Bank of America’s Nice Big Chunk of China Construction Bank

Jun 16, 2011
J. Webster
Comments Off on Bank of America’s Nice Big Chunk of China Construction Bank

You don’t hear much good news these days about the bank stocks in general, and especially Bank of America, the bank who is repeatedly in the news about how they’re struggling to tackle the housing crisis, from claw backs to foreclosures, the news is all bad.

However, here’s some good news for those interested in buying Bank of America’s stock or maybe a bit of relief for current Bank of America stock holders: They have a nice big chunk of a China Construction Bank. And in August they could sell it.

How much is BofA’s share of China Construction Bank worth? Try a cool $22.2 billion based on its current stock value right now. That’s a lot of money. And its initial value was just $8.5 billion when they bought it. That’s a nice trade, too.

What’s interesting though is this holding once sold could help Bank of America’s capital position. In other words, they wouldn’t have to issue new shares to raise capital. Of course, Bank of America can’t just sell all the shares without approval from Chinese authorities and then they need Chinese banks stocks to retain their value. Still, all in all, these are nice issues to have to deal with. A positive for BofA, for once.

Full story over at the Wall Street Journal:

Amid this gloom, there is an overlooked bright spot for BofA: A lockup on most of its $22.2 billion holding in China Construction Bank expires in August. This means the bank, if it chooses, would be able to start selling down this holding.

In one sense, this won’t be that big a deal because gains on the stake, which had an initial value of about $8.5 billion, are mostly reflected in BofA’s equity, or book value. But bank investors should remember there is a difference between equity and capital, which is a regulatory measure.

During the crisis, such differences meant big losses on securities sometimes didn’t show up in measures of capital. In this case, the opposite is true. About $12 billion of the value of BofA’s Chinese holding is excluded from capital ratios.

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