Chinese buyer seen as negative for Wing Hang
Warning from Moody's comes because of the increased mainland exposure that the Hong Kong bank would have in the event of takeover
Wing Hang Bank, Hong Kong’s second-largest family-owned lender, which is in takeover talks, would likely have its credit rating downgraded if the acquirer was based on the mainland, Moody’s Investors Service said.
That comes after the rating agency placed Chong Hing Bank under review for a downgrade following the bank’s announcement on Friday it agreed to sell up to 75 per cent of its shares to Guangzhou-based investment firm Yue Xiu.
The list of potential suitors for Wing Hang includes Agricultural Bank of China and Singapore-based Oversea-Chinese Banking Corp and United Overseas Bank, market observers said.
“If the buyer was from China, the impact on [Wing Hang’s] standalone credit rating would be negative, as the bank would later develop more exposure to the mainland,” Moody’s senior analyst Sonny Hsu said.
“But if the buyer is from Singapore or Australia, then the impact would be mixed.” Hsu said parental support from a foreign acquirer could be positive for the ratings on Wing Hang’s debt or deposits.
Previous acquisitions of Hong Kong banks by mainland firms, such as China Merchants Bank’s acquisition of Wing Lung Bank, have consistently led to faster growth in the balance sheet and increased the mainland exposure of the acquired banks.
The acquisition of individual banks would not affect the ratings of Hong Kong’s banking sector, Hsu said. But Moody’s assigned a negative outlook in June to nine banks operating in the city, because of increasing risk as loans rose in a low-interest-rate environment.
Fitch Ratings analyst Sabine Bauer said: “The credit rating [of banks] is sensitive to changes in strategy and financial profile. But higher exposure to the mainland does not necessarily lead to a negative impact on the rating, if the bank maintains a prudent risk appetite and established risk management standards.” The rating agency holds a stable outlook for both Chong Hing and Wing Hang.
Moody’s said its ratings on Chong Hing, before any takeover, take account of the bank’s conservative management and credit risk appetite, as reflected in its modest loan growth and low loan credit costs since 2010.
The transfer of the majority ownership in Chong Hing from the Liu family to Yue Xiu would likely herald faster growth and more proactive risk-taking, Moody’s said. Yue Xiu, the investment arm of the Guangzhou city government, offered HK$11.6 billion last Friday for the stake, translating into 2.08 times the price-to-book value of the lender’s assets.
During the ongoing review period, the credit agency said it would assess the buyer’s strategy for Chong Hing’s operations and its expansion plans for the bank’s mainland-related business. The review would place emphasis on the impact of likely stronger asset growth and increase in exposure to southern China.
Chong Hing’s ratings are unlikely to be upgraded in the near term, assuming the transaction goes through, the rating agency said.
If the deal is completed, concerns about changes in the bank’s strategic direction, risk appetite and faster loan growth could all lead to a downgrade in its ratings, Moody’s said.