Bank of America Corp. plans to sign an agreement today to buy a 9 percent stake in China Construction Bank for $2.5 billion, according to a person familiar with the deal, as the U.S. lender takes a plunge into the world's fastest-growing economy with one of the largest single foreign investments in China's banking sector.
Bank of America also has committed to invest an additional $500 million to maintain its ownership level when China Construction sells shares to the public this year. In addition, the U.S. bank has a nonexclusive, 51/2-year option to increase its stake to 19.9 percent at the price of the shares in the initial public offering.
The agreement was expected to be signed this morning in Beijing by Bank of America Chairman Kenneth D. Lewis and China Construction Bank Chairman Guo Shuqing.
As part of the agreement, Bank of America will provide much-needed technical support and management skills to the Chinese bank and get one seat on a newly structured board of 16 to 19 people.
The deal, the first foreign investment in one of the four big banks that dominate China's lending, brings strategic benefits to both parties. Bank of America, the second-largest U.S. bank in assets after Citigroup Inc., gains access to a rapidly developing market at a time when it is seeking growth outside of its home market. The bank, based in Charlotte, has little exposure to China and a generally low profile across Asia, an increasingly important market for financial institutions. Bank of America declined to comment yesterday.
China Construction Bank is eager for banking expertise as it restructures and attempts to deal with a spate of corruption scandals and a legacy of bad loans. A big investment from an international bank will provide a highly visible vote of confidence in the Chinese bank's progress.
In March, the bank's chairman, Zhang Enzhao, resigned suddenly for what the bank called "personal reasons," though official Chinese media have indicated that the move may have been linked to wrongdoing. Zhang had taken over after the bank's previous head, Wang Xuebing, was fired in 2002 and jailed in 2003 on corruption charges stemming from his previous career at Bank of China, another big state bank.
China's rapidly developing economy and growing middle class make it a promising market for consumer and corporate lending. Foreign investors are allowed to own as much as 20 percent of a Chinese bank, and they are positioning themselves ahead of 2007, when Beijing will completely open the sector to competition for the $1.3 trillion in domestic deposits.
Many foreign lenders have been intrigued by the prospect of gaining an instant presence in the market by buying into a Chinese bank. But they also have been put off by the poor state of the Chinese banks, which have been hobbled by widespread corruption, weak management and mountains of bad loans. Only a handful of deals have been completed. Last year, HSBC Holdings PLC of London paid $1.75 billion for a 19.9 percent stake in Bank of Communications, which is seeking to raise as much as $1.9 billion in an initial public offering.
The China Construction investment is a relatively small one for Bank of America, which reported 2004 profit of $14.14 billion on revenue of $49.89 billion. But it represents a significant strategic decision and would vault the U.S. bank to the status of major player in China. Bank of America's aggressive acquisition strategy has brought it control of 10 percent of U.S. depositors, which is the legal limit. Only 5 percent of the bank's revenue and profit comes from international sources.
Lewis, Bank of America's chief executive, has told investors that he is eagerly seeking new markets abroad, particularly given the bank's success in its 2002 Mexican partnership with Madrid's Banco Santander Central Hispano SA. That partnership grew out of a mutual interest in wiring money from the United States to Mexico, a business that Bank of America said has made money and attracted Hispanic consumers to other financial services.
Bank of America's only retail presence in Asia is in Hong Kong and Macau, though it has a bigger corporate-banking business around the region. But it has little presence in China, the region's most dynamic economy.
China traditionally has been a market of interest for some of Bank of America's predecessor components, particularly San Francisco-based BankAmerica Corp., which merged with NationsBank in 1998. The bank closed its branches in China in 1949. It opened a satellite office in Beijing in 1981, focused on corporate and investment banking, and opened its first retail-banking center only last year in Shanghai.
Bank of America has 5,889 branches and 16,798 automated teller machines in the United States.
Founded in 1954, China Construction Bank for years made its lending decisions at the behest of Beijing, which kept the bank from gaining smart lending experience and strong customers. It has struggled with mixed success in recent years to clean up its image and its books. In December 2003, Beijing gave China Construction and Bank of China, also seeking to go public, $22.5 billion each as fresh capital to enable them to offload additional bad debt.
When the bank began courting strategic partners last year, several big foreign players lobbied hard to fill the role. Citigroup brought in former U.S. Treasury secretary Robert E. Rubin to lobby on its behalf, and former secretary of state Henry Kissinger came in to pitch for J.P. Morgan Chase & Co. Citigroup ended up winning a spot at the table, and also getting a place on the underwriting mandate. When talks between Citigroup and China Construction stalled, that opened an opportunity for Bank of America to come in.
Linebaugh reported from Hong Kong and Bauerlein from Atlanta.