Shares in China Construction Bank (CCB) dived 5.6 percent yesterday after Bank of America said it will boost its stake in CCB at a significant discount to its current trading price.

On Monday, Bank of America said it planned to pay $7 billion to almost double its stake in CCB to 19.13 percent from 10.8 percent by exercising an option to buy the shares at a steep discount to the current market price.

According to the announcement, Bank of America will buy an additional 19.58 billion CCB shares at 1.2 times the lender's book value. The transaction price is around HK$2.8 a share, based on CCB's unaudited third-quarter results, a nearly 32-percent discount to CCB's closing price of HK$4.11 on Monday.

CCB shares yesterday dropped HK$0.43 or 10.46 percent to as low as HK$3.68 and pared some losses to end the day at HK$3.88.

Goldman Sachs said in a research note that Bank of America might consider the option of selling its unrestricted CCB stake gradually in the coming quarters given the weak operating environment for US banks. The investment bank also said there will be negative impact on CCB's H shares.

Bank of America is barred from selling the newly-acquired CCB shares until August 2011, but the three-year-lock-up period ended recently on some of its existing holdings.

Analysts believe that Bank of America was preparing to sell some of its stake to shore up its books as credit losses mount in the US, and the move was aimed at funding its purchase of Merrill Lynch. The bank has raised $22 billion by selling common and preferred shares this year, including $10 billion in October to help pay for its Merrill Lynch acquisition.

"People interpret that Bank of America is positioning itself to cash out of its original stake. Rather than as a stimulus to buy, it has become an opportunity to sell for some investors," said Paul Lee, analyst at Tai Fook Securities.

"They will probably sell their old stake in CCB when the stock price hits a certain level," he said.

Bank of America first invested in CCB in June 2005, buying $3 billion stock before the lender's Hong Kong initial public offering, and invested another $1.9 billion this July. The value of its holding almost tripled to $14.5 billion as of Sept 30.

Citigroup believes that the stake increase was driven by pricing considerations. It also noted that a stake disposal by Bank of America was possible as the bank might need to raise extra capital as the year-end approaches.

(HK Edition 11/19/2008 page3)