U.S. Lender Sells Remaining Holdings in China Construction Bank for $1.47 Billion
Updated September 3, 2013, 9:17 p.m. ET
Eight years later, the Charlotte, N.C., lender has sold the last of its shares for $1.47 billion, marking the end of an era in which big Western banks piled into China in hopes of gaining a long-term foothold there.
A broad swath of firms, including Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley, UBS AG and Royal Bank of Scotland Group PLC, took positions in Chinese banks in the past decade. But international regulations scheduled to take effect in the next few years require banks to hold extra capital against minority stakes in other financial institutions, making such investments less attractive.
What's more, China analysts said, the stakes have failed to deliver greater access to the broader Chinese economy.
"These shareholdings haven't yielded the kind of China access Western banks initially expected," said Keith Pogson, a Hong Kong-based partner in Ernst & Young's Asian-Pacific financial-services office.
After making millions taking China's big banks public, Western banks suffered as the Chinese banks started competing with them for Chinese clients, often offering much lower fees and better terms. The number of underwriters on some big deals approached 20, meaning banks got a smaller share of the fee pie, and occasionally the Chinese banks offered to buy up any unsold shares, something Western banks are rarely allowed to do on IPOs.
Still, the banks' Chinese investments have largely been profitable. All told, U.S. banks acquired at least $14.8 billion in stakes in Chinese banks from 2002 to 2010, according to data provider Dealogic. The banks sold $37.3 billion worth of those stakes from 2009 to 2013, according to Dealogic.
Bank of America made its first investment in China Construction Bank in 2005, paying $3 billion for a 10% stake. Bank of America former Chief Executive Kenneth Lewis had pushed the bank to invest in China, starting with a June 2005 trip to Beijing in which he hailed the 10% stake purchase as a "long-term investment." The bank poured another $7 billion into the bank in 2008, boosting its position to almost 20%.
New regulatory pressures and the difficulties tapping business in China caused banks to pull back. Between January 2009 and November 2011, Bank of America sold at least $22.6 billion worth of shares, which had increased in value, leaving it with less than 1%.
Early Wednesday, Bank of America sold two billion Hong Kong-listed shares for HK$5.70 each (74 U.S. cents), according to a term sheet reviewed by The Wall Street Journal. The price was a discount of 3.9% from Tuesday's closing price of HK$5.93, and in the middle of the HK$5.63-to-HK$5.81 range in which the bank intended to sell.
With the latest deal, Bank of America has reaped about $14 billion in profit from its shares since 2009.
Along with the financial stake, Bank of America and China Construction Bank in 2005 signed a strategic agreement to cooperate in getting new business. In 2011, they extended the arrangement until 2016.
Bank of America Chief Executive Brian Moynihan in a statement Tuesday said, "The Bank of America-CCB relationship continues to bring substantial benefits to each company." China Construction Bank couldn't be reached for comment.
Bank of America's sale comes four months after Goldman Sachs sold the last of its stake in China's biggest bank, Industrial & Commercial Bank of China Ltd. Volatility in ICBC's shares led Goldman to report a full-year net loss in Asia in 2011, its first such loss since the 2008 financial crisis.
UBS kicked off the selling spree in Chinese banks in January 2009, when it sold its whole stake in Bank of China Ltd. Two weeks after the Swiss bank's sale, Royal Bank of Scotland also exited from its Bank of China stake.
To be sure, some Western banks continue to hold stakes in Chinese lenders, though not the so-called Big Four, which includes Agriculture Bank of China Ltd. in addition to Bank of China, China Construction Bank and Industrial & Commercial Bank of China.
HSBC Holdings PLC, which has the most branches in mainland China of any foreign bank, owns 19% of Bank of Communications Co., China's fifth-largest lender by assets. It also has an 8% stake in city lender Bank of Shanghai.
Citigroup owns 20% of China Guangfa Bank, which is based in the Southern province of Guangdong, but sold its entire 2.71% equity stake in Shanghai Pudong Development Bank Co., a commercial bank based in Shanghai, last year.
A big reason for the pullback is that the international regulations known as Basel III—the latest standard for bank capital, risk management and liquidity—are pressuring lenders to pull out of minority investments.
"Because of Basel III, the era that global banks can buy small stakes in businesses here and there is gone," said James Antos, a Hong Kong-based banking analyst at Mizuho Securities Asia.
Bank of America, the second-largest U.S. bank by assets, has been shedding noncore assets and businesses as part of Mr. Moynihan's strategy of focusing on the bank's main consumer and business customers. All told, it has sold more than $67 billion in assets and businesses in the past three years, according to the bank.
Investors are increasingly wary of the quality of Chinese banks' assets after a huge government-sparked credit boom fueled enormous lending while buoying the economy in recent years. China Banking Regulatory Commission Chairman Shang Fulin warned this week about rising risks in the banking sector. He said the financial system's support of the real economy "needs to be vastly improved" and China should "prevent regulatory arbitrage" and "reduce the risks of financial contagion."
While China Construction Bank said last week that its nonperforming-loan ratio was unchanged at 0.99% for the first half of the year that ended June 30, the bank also said it wrote off a total of 5.38 billion yuan ($879 million) in bad loans, more than four times the 1.17 billion-yuan total from the same period last year.