Bank of America (BAC) has undoubtedly been one of the most active stocks in the market over the last couple of weeks. Last week alone, the bank’s stock was up more than 60% after results of the stress tests revealed that the bank will need to raise as much as $34 billion. It was unclear to us at Ockham, why this was being received so positively by the market, but perhaps that is being made clearer today.
“Also, Bank of America selling a roughly $7.3 billion stake in China Construction Bank to a group of investors that includes China life insurance agents. The shares were said to be sold at a 14% discount to their closing price yesterday. We knew this was potentially coming. We heard about the $7 billion to $8 billion Bank of America could raise. The bank now holds less than an 11% stake in CCB. The sale comes as Bank of America tries to raise some cash as it was directed to do by the government last week.” CNBC’s Squawk Box 5/12/2009.
Remember that BofA had just added to its stake in CCB back in Novemeber 2008 with a purchase of 8.4% of CCB stock for the sum of around $7 billion, so while BofA did make a profit on this portion they are giving up the future growth potential. Bank of America is trading down about 6% on the news that they will be selling an asset that has about as much growth potential as anything they own. While the sale was only of about one-third of BAC’s stake in CCB, it is a reminder that capital raises can be generally painful as the bank will have to either dilute their shareholders or get ride of valuable assets, and probably both. In this case, Bank of America had to see the stake in CCB at a discount to the closing price. The euphoria surrounding the stress test results being “better than expected” seems to have worn off and now it is time to get back to business.
This is not a deal that needs to get overly worked up about, because China Construction Bank is not essential to Bank of America’s business. But it was a large piece of a very sexy asset, as some economists believe that China will be one of the quickest economies to recover from this global recession. When China does recover, it would not be surprising to see double digit growth in the economy resume.