Singapore's Temasek sold its 3 percent stake in Bank of America in the first quarter of this year, taking a loss of around $3 billion in the process, as the state investor refocuses on emerging markets.

Temasek invested in Merrill Lynch and other global banks during the early phase of the credit crisis but, like most sovereign wealth funds, was burned by losses as the crisis deepened.

Temasek ended up with a stake in Bank of America when the U.S. bank bought Merrill in January.

But the U.S-centric Bank of America may not have been the first choice of investment for Temasek, given the state investor focuses on global companies that aim to grow in Asia, sources familiar with Temasek's thinking told Reuters.

Analysts said Bank of America did not offer the global banking franchise that prompted Temasek and other sovereign funds to buy into Merrill and other Western banks.

Singapore's bigger sovereign wealth fund, GIC, also invested in Citigroup and UBS .

Bank of America is no longer a global franchise. It's pulled out from a lot of its overseas operations, said Mike Kerley, a London-based fund manager at Henderson Global Investors.

He added the U.S. Federal Reserve's recent 'stress tests' on banks showed BofA needed to raise new capital, which would dilute the holdings of existing investors such as Korea Investment Corp.

Bank of America's shares in Frankfurt were up 1 percent in early European trade on Friday.

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Temasek has also recently become more aggressive in the Asian market and is eyeing investments in Latin America and Russia.

The cash from the BofA stake sale partly allowed Temasek to subscribe to rights issues of Asia-focused Standard Chartered , Singapore's DBS and Indonesia's Bank Danamon .

This week it bought more shares in China Construction Bank <601939.SS> from Bank of America.

It seems they feel the China growth story is better than the 'green shoots' of recovery in the U.S., said Song Seng Wun, chief executive of CIMB Research in Singapore.

He said Temasek probably sold its BofA holdings to cap its exposure to financial stocks, which at the end of March 2008 was 40 percent of its portfolio.

Temasek CEO Ho Ching, who will be replaced by former BHP Billiton Chief Executive Chip Goodyear in October, said this week that the investment firm has debated whether to raise its long term Asia exposure, and add new exposures to other geographies.

Asia and Singapore account for 70 percent of its portfolio.

Temasek's portfolio fell 31 percent between March 2008 and November last year to S$127 billion ($87 billion).

The global financial crisis has sent Temasek's portfolio value back three years to the level seen in March 2006, said Ho, who is the wife of Singapore Prime Minister Lee Hsien Loong, in a speech posted on Temasek's website on Thursday.

For the speech, click: http://www.temasekholdings.com.sg

The Bank of America stake sale was confirmed by a Temasek spokeswoman on Friday.

Temasek held 188.8 million Bank of America shares. The state investment firm said in early January it had converted its 13.7 percent stake in Merrill Lynch & Co into BofA stock.

At that time, its stake in Bank of America was worth around $2.6 billion, or $13.7 a share.

The shares were sold for between $2.53 and $14.81 during the first quarter.

Bank of America had an average price of $6.8 during the first quarter, according to Thomson Reuters data, giving Temasek a loss of about $1.3 billion since January.

The loss on the Bank of America shares adds to the $2 billion paper loss Temasek took when it converted Merrill shares into 189 million BofA shares based on the announced conversion ratio of 0.8595 BofA share for each Merrill share.

The exact loss is hard to calculate as Temasek had been offloading Merrill shares in smaller lots since it first invested in the bank in late 2007.

(Additional reporting by Harry Suhartono)

(Editing by Ian Geoghegan)

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