Bank of America's foreign foray
China deals shows U.S. bank is going overseas for growth
MarketWatch | June 17, 2005
By David Weidner
For years, Bank of America has been exactly that, a domestic powerhouse without the foreign presence of its chief competitors.
But with the Charlotte, N.C.-bank's $47 billion purchase of FleetBoston Financial in 2004 and its announcement late Thursday that it is acquiring a 9% stake in China Construction Bank for $3 billion, that strategy is changing.
It's not the first time Bank of America has signaled the shift. The bank bought a 24% stake in Banco Santander Serfin for $1.6 billion in 2002. That deal has been "highly successful," according to BofA Chief Executive Ken Lewis.
"We have said that we liked the Serfin investment and would be interested in entering into another such transaction," Lewis said. "It makes sense, if you are looking to tap into economic growth, to consider an investment in China."
Even with those deals, however, Bank of America still only generates less than 5% of its revenues overseas.
That deal filled out an already big presence in Latin America that BofA inherited with its FleetBoston purchase.
The China deal will give Bank of America (BAC: news, chart, profile) a toehold in a bank with $472 billion in assets, grant it access to 132 million customers and an ownership stake in one of China's big four banks. See full story.
Bank of America isn't the first financial institution to take a stake in the fast-developing country. HSBC Holdings (HBC: news, chart, profile) bought a 20% stake in Bank of Communications in 2004 for $1.75 billion. Yet, BofA is the first U.S. bank to make such a deep investment - one that could grow to a 19.9% stake in five years under the current agreement.
The emphasis on foreign investment is not entirely surprising. After the FleetBoston deal closed, Bank of America bumped up against federal limits on U.S. deposits.
As of June 30, 2004, the bank had 5,835 branches and $526 billion in deposits, more than double the next biggest U.S. depositor, Wells Fargo Corp. (WFC: news, chart, profile) : 3,075 and $256 billion, according to the Federal Deposit Insurance Corp.
In short, the bank was finished buying in the U.S. market.
"While (Bank of America) enjoys an enviable position in the U.S. market, its strategic capital reinvestment options have been limited relative to other large global banks such as Citigroup and HSBC, both of which possess global franchises and access to fast-growth international consumer markets," wrote Morgan Stanley analyst Betsy Graseck in a note Friday.
There is much room to grow. While competitors such as Citigroup, Goldman Sachs Group, Lehman Bros. and Morgan Stanley and have long been deep into Europe - Lehman disclosed this week that 40% of its revenues come from international operations - Bank of America's effort has been limited to a small investment banking operation of 2,200 employees based in London.
Some analysts are worried that BofA may make a misstep with its new strategy.
"We're becoming a bit less positive on BofA given revenue growth is likely to become increasing challenging, consumer credit risk is above average, expense (and) capital flexibility is less than it's been, and acquisition risk is rising a bit," wrote UBS analyst Matthew O'Connor in a note Friday.