Singapore state investor Temasek Holdings (TEM.UL) said it will raise its stake in China Construction Bank (0939.HK) by taking up Bank of America’s (BAC.N) entire entitlement in the rights issue of China’s No. 2 lender.

CCB (601939.SS) plans to raise up to 61.6 billion yuan ($12 billion) this month in Asia’s biggest rights issue outside Japan to shore up capital after an industry-wide lending binge in 2009.

 

BofA, CCB’s second-largest shareholder with just under 11%, has been looking for a buyer for its rights entitlement, sources have previously said.

 

“People would prefer Bank of America to sell the rights to Temasek because they’re an existing shareholder, and they’ve demonstrated that they will probably hold this stake for a longer term,” said Ivan Li, an analyst at Kim Eng Securities in Hong Kong.

 

BofA may be looking to protect its capital adequacy ratios (CAR) ahead of tougher new international banking regulations coming into force with the so-called Basel III agreement, Li said.

 

“Maybe the politics also played a part, since Bank of America took money from the U.S. government, so to subscribe to the rights issue of a Chinese bank may not be a good idea.”

 

By taking over BofA’s rights, Temasek, which already owns about 6% of CCB, will have to invest an additional $1.5 billion to $1.6 billion in the Chinese lender.

 

A Temasek spokesman confirmed the deal, initially reported by Reuters, without providing any further details. 

 

A spokesman for Bank of America declined comment, while CCB was not available to comment.

Temasek, whose sole shareholder is Singapore’s Ministry of Finance, came in for criticism last year over its loss-making investments into Western banks such as Bank of America/Merrill Lynch and the departure of foreigners from its management team.

 

In August, Temasek hired BofA’s former chief risk officer Greg Curl as its president to oversee the financial services sector, and analysts said he could have helped drive the investment.

 

The state-owned fund, which had a $134 billion portfolio as of end-March, is 37% invested in financial services and 46% in Asia, excluding Japan and Singapore.  

 

Some economists suggested the exposure to financial services could be too high, but noted the offering was lucratively priced. HK$7.72.($1.28) 

 

“It may seem to be putting too many eggs in one basket, but investment choices could be limited at this juncture,” said Song Seng Wun, an analyst at CIMB.

 

On Curl, he added: "That helps as well. Everything seems to have fallen into place.

 

CCB, whose largest shareholder is the Chinese government, is offering 0.7 shares for every 10 existing shares at 3.77 yuan per A-share and HK$4.38 per H-share.

 

The price of the rights, first proposed in April, is about 43% below CCB’s Hong Kong-listed H shares that closed at Chinese lenders are nearing the end of an US$80 billion fundraising boom after a government-mandated lending spree during the financial crisis threatened their asset quality.

 

Industrial and Commercial Bank of China (ICBC) (1398.HK), the world’s most valuable lender, on Thursday announced plans to raise US$6.8 billion through a rights issue this month.

 

Temasek, the smaller of Singapore’s two sovereign wealth funds, had about $186 billion in assets under management as at end-March this year.

 

Besides CCB, the Singapore investor also owns large stakes in Bank of China (3988.HK), Singapore’s DBS Group (DBSM.SI), Standard Chartered (STAN.L) and India’s ICICI (ICBK.BO).

 

Temasek invested in Merrill Lynch during the early days of the financial crisis, scooping up a roughly 4% stake, before Bank of America bought the Wall Street brokerage. In May last year, Temasek sold its remaining 3% stake in BofA, taking a roughly US$3 billion loss.