BofA Can Pocket $750 Million Gain By Selling China Construction Bank

by Trefis Team
Bank of America
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Earlier this week, Bank of America (NYSE:BAC) announced its decision to dispose of its remaining stake in China Construction Bank Corporation (CCB) in what will be the fifth and final stake sale by the U.S. banking giant in CCB since the economic downturn of 2008. [1] The remaining 2 billion shares, which account for about 1% of all outstanding CCB shares, will bring in $1.47 billion in cash for Bank of America – working out to a pre-tax profit of $750 million that will be recorded this quarter. [2] Quite notably, Bank of America’s decision to exit the CCB stake comes within months of a similar decision by rival Goldman Sachs (NYSE:GS) to wind up its stake in the Industrial and Commercial Bank of China (ICBC) (see Goldman Cashes In Its Remaining Stake In ICBC).

At its peak in early 2008, Bank of America held a near-20% stake in CCB as a long-term investment into the growing banking sector of the world’s second largest economy. But the recession and the ensuing regulatory changes made the investment less favorable, prompting the staggered sale over the years. The stake also served as a great tool for Bank of America to raise cash in a crunch – as was seen in January 2009 as well as September 2011, when investor sentiments towards the bank were at their lowest (see Bank of America Scrambling to Ease Investor Concerns).

We maintain our price estimate for Bank of America’s stock at $15.50, which is about 10% ahead of the current market price.

See our full analysis of Bank of America

The table below tracks Bank of America’s stake in China Construction Bank over the years in terms of the number of shares and value, giving a clear picture of the series of transactions involved. Do note that the cumulative shares figure does not add up in a few cases due to rounding errors.

Buy / Sell Transaction Value No. of Shares Cumulative Shares CCB Stake Source
Jul-05 Buy ($3 billion) 25.1 billion 25.1 billion 9.0% CCB Website
Nov-08 Buy ($9.2 billion) 19.6 billion 44.7 billion 19.1% China Daily
Jan-09 Sell $2.8 billion (5.6 billion) 39.0 billion 16.6% Financial Times
May-09 Sell $7.3 billion (13.5 billion) 25.5 billion 10.9% Wall Street Journal
Sep-11 Sell $8.3 billion (13.1 billion) 12.3 billion 5.4% BofA Website
Nov-11 Sell $6.6 billion (10.3 billion) 2 billion 1.0% BofA Website
Sep-13 Sell $1.5 billion (2 billion) 0.0% BofA Website

One thing is clear from the table – the CCB stake has been really profitable for Bank of America. The bank spent about $12.2 billion to increase its stake in CCB to 19.1% by the end of 2008, and then raised roughly $26.5 billion in cash by selling parts of the stake on five different instances. This represents a handsome $14.3 billion in gross profits from the CCB stake for the bank over the years.

The stake sales have also helped Bank of America bridge its capital requirement gap to a great extent – on occasions being used specifically to garner dwindling investor confidence in the bank’s capital structure (see Bank of America Sells More of CCB Stake to Shore up Balance Sheet). The recently announced stake sale will boost Bank of America’s quarterly performance figures for one last time. Also, as the stake formed a part of the bank’s trading assets, the sale will reduce the size of Bank of America’s total trading assets by roughly $1.5 billion – something that has a negligible impact on long-term value, as can be seen by making the change to the chart below.

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  1. Bank of America to Sell Remaining Stake in China Construction Bank, Bank of America Press Releases, Sep 3 2013 []
  2. Bank of America Exits China Bank Stake, The Wall Street Journal, Sep 3 2013 []
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