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Bank of America Corp. (BAC-N) is selling about half its stake in China Construction Bank for $8.3 billion US, in its latest effort to shed assets and boost capital.
A group of investors is buying 13.1 billion CCB shares from Bank of America, with the deal expected to close in the third quarter. The U.S. bank declined to name the investors but two sources said Singapore state fund Temasek was among the buyers.
Bank of America needs to boost capital by some $50 billion in the coming years to meet new global rules, according to multiple analyst estimates.
CCB is the second-largest bank by market value in the world, and Bank of America's ties with the Chinese bank are seen as an important source of future growth. Bank of America's willingness to sell part of its CCB investment shows how far it must go to meet new capital requirements, analysts said.
"Bank of America's decision to sell that stake is wrong strategically in the long run, but they need money," said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.
The bank has said it can raise the money through earnings and selling off assets, but a number of investors have expressed concern that the bank will need to issue more common shares.
Those dilution concerns helped push the bank's shares this month to their lowest level in two-and-a-half years. Investors are also concerned about the bank's potential losses from mortgages and related litigation. A $5 billion investment from Warren Buffett's Berkshire Hathaway stopped that fall last week.
In the CCB, deal, Bank of America sold each share for HK$4.93, an 11 percent discount to the Chinese bank's most recent closing price of HK$5.55.
Bank of America will record a $3.3 billion gain in the third quarter as a result of the sale, and a $3.5 billion increase to its core capital under current rules, a spokesman said.
Under proposed Basel III rules, the sale will generate an $8.3 billion gain for Bank of America. The bank will also be required to hold less capital against the CCB shares, because it will now own about 5 percent of the holdings, less than the 10 percent level that triggers higher capital requirements under Basel III.
The CCB stock sale is the latest in a series of moves by the largest U.S. bank to increase capital before Basel III takes effect.
"It really doesn't move the needle under current rules," said Jefferson Harralson, bank analyst with Keefe, Bruyette & Woods Inc. "But this starts to move them to where they need to be."
Bank of America in recent weeks has agreed to sell an $8.6 billion Canadian credit card portfolio to TD Bank Group and is in talks to sell $1 billion of real estate assets to Blackstone Group.
In the last six quarters, Bank of America has generated some $30 billion of proceeds from asset sales, as it has sold a range of assets from a foreclosure insurance unit, investments in Latin and South American banks, and U.S. mortgage-servicing rights.
Fears about the bank's ability to meet its capital requirement have cut the bank's stock price by a third since the beginning of August, including a 20 pct plunge on August 8.
Bank of America paid $3 billion for a 9.9 percent stake in CCB, the world's No. 2 bank by market value, before the Chinese lender's IPO in 2005.
The U.S. bank increased its holdings in following years to 25.6 billion shares, including 23.6 billion that came out of lock-up on August 29.
It is free to sell the remaining shares in 2013.