After loading up on Asian assets, could financially troubled Western banks be forced to sell?
That is what analysts and bankers are asking as Bank of America Corp. considers reducing its 9% stake in China Construction Bank. After reporting nearly $2 billion (about Rs8,000 crore) in write-downs related to bad loans on Monday, Bank of America executives said they were discussing a sale of the stake with the Chinese government.
John Wadle, Asian bank analyst for UBS AG in Hong Kong, said, “People may have done these deals at a time when capital was plentiful and hope was abundant, but now they have to be realistic.”
They should be showing investors, Wadle said, that they are making decisions based on “what is core and non-core” business.
American and European banks acquired minority stakes in many Asian banks in recent years, hoping to capitalize on fast growing economies that often had nascent consumer credit businesses.
For example, American Express Co., Goldman Sachs Group Inc. and the Allianz group paid $3.8 billion for a stake in Industrial and Commercial Bank of China in 2006; Royal Bank of Scotland bought 5% of Bank of China for $1.6 billion in 2005; and Citigroup Inc. purchased 10% of India’s HDFC Bank Ltd in 2006.
China and India have restrictions on foreign bank business and limit foreign branches, making such deals a necessity for anyone who wants to do business there. China limits individual foreign investors to 20% stakes in local banks, but it has discussed increasing that for securities and brokerage firms.
Foreign investors are allowed to own as much as 49% of private banks in India and 20% of state banks, and need approval for each branch they open. They own 40% of the largest private bank in India, ICICI Bank Ltd, and 26%of HDFC.
Whether Bank of America will actually sell its 9% stake, and start a succession of sales, is unclear. “You’ve seen a lot of banks suffering with subprime,” said Warren Blight, an analyst at Fox-Pitt Kelton in Hong Kong, “but ultimately there is a lot of interest in China and the rest of Asia,” and it would be odd for Western banks to abandon that now.
Still, Blight said, if a Western financial institution really needed to raise cash, Asian bank assets might be the way.
Many American and European banks took stakes in Chinese institutions before they went public and now have the makings of sizable gains, even after recent losses in the Chinese stock market, Blight said.
Bank of America bought the 9% stake in China Construction Bank in 2005 for $2.5 billion. It is now worth several times that.
Banks often hold a wide variety of assets beyond loans and deposits, including real estate, venture capital and hedge funds, and equity of other companies. They have rebalanced these assets on a regular basis—especially when losses came rolling in from their main businesses of lending money in home markets.
In the 1980s, some American banks unloaded namesake buildings after suffering losses. In 1987, Citigroup’s predecessor, Citicorp, saddled with billions in bad loans in developing countries, sold a two-thirds stake in Citicorp Center in Manhattan to Japan’s Dai-Ichi Mutual Life Insurance Co.
In recent years, British banks have been selling branch offices and then leasing them back to free up capital. After deciding en masse to get into the insurance business in the late 1990s, banks started dumping those units.
In India, bank stocks are trading well off recent peaks.
Bhavesh Kanani, a research analyst with brokerage firm Sharekhan Ltd, said, “I as an investor would not exit at this point unless the need for cash is pressing.” Indian investors are likely to pick up any shares that foreign banks sell. Their relatively low price “makes them attractive for domestic institutions such as mutual funds, which are sitting on a cash pile,” Kanani said.
Some analysts express doubt that American and European banks will significantly shed assets at this time. “These banks are cash-flow-positive and their cash positions are growing,” Richard Bove, an analyst with Punk Ziegel, said. “They will reduce employment in businesses where the outlook is weaker.”
©2008/THE NEW YORK TIMES