Some Banks Rethink Investments As Money Tightens

After loading up on Asian assets, could suffering Western banks be forced to sell out?

That is what analysts and bankers are asking as Bank of America considers lowering its 9 percent stake in China Construction Bank. After reporting $2 billion in write-downs related to bad loans on Monday, Bank of America executives said they were discussing a sale of the stake with the Chinese government.

John Wadle, Asian bank analyst for UBS in Hong Kong, said, “People may have done these deals at a time when capital was plentiful and hope was abundant, but now they have to be realistic.”

They should be showing investors, Mr. Wadle said, that they are making decisions based on “what is core and noncore” business.

American and European banks have picked up a wealth of minority stakes in Asian banks in recent years, hoping to capitalize on fast-growing economies that often have nascent consumer credit businesses.

For example, American Express, Goldman Sachs and Allianz Group paid $3.8 billion for a stake in Industrial and Commercial Bank of China in 2006; Royal Bank of Scotland bought a 5 percent stake in Bank of China for $1.6 billion in 2005; and Citigroup bought 10 percent of HDFC Bank of India in 2006.

China and India, among other fast-growing Asian economies, have caps on foreign bank business and limit foreign branches, making such deals a necessity for anyone that wants to do business there.

China limits individual foreign investors to 20 percent stakes in local banks, but it has discussed raising that limit for securities and brokerage firms.

Foreign investors are allowed to own as much as 49 percent of private banks in India, but just 20 percent of state banks, and they need approval for each branch they open. Foreign investors own 40 percent of the largest private bank in India, ICICI Bank, and 26 percent of HDFC Bank.

Whether Bank of America will actually sell its 9 percent stake, and start an exodus, is still unclear.

“You’ve seen a lot of banks suffering with subprime, but ultimately there is a lot of interest in China and the rest of Asia” and it would be odd for Western banks to abandon that, said Warren Blight, an analyst at Fox, Pitt-Kelton in Hong Kong.

Still, Mr. Blight said, if they really need to raise cash, looking at Asian bank assets may be the way to go.

Many American and European banks took stakes in their Chinese counterparts before they went public and are now holding sizable profits even after recent losses in the Chinese stock market, Mr. Blight said.

Bank of America bought the 9 percent stake in China Construction bank in 2005 for $2.5 billion. It is now worth several times as much.

Banks often hold a variety of assets outside the standard loans and deposits, from real estate to venture capital and hedge funds to equity in other companies.

They have historically rebalanced these assets on a regular basis — especially when losses come rolling in from their main businesses of lending money in their home markets.

In the 1980s, some American banks unloaded namesake buildings after suffering losses. In 1987, the Citigroup predecessor Citicorp, saddled with billions in bad developing world loans, sold a two-thirds stake in Citicorp Center on Lexington Avenue to Dai-Ichi Mutual Life Insurance Company on Japan.

In recent years, British banks have been selling branch offices and then leasing them back, in order to free capital. After deciding, en masse, to get into the insurance business in the late 1990s — sparked by Citicorp and its merger with Travelers Group — banks started dumping these units.

“I as an investor would not exit at this point unless the need for cash is pressing,” said Bhavesh Kanani, a research analyst with Sharekhan, a brokerage in Mumbai, India.

Still, local investors are likely to pick up any shares foreign banks offload. Their relatively low price “makes them attractive for domestic institutions such as mutual funds, which are sitting on cash pile,” Mr. Kanani said.

Some analysts doubt that American and European banks will do any significant shedding of assets.

“These banks are cash flow positive and their cash positions are growing,” Richard Bove, an analyst with Punk Ziegel, said. “They will reduce employment in businesses where the outlook is weaker.”

Selling off Chinese banks asset could be politically difficult for American banks, because they have made gains on these deals, while Chinese investment groups that have bought into American financial companies have watched their investments decline in value.

Whether foreign banks start selling stakes in their Asian counterparts may come down to how the original deal was negotiated.

“It all depends on the terms and understanding and agreement banks have when they entered into these commitments,” Mr. Waddle of UBS said.

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