SINGAPORE - OCBC'S planned $6.23 billion takeover of Hong Kong's Wing Hang Bank has prompted mixed reactions from credit rating agencies.
Standard & Poor's (S&P) was the first to issue its take on the news, affirming on Tuesday its AAlong- term and A-1+ short-term credit ratings on OCBC. It also affirmed its "stable" outlook on OCBC's long-term credit.
OCBC unveiled the mega bid on Monday as it sought to deepen its penetration of the Greater China market.
"We affirmed the rating because we believe OCBC's financial profile will remain unaffected despite the bank's proposed acquisition of Hong Kong-based Wing Hang Bank," said Standard & Poor's credit analyst Chris Lee. "We believe OCBC will continue to benefit from its strong market position and solid funding profile."
But the two other rating agencies, Fitch Ratings and Moody's Investors Service, issued reports on Wednesday placing their ratings of OCBC under review, with a view towards downgrading.
For Fitch, which has a rating of AA- on OCBC's long-term credit, the main worry is that a larger Greater China presence might lead to higher risks.
"The acquisition of Wing Hang Bank will increase OCBC's exposure to Greater China, where credit and operating risk is higher than in OCBC's home market of Singapore. This could potentially lead to deterioration in OCBC's credit profile," wrote Fitch analyst Mikho Irawady.
An acquisition of this size will materially reduce OCBC's core equity Tier 1 capital ratio, she added.
"OCBC intends to raise equity to maintain prudent capital buffers after the acquisition, but even with the equity raising, Fitch expects that OCBC's core equity Tier 1 ratio will likely be lower than its pre-transaction level."
Moody's analyst Eugene Tarzimanov agreed. The main reason the agency is reviewing its Aa1 credit rating of OCBC is because of the risk associated with financing such a large acquisition, he said.
"Moody's understands that OCBC plans to finance the transaction through a combination of debt and equity. The success of the new capital raising is important for OCBC if it is to maintain capitalisation on a par with similarly rated peers," he wrote.
"While Moody's sees the financing plan as credible, the review for downgrade reflects the risk that such financing could be delayed or significantly reduced in size."
In the unlikely event that this happens, OCBC would continue with a lower capital buffer for coping with unforeseen market and credit risks, he said.
But Moody's added in a note yesterday that beyond the risks related to OCBC's recapitalisation plan, the agency does not expect the transaction to weaken OCBC's credit profile, given the strength of Wing Hang's balance sheet and positioning in the Hong Kong and China markets.
"Strategically, the transaction will enlarge OCBC's platform in Greater China, improve its ability to provide offshore renminbi financing, and position its franchise to benefit from increasing intraregional trade and capital flows within Asia," said Moody's senior analyst Gene Fang.
This article was published on April 4 in The Straits Times.
Get a copy of The Straits Times or go to straitstimes.com for more stories.