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HONG KONG/DUBAI (Reuters) - Bank of America Corp (BAC.N) has held exploratory talks with the principal investment funds of Kuwait and Qatar about selling part of its $17 billion stake in China Construction Bank (0939.HK), three sources with direct knowledge of the talks told Reuters.
Bank of America, which owns about 10 percent of CCB's (601939.SS) Hong Kong-listed shares and is scurrying to raise capital for its mortgage-scarred balance sheet, will be contractually free to sell the bank shares after August 29.
BofA, the largest U.S. bank by assets, is likely to sell half its stake to shore up its Tier 1 capital, one of the sources said. Analysts believe Bank of America needs about $50 billion to meet new capital requirements.
Talks about the Chinese bank have been held with other investors in addition to the Kuwait Investment Authority and the Qatar Investment Authority, the sources said.
If successful, the move to sell the shares to the sovereign wealth funds will alleviate concerns that BofA will be selling the stake in the open market through a block deal.
Shares of CCB rose as much as 4 percent, bucking a fall in the benchmark Hong Kong share index .HSI, as traders cut short positions and bet the huge overhang would now not have to be absorbed on the market.
"The market must be thinking that BofA is going to unload their entire stake to Middle Eastern SWFs without showing anything to the street," one Hong Kong-based trader said.
Shares of the Chinese bank have fallen some 20 percent, partly in anticipation of a BofA sale, traders said.
The stock was up 1.3 percent at the mid-session break compared with a 1.5 percent fall in the benchmark index.
It was unclear if any agreement with the sovereign wealth funds or other investors have been cemented. Sources said no talks are being held currently.
Bank of America, whose shares have fallen 27 percent in the past week, did not mention the China investment during a widely followed conference call that top executives held on Wednesday with thousands of investors. Chief Financial Officer Bruce Thompson said on the call that asset sales are being considered to boost capital.
"These stakes will be sold eventually," a second source said of the Chinese bank shares. "They have been shown previously to funds who matter."
Bank of America spokesman Jerry Dubrowski declined to discuss whether negotiations have been held, and officials at QIA and KIA were not immediately available for comment.
"We continue to be a significant shareholder in CCB and we intend to continue the important long-term strategic alliance with CCB originally entered into in 2005," Dubrowski said.
The sources sought anonymity because they are not authorized to speak to the media.
Bank of America has not been getting much support this year from its CCB investment.
Last November, Bank of America sold its option to purchase additional shares of CCB that were available in a rights offering.
Chinese banks have been pressured by slowing loan growth and mounting worries about bad debts. Last month, Temasek Holdings TEM.UL, a state-owned investment vehicle in Singapore that bought the CCB rights from BofA, sold $3.6 billion worth of stakes in two large China banks.
Over the past year, BofA has shed its stakes in banks in South America and Latin America, as well as a portion of its holdings in New York-based BlackRock Inc, (BLK.N) the world's largest asset manager.
Last week, the Charlotte, North Carolina-based bank sold 400,000 residential mortgage loans with an unpaid principal balance of $73 billion to Fannie Mae, the Wall Street Journal reported Wednesday, citing sources familiar with the deal.
Middle Eastern sovereign funds are familiar with Chinese financial firms. QIA and KIA were cornerstone investors in Agricultural Bank of China Ltd's (1288.HK) IPO last year. KIA also invested $1 billion in insurer AIA Group's (1299.HK) Hong Kong listing.
BofA paid $3 billion for a 9.9 percent stake in CCB, the world's No. 2 bank by market value, before the Chinese lender's IPO in 2005. The U.S. bank then exercised an option to buy an extra 11 percent for $9.2 billion. BofA sold part of its stake in May 2009.
The U.S. bank is now left with 25.6 million shares, including 23.6 million that come out of a lock-up on Aug 29. It is free to sell the remaining shares in 2013.
The U.S. bank is eager to retain about half of the stake as a bet on growth in China, one source said.
China's top three banks went public in the middle of last decade, and each attracted large investments from U.S. and European banks before their offerings. The investments were marketed as a strong selling point by underwriters, but several of the overseas strategic investors have partly or fully exited their stakes following the expiration of lock-up periods.
Additional reporting by Joe Rauch and Vikram Subhedar; Reporting by Denny Thomas and Dinesh Nair; Editing by Jed Horowitz and Lincoln Feast