One of America's largest banks, Bank of America (NYSE: BAC), is taking the next logical step in building itself into a major global banking player. It's going to China. On Thursday, the company announced that it had agreed to buy 9% of state-owned China ConstructionBank for $3 billion.
Not only does this investment give Bank of America a toe-hold in China's second-largest bank, but it also gives the company a five-and-a-half-year option to raise its stake to 19.9% -- the legal limit that any foreigner can own in a Chinese bank.
While China Construction is certainly big ($472 billion in assets, $422 billion in deposits, 14,500 branches), it has considerable room for improvement in its operations. Corruption is still endemic in China, and many loans are given out that the borrower has no intention of repaying. Other loans are given to companies on rather shaky footing. As a result, many Chinese banks have had significant issues with bad loans and write-off losses.
What's more, concepts like consumer-focused banking and credit cards are still a little unfamiliar to many state-owned banks, despite the influence that Hong Kong has had since its re-integration. That's where Bank of America comes into the picture. With its expertise in risk management, consumer-oriented banking, and credit cards, the American bank should be a helpful advisor to China Construction.
Of course, Bank of America isn't doing this out of nobility. China is a major growth opportunity for any bank, and by working with China Construction, Bank of America should be able to get its feet wet and build both connections and goodwill.
Furthermore, Bank of America doesn't really have much of a choice. It can't do much more in the way of banking acquisitions in the U.S. -- it's already bumping against regulations preventing any bank from controlling more than 10% of U.S. deposits -- so growth will have to come from the slow, hard, boring strategy of simply leveraging a good business. That means that if Bank of America wants to maintain a strong pace of growth, it has to look at other options like overseas investment.
Bank of America isn't the first to move into China, and it won't be the last. HSBC (NYSE: HBC) bought one-fifth of China's Bank of Communications last year for $1.75 billion and was supposedly interested in China Construction as well and may yet make a small investment. Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) are also onto the China story and looking to expand their presence in the huge market.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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