Analysis: BofA and PNC may divest BlackRock under Basel

CHARLOTTE, North Carolina Tue Aug 3, 2010 3:03pm EDT

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CHARLOTTE, North Carolina (Reuters) - Bank of America Corp (BAC.N) and PNC Financial Services Group Inc (PNC.N) may be forced to sell their stakes in asset manager BlackRock Inc (BLK.N) under far-reaching rules proposed last week by the Basel Committee of Bank Supervision.

The rules, known as the Basel III capital requirements, would effectively prevent banks from holding big stakes in other companies.

Any shareholding greater than the value of 10 percent of a bank's common equity capital would not count as capital, forcing the bank to raise additional money to buttress against potential losses.

Analysts and regulatory experts said while the new rules are years away from implementation, banks are already preparing for the worst.

"It's clear from the rules that are out, there will be lots of adjustments, whether that's divestitures or raising additional capital," said John Douglas, banking attorney with Davis, Polk & Wardwell LLP, and former general counsel for the Federal Deposit Insurance Corp.

The proposals are aimed at providing universal capital and leverage standards for banks to avert the next crisis.

Governments must ratify the accords for them to take effect, and sometimes countries do not adopt the rules. But this version likely will gain approval because of the severity of the 2008 crisis, despite Wall Street's opposition to many new regulations.

In the United States, banks rarely own large chunks of other companies. But Bank of America and PNC -- through a unique series of deals -- combined own nearly 60 percent of BlackRock, though the asset management company remains independent.

Bank of America might also have to part with its 11 percent stake in China Construction Bank (601939.SS).

For BofA and PNC Financial, selling the BlackRock stake may not be ideal, but it may also be their only choice. Holding it could require them to raise more capital.

"Its going to be tough to raise capital to support a minority investment," said David Konrad, a bank analyst with Keefe, Bruyette & Woods Inc. "Banks may need, in some cases, to hold double the capital to maintain the current level of an investment and that's tough to justify."

Bank of America, PNC and BlackRock officials declined to comment on the proposals. Instead, they said they were evaluating them and would act in the best interests of shareholders.

NO OTHER CHOICE

A look at the banks' BlackRock stakes shows that they could stand to lose a lucrative investment if they sell.

Pittsburgh-based PNC Financial's investment in BlackRock is currently a 24.6 percent economic interest. PNC Financial received $77 million of BlackRock's earnings in first quarter, which represented 12 percent of the bank's $648 million net income, according to the most recent figures available.

As of March 31, PNC Financial's stake is valued at $5.7 billion on the bank's balance sheet, roughly $1 billion below the stake's current market value, Konrad said.

Konrad, in a recent note to clients, projected PNC Financial could earn up to $7.40 per share annually if it sold its BlackRock stake, assuming the capital it raised from a sale generated an 18 percent return on equity.

Conversely, if PNC held onto the stake, Konrad projects annualized earnings of $6.85 per share, assuming a 16 percent return on equity.

"PNC could buy a regional bank with the kind of gain they would see from selling their BlackRock stake," Konrad said.

Bank of America owns a 34.1 percent economic interest in the asset manager, according to a BlackRock spokeswoman. As of March 31, the bank valued its BlackRock investment at $14.1 billion.

The bank does not break out its earnings from BlackRock separately. But BofA noted in first quarter report its so-called "all other income" increased to $95 million from $64 million a year prior due to more noninterest income from the Blackrock investment.

Bank of America has the right to appoint two directors to BlackRock's board as part of its 2009 buyout of Merrill Lynch.

(Reporting by Joe Rauch. Editing by Robert MacMillan, Leslie Gevirtz)

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