HONG KONG/SINGAPORE (Reuters) - Singapore state investor Temasek Holdings TEM.UL sold stakes in two of China's biggest banks on Wednesday to raise $3.6 billion, piling more pressure on mainland lenders amid concerns about rising bad debts.
The sale of stakes in Bank of China (3988.HK) and China Construction Bank (CCB) (0939.HK) reduces Temasek's big exposure to the financial sector and adds to a growing war chest as it boosts focus on resources.
The move, coming just a day after ratings agency Moody's warned of a possible downgrade for Chinese banks due to their higher-than-expected exposure to local government debt, pushed down shares of the two lenders more than 3 percent in Hong Kong and triggered broad stock market weakness in the territory and in Shanghai.
"I don't like the Chinese banks," said Mark Matthews, head of research in Asia for Swiss wealth manager Julius Baer, citing their exposure to local government debt. "My concern is that they may freeze their dividends."
Temasek's stake sales also come ahead of an end-August expiration of a lock-up period for Bank of America's (BAC.N) 10.6 percent stake in China Construction Bank. There is speculation that Bank of America will sell off a majority of that stake.
China Construction Bank Chairman Guo Shuqing said he was not worried about Temasek's sale and added he did not hear about Bank of America diluting its stake in CCB. [ID:nL3E7I60TU]
Bank of China did not issue any statement.
With about $150 billion in assets under management as of March 2010, Temasek has emerged as a powerful global investor and played a big role in providing capital to banks during the financial crisis.
"Temasek's sale will be closely examined by other long-term investors and is certainly a negative sentiment driver for H-share prices in the near term," James Antos, analyst at Mizuho Securities, said in a report.
Investors turned their focus to other possible block deals following Temasek's surprise sell down. Agricultural Bank of China (1288.HK) was one such case, with the stock falling about 5 percent on concerns that cornerstone investors may exit part of their stakes. About 12.4 billion shares worth more than $6 billion will come out of the one-year lock-up on July 15.
Temasek's move is reminiscent of late 2007, when it sold stakes in the two Chinese banks a few weeks ahead of its large stake purchase in Merrill Lynch, an investment that turned sour during the global financial crisis.
The Singapore investor has been building its cash levels through profitable exits from some of its investments. Last year, it sold a S$1.3 billion ($1.1 billion) stake in food and beverages company Fraser & Neave (FRNM.SI) making a hefty gain of 49 percent.
It also raised $607 million by selling its entire stake in South Korea's Hana Financial Group (086790.KS) last year.
Temasek owned about 7 percent of CCB and the sale of 1.5 billion Hong Kong-listed shares would cut its holding to just over 6 percent, according to Thomson Reuters data. Temasek would own about 6 percent of Bank of China's outstanding Hong Kong shares after it sold 5.2 billion shares.
"This sale is part of our portfolio rebalancing, which we do from time to time," said Temasek spokesman Jeffrey Fang. "Temasek continues to hold substantial positions in Chinese banks."
The stake sales come ahead of its annual review planned later this month and is a sign it is trying to cut exposure to the financial sector from 37 percent at end-March 2010.
Temasek's portfolio probably rose in the most recent financial year for the second year in a row, as it followed a cautious strategy of staying invested close to home, a path it has pursued since the financial crisis.
The gains in Temasek's portfolio are still likely to pale in comparison to the 43 percent surge seen in 2009/10 when it recovered from the pain suffered during the financial crisis following billions of dollars of losses on Western banks.
With one-third of its portfolio in Singapore companies, Temasek tends to outperform the Straits Times Index .FTSTI, which gained about 8 percent between April 1 2010 to March 31 this year.
The state investor is also likely to formally respond to speculation that its chief executive Ho Ching may leave, which she recently denied in an internal communication to staff.
Temasek may remain cautious in the near-term due to lingering questions over who will succeed Ho as CEO, and a worsening global economic outlook, analysts said.
"It is a transition period and during the transition period I think on average people normally do not want to take too many too big bets," said Michael Preiss, chief equity strategist at Standard Chartered Bank.
The Bank of China stake was sold at HK$3.63 a share, raising
HK$18.84 billion ($2.4 billion), while the CCB stake was sold at HK$6.26 a share, raising HK$9.39 billion, a source familiar with the matter told Reuters.
The large block sales were covered within an hour after going to market and the books were closed in three hours, showing strong appetite from investors for the deal, added the source, declining to be named due to not being authorized to speak to the media.
Bank of China shares fell 3.6 percent to HK$3.72 while CCB shares lost 3.2 percent to HK$6.28. The benchmark Hong Kong share index .HSI shed 1 percent.
Temasek bought a 10 percent stake in Bank of China in 2005 for $3.1 billion and invested $500 million in the bank through its initial public offering. It invested over $1 billion in CCB's 2005 IPO.
Temasek has been paring exposure to the financial sector after suffering billions of dollars of losses from its investments in Barclays (BARC.L) and Bank of America during the financial crisis.
Morgan Stanley (MS.N) was the sole book runner for the sale. ($1 = 7.780 Hong Kong Dollars) ($1 = 1.228 Singapore Dollars)
Additional reporting by Elzio Barreto and Fiona Lau in HONG KONG, Kevin Lim in SINGAPORE; Editing by Muralikumar Anantharaman