced, BofA's stock has climbed nearly 18% to trade at $8.24 as of Monday afternoon.

The Charlotte, N.C., banking giant expects the share sale to generate about $3.5 billion of additional Tier 1 common equity thanks to a $3.3 billion after-tax gain associated with the divestiture. The sale, expected to close in the third quarter of this year, will also reduce the bank's risk-weighted assets by $7.3 billion.

BofA sold the approximately 13.1 million shares for HK$4.94 (63 cents) each, representing a roughly 77% gain from the HK$2.79 it paid for the shares in a November 2008 CCB second offering, said a BofA spokesman. CCB's shares closed up about 5% to HK$5.55 on Monday.

The CCB sale also serves to preserve BofA's capital levels because "under Basel III, if you own 10% of a significant financial institution, then [the holding] is counted against your capital and it is a deduction," explained the spokesman.

BofA's Tier 1 common equity ratio, which was 8.23% of risk-weighted assets as of the second quarter ended June 30, will climb to about 8.64% thanks to the CCB sale, the Buffett investment and the mid-August sale of the bank's $8.5 billion Canadian credit card portfolio to Toronto-Dominion Bank, said the spokesman. The 8.64% ratio represents a return to the level BofA had maintained prior to taking more than $20 billion in mortgage charges during its second quarter, he added.

Regulators currently require that a bank's Tier 1 common equity be at a minimum of 2% of risk-weighted assets, which is expected to increase to 3.5% by January 2013 under Basel III and ultimately reach 4.5% by 2015.

While BofA is adequately capitalized, it plans to continue divesting noncore assets such as its U.K. credit card portfolio and unspecified private equity investments.

BofA had initially purchased about 19.6 billion CCB shares in 2005 and picked up another 25.6 billion shares in the Chinese bank's late-2008 second offering.

BofA was not permitted to sell the shares it acquired in 2008 until August, but it did unload its original 19.6 billion shares in 2009.

As part of its equity ownership arrangement, BofA has a strategic partnership with the CCB in which it "shares information" and provides it with "best practices" advice as the Chinese bank seeks to establish a retail banking presence in its home country, the spokesman said. In return, CCB provides BofA with "local assistance" in China. The two banks plan to expand and extend their strategic alliance, but the spokesman declined to provide specifics.

Bank of America Merrill Lynch managed the share sale for BofA.