Bank of America Corp., facing an estimated $18 billion bill to resolve mortgage and foreclosure disputes, may cover the cost by liquidating its stake in China Construction Bank Corp., according to Citigroup Inc.
Instead of selling stock to raise capital, Bank of America could liquidate its 10 percent stake in CCB starting in August, Keith Horowitz of Citigroup said yesterday in a research note. Bank of America owned 25.6 billion shares of CCB valued at $21 billion as of March 31, the firm said in a May filing.
Bank of America has declined 16 percent this year in New York trading as the projected costs from defective mortgages and foreclosures mounted. That’s raising concern that the Charlotte, North Carolina-based company may need to sell new shares, diluting the holdings of current investors. The lender was the only U.S. bank among the largest four that had its capital plan rejected by the Federal Reserve this year.
“There are large risks related to legacy mortgage businesses, but we believe they are manageable and reflected in the current stock price,” Horowitz, who rates Bank of America “buy,” said in the note. “Bank of America’s capital position is clearly among the lowest of the large banks, but we believe fears of a capital raise are way overdone.”
The bank may have $10 billion more in costs related to demands that it repurchase bad mortgages, Horowitz wrote. It may cost $8 billion to settle with state attorneys general over documentation lapses during home seizures, he wrote. The firm became the biggest servicer of mortgages after its 2008 purchase of Countrywide Financial Corp., which has drawn criticism for sloppy lending that caused a surge in defaults.
Bank of America may also sell its stake in CCB to improve its capital levels ahead of tougher international rules, Horowitz said. The sale may result in a $10 billion after tax gain, he said.
The lender “remains a significant shareholder in China Construction Bank and we intend to continue the important long-term strategic alliance with CCB originally entered into in 2005,” said Jerry Dubrowski, a Bank of America spokesman. While restrictions on the sale of most CCB shares end in August, about 2 billion units cannot be sold until 2013, he said.
Last month, Bank of America agreed to sell its remaining stake in BlackRock Inc. back to the world’s biggest money manager for about $2.5 billion. The bank said at the time that the sale wouldn’t affect its business relationship with BlackRock.
Bank of America slipped 2 cents to $11.22 at 10:36 a.m. in New York Stock Exchange composite trading. Horowitz predicts the price will rise to $17.