BofA to Reduce BlackRock Holding

On Sunday, the Wall Street Journal reported that Bank of America Corporation (BAC) is planning to sale its 34.1% (64.7 million common and preferred shares) stake in BlackRock Inc. (BLK). BofA is considering this sale as it does not view the BlackRock stake as its core earning asset. However, no talks have started regarding when and how the company may trim its holdings.

This is part of BofA’s effort to reduce its investments and units, which they think are not performing well to earn under its retail banking, capital market units, home lending and wealth management.

A lock period, which stopped BofA from selling its stake in BlackRock, expired in September 2009. But still BlackRock has the first right to refuse buying back shares from the company. However, there remain some limitations regarding how much stake can be sold at a time. The company may not sell more than 4.5% of BlackRock’s total common shares outstanding in one quarter without its permission.

Similarly, in 2009, BofA sold Columbia Management, its asset management unit, to Ameriprise Financial Inc. (AMP) for approximately $1 billion. In June 2010, the company announced the sale of 24.9% stake in Banco Santander SA’s (STD) Mexican unit for $2.5 billion. In July 2010, the company completed sale of First Republic Bank to a group of investors led by Colony Financial Inc. (CLNY) and General Atlantic LCC for $1.86 billion.

In July 2010, BofA also declared that it is planning to sell the Balboa Insurance unit, which it had acquired through the purchase of Countrywide Financial Corp. in 2008. In August 2010, the company announced the spin-off of its private equity business, now known as Ridgemont Equity Partners.

Another factor that may have precipitated the BlackRock stake sale is the proposed Basel III capital requirement rule. Forwarded by the Basel Committee of Bank Supervision, this rule will prevent banks from holding huge stakes in other companies.

Apart from BofA, other companies such as Barclays plc (BCS), China Investment Corp and PNC Financial Services Group Inc. (PNC) also have stakes in BlackRock. These companies may also be forced to sell their holdings under the new Basel III rule.

When BofA acquired Merrill Lynch & Co. in January 2009, the company also received BlackRock shares. In 2006, Merrill had sold its Merrill Lynch Asset Management unit to BlackRock and received 49.8% stake. However, according to the recent filings with the Securities and Exchange Commission (SEC), a successive share exchange has left BofA with 2.3 million of BlackRock’s common shares and 62.4 million of preferred shares.

As of June 30, BofA’s carrying value for its stake in BlackRock was $10.1 billion and the fair market value was $9.3 billion.

BofA’s sale of stake in BlackRock is an integral part of the company’s strategy to streamline its operations, strengthen capital and assure the U.S. regulators of its growth potential. Though there remain concerns regarding BofA’s inconsistent credit quality and net interest yield compression, we anticipate continued synergies from its large scale operations and balance sheet restructuring.

BofA currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we are maintaining our Neutral recommendation on the stock in the long term.

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