BLK BlackRock Inc

According to a CNBC report on Friday, Bank of America Corp. (BAC) is in the final stage of selling at least half of its stake in China Construction Bank (“CCB”). This is part of BofA’s effort to strengthen its capital position in order to reinstate dividend hike and meet new international capital standards. However, the company will continue to be a strategic investor in CCB, the world’s second largest bank by value.

BofA will sell around $8.5 billion of its 10% stake in the Chinese bank CCB, which is valued at about $17 billion, per the source.

Bloomberg data show that the company is the second largest stake holder in CCB after the 59% right held by the Chinese government. The lockup-period, wherein BofA is not allowed to sell its stake, will expire on August 29.

The potential buyers of BofA’s stake could be a consortium of sovereign wealth funds in Asia and the Middle East.

In 2005, BofA had paid $3 billion for a 9.9% stake in CCB, before CCB’s IPO. The company further raised its stake by exercising the option to purchase an additional 11% for $9.2 billion.

This is not the first time that BofA is planning to sell its stake in CCB. In January 2009, the company had sold 2.5% holdings in CCB, reaping a profit of $1.1 billion.

Further, in May 2009, the company sold another 9.9% stake leading to a pre-tax profit of $7.3 billion. Also, in 2010, the company sold its right to buy another 1.79 billion shares in CCB to Temasek Holdings Pte, Singapore’s state investment company.

If BofA can successfully shed a sizeable holding in CCB on attractive terms, its capital ratios would come in for a real boost.

The $5 billion investment made by Warren Buffett's Berkshire Hathaway (BRK) in the company on August 25, 2011 was also a confidence booster.  

BofA’s plan to sell about half of its stake in CCB is part of its long-term strategy to remove non-core assets from its balance sheet. The company also looks to concentrate more on businesses that directly serve customers, as well as fortify its balance sheet.

BofA has also broached talks with The Blackstone Group (BX) to sell real estate assets held by its Merrill Lynch unit for nearly $1 billion.

Moreover, early this month, the company agreed to sell its Canadian credit-card unit to Toronto-Dominion Bank (TD) for $7.6 billion. Non-core asset selling is not a recent hype. BofA shed a number of non-core assets earlier this year as well as the last.

Among others, BofA sold 43.6 million of its BlackRock Inc. (BLK) shares for $163 each in November 2010. Furthermore, the company sold an additional 2.5 million shares of BlackRock to Japan’s third-biggest bank Mizuho Financial Group Inc. Also, in July 2010, BofA completed the sale of First Republic Bank (FRC) for $1.86 billion to a group of investors led by Colony Financial Inc. (CLNY) and General Atlantic LCC.

Besides hiving off non-core assets, BofA is also planning to retrench 3,500 workers this quarter as the company is fraught with its $1 trillion problem-loan portfolio. Also, thousands of additional layoffs could ensue in the upcoming quarters as the company is working on a broader restructuring plan to recover its financial position. Though BofA is still deliberating about the extent of the job cut, the number might go beyond 10,000 as part of a wider review.

Focused non-core asset shedding and job-cut initiatives explain BofA’s attempt to improve profitability amid revenue headwinds in a scenario of weak economy and stricter capital requirements demanded by regulators.

We do not see an end to this non-core divestiture in the recent future. With BofA’s plan to boost dividend in the second half of 2011 being turned down by the Federal Reserve in March, the company sees this as an inevitable way to shore up capital strength and fortify its balance sheet.

Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
BLACKROCK INC (BLK): Free Stock Analysis Report
 
BLACKSTONE GRP (BX): Free Stock Analysis Report
 
COLONY FINL INC (CLNY): Free Stock Analysis Report
 
FIRST REP BK SF (FRC): Free Stock Analysis Report
 
TORONTO DOM BNK (TD): Free Stock Analysis Report
 
Zacks Investment Research