August 31, 2011 (Chinavestor) When news that Bank of America (NYSE:BAC) trimmed its stake to just 5% in China Construction Bank (HKG:0939) broke out, investors cheered in the U.S. The nation's largest commercial bank by number of branches and clients netted in $8.3 billion on top of Warren Buffet's $5 billion investment a few days earlier. But that's the end of the good news. And here is the other side of the coin.
Chinese financial institutions have been increasingly profitable since they went public, a trend that is about to continue. Commercial and Industrial Bank of China (HKG:1398), the largest Chinese financial institution, reported a net profit of $8.4 billion just for the second quarter! China Construction Bank (HKG:0939), the second largest lender, made $7.3 billion while Bank of China (HKG:3988) reported a net profit of $5.2 billion for 2011 Q2. So selling a stake in a golden venture raises a lot of questions.
First, let's just see how did Bank of America (NYSE:BAC) acquire a 10% stake in China's number two bank. Going back to the autumn of 2005 when the Chinese started to IPO major financial institutions. They needed a know-how of western counterparts to pull off a successful overseas IPO. One way was to let these, mostly U.S., financial institutions buy stake at them. That stake was limited to 20% total. In case of China Construction Bank (HKG:0989), Bank of America (NYSE:BAC) acquired 10%. Related story: China Construction Bank IPO to raise up to 7.65 billion US dollars
The only major western bank ever acquiring 20% was HSBC Plc. (NYSE:HBC), a bank that got a 20% stake in Bank of Communications or BoComm. That was the first ever IPO and HCBC (NYSE:HBC) got more then the rest following.The same way Goldman Sachs (NYSE:GS) got 10% along with American Express another 10% of Industrial and Commercial Bank of China (HKG:1398).
Now that Bank of America (NYSE:BAC) has the stake, all it had to do was to collect dividends. But that was about to change when BAC got more than it wanted with Countrywide. The swallowing of largest mortgage lender continues to hunt Bank of America (NYSE:BAC) as the following chart shows. Bank of America (NYSE:BAC) has had a shrinking top line along with a highly volatile bottom line ever since the acquisition. Losses mounted since 2008 and 2011 is not looking much better yet either.
This is in sharp contrast to profitability of Chinese banks. The following table lists net profit of the top four Chinese banks along with some of the most prestigious U.S. financial institutions. The U.S. list consists of Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC). The Chinese list is led by Industrial and Commercial Bank of China (HKG:1989), China Construction Bank (HKG:0939), Bank of China (HKG:3988) and Agricultural Bank of China (HKG:1288).
So selling 13.1 billion shares of China Construction Bank (HKG:0939) is most likely a sale of necessity. Not that there is not enough cash on the book of Bank of America (NYSE:BAC). But it's that regulations call for a lot more as the mortgage mess linger around.
The $13.5 billion income from CCB stake and Buffet is certainly a help. We just hope that BAC will have more than enough not to tim stake in Chinese banks but to increase them.