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BofA May Get $13 Billion Capital Boost on China Stake

Brian T. Moynihan,chief executive officer of Bank of America
Brian T. Moynihan, president and chief executive officer of Bank of America Corp. Photographer: Jonathan Fickies/Bloomberg

Bank of America Corp., hit by last month’s disclosure of a potential $10 billion charge tied to new regulations, may add $13 billion to its book value when it posts gains from a Chinese bank stake for the first time in October.

The windfall stems from Bank of America’s 11 percent stake in China Construction Bank Corp., according to analysts at Wells Fargo & Co. and Royal Bank of Canada. The shares have been valued at original cost of $9.2 billion because they couldn’t be sold until August 2011, according to the bank. With the lockup expiring in less than a year, accounting rules require the stake to be carried at market value -- now $22.1 billion.

That would soften the blow from the writedown announced by Bank of America on July 16, spurring the stock’s biggest one-day drop in 13 months. Chief Executive Officer Brian T. Moynihan said he’ll reduce the value of the credit-card unit in the third quarter because limits on fees in the U.S. financial overhaul will slice into annual revenue.

“They could end up with a nice big pop to their capital,” said Nancy Bush, an independent analyst based in New Jersey who specializes in financial firms. The China Construction stake will “add significantly to tangible book value, and it’s coming at a time when the Street is looking at tangible book value as an important yardstick.”

Big Banks

The increase will be included in the October report of third-quarter results, according to Bank of America spokesman Jerry Dubrowski. Bank of America is the largest lender in the U.S. by assets, while Beijing-based China Construction is second in its home country and the world behind Industrial and Commercial Bank of China Ltd.

China Construction declined 3 percent today in Hong Kong on concern import growth and the pace of property price gains slowed in July. Bank of America fell 17 cents, or 1.3 percent, to $13.73 at 10:20 a.m. in New York Stock Exchange composite trading. China Construction had gained 3.9 percent in Hong Kong so far this year before today, while Bank of America dropped 7.6 percent.

The U.S. company said in a regulatory filing last week it faces $11.1 billion of requests to repurchase soured mortgages, mainly from bond insurers and government-sponsored enterprises such as Fannie Mae.

Bank of America agreed to buy shares of the Chinese bank in June 2005 and at times boosted the stake as high as 17 percent. The increase in value wouldn’t immediately erase the impact on earnings from the card-unit writedown, because writeups on securities are considered “other comprehensive income.” That’s not included in the income statement of the Charlotte, North Carolina-based bank until sales actually occur, bank spokesman Dubrowski said.

Share Sales

Bank of America posted a $7.3 billion pretax gain on 2009’s income statement by selling some China Construction shares.

The card unit’s writedown stems in part from new U.S. limits on “swipe’” fees banks can charge to merchants each time a consumer uses a debit card. Bank of America estimated that annual debit revenue may decline by $2.3 billion, casting doubt on what the card unit is worth, said Robert Willens, an independent tax and accounting consultant based in New York. The bank paid $35 billion in 2006 for MBNA Corp., then the largest U.S. card issuer.

“The business they own isn’t the same business they bought,” Willens said. The writedown will probably cause a third-quarter net loss, which investors should regard as a non-recurring event, said Marty Mosby, an analyst at Guggenheim Securities in Memphis.

Bank of America’s stock decline trails the 14 percent gain of the KBW Bank Index since Moynihan, 50, took over at the start of this year. Bush said Moynihan’s candor will benefit shareholders in the long run.

Building Trust

“Over time, it should give them a better multiple because no one has trusted them before,” said Bush, whose NAB Research in Annandale, New Jersey has a “buy” rating on the stock. “Brian is being honest here, changing the way the bank has worked and trying to take out some risks.”

As for the China Construction stake, “it was one investment that Ken Lewis got right,” she said, referring to Moynihan’s predecessor as CEO. Lewis retired last year after his takeover of Merrill Lynch & Co. triggered a federal bailout and a slump in the bank’s share price. “Over the long term, it’s clear that the Chinese stock market is going up,” Bush said.

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