NEW YORK – It was has been a busy weekend for blockbuster M&A deals, news emerged early Tuesday that Bank of America (NYSE:BAC) is seeking to sell its remaining shares in China Construction Bank (HK:0939) for as much as $ 1.5 billion.
According to the term sheet, Bank of America is seeking between 5.63 Hong Kong Dollars to 5.81 Hong Kong Dollars per share to end their eight-year investment in the Chinese bank. The deal follows a move by Goldman Sachs (NYSE:GS) in May to sell its share in the Industrial and Commercial Bank of China (HK:1398). That deal was worth $ 1.1 billion.
Overall, investments by U.S. banks into China have been profitable, but moves to sell might be an attempt to cash out before the Chinese banking system faces problems. Concerns over China’s slowing economic growth and the potential risk of nonperforming loans (NPL) have dragged shares of Chinese banks down in recent months.
For years, experts have been warning that connected lending and the high level of NPLs on the balance sheets of Chinese banks would cause undermine the banking system of the world’s second largest economy. The moves by Bank of America and Goldman Sachs appear to be preemptive moves to reduce their exposure to any possible slowdowns.
In addition, Bank of America might be hoping that the deal will allow it to change its fortunes. According to Standard & Poor’s Capital IQ, the nation’s second largest bank by assets is trading at only 0.73 times its book value; that is 73 percent lower than the average of the KBW Bank Index (Dow Jones Indices: BKX). While this might a residual effect of the financial crisis, it would appear that hedge funds have also shied away from the bank, with many reducing or selling off their shares completely in the past year.
Speaking in California last week, Bank of America CEO Brian Moynihan noted that the bank is starting to gain forward momentum, what he called ‘addition by subtraction’ in describing attempts to downsize the bank to a more sustainable size. In his four years as CEO, Moynihan has cut billions in expense. According to Mike Moebs, a bank efficiency expert, Bank of America generates more fees per dollar of assets than any other major mainstream bank in the U.S. However, many remember the bank’s mishandling of foreclosures, which have led to investigations by the Department of Justice and the Securities and Exchange Commission, and it might take years to win back the trust of many former customers.