Moody's tags Wing Hang Bank's stake sales as 'credit negative'

Purchase likely to weaken its standalone liquidity profile.

According to Moody's, last Monday, Hong Kong-based Wing Hang Bank (A2 negative, C+/a2 negative)1 announced that independent third parties had approached its two main shareholders, the Fung family and The Bank of New York Mellon (Aa1 review for downgrade, B/aa3 review for downgrade), about purchasing their stakes. 

A sale by the two main shareholders, which together control 45% of Wing Hang Bank, would trigger a mandatory general offer to all shareholders.

Here's more from Moody's:

Although the potential buyers are unknown, we suspect that mainland China institutions are most likely behind the offer. This would be credit negative for Wing Hang Bank because it would likely lead to significant loan and asset growth and weaken its standalone liquidity profile.

We base our view on other transactions involving midsize Hong Kong banks over the past decade. However, our expectation of strong parental support from a mainland bank should partially mitigate the acquisition’s negative effect on Wing Hang’s standalone credit profile.

In addition to Wing Hang Bank, Chong Hing Bank Limited (Baa2 stable, C-/baa2 stable), another midsize Hong Kong bank, has announced that its controlling family is in discussions about a potential sale, but so far neither bank has announced an agreement.

The potential ownership changes are likely to herald a transformation in the business models of these two Hong Kong-based banks, which have traditionally operated conservatively.

The key credit issue is whether an ownership change will lead to more aggressive expansion strategies, including strong growth in mainland-related exposures, that could weaken their credit profiles. 

This has been the pattern in previous takeovers, including China Merchants Bank’s (Baa3 stable, D+/ba1 stable) acquisition of Wing Lung Bank Limited (A3 negative, C-/baa1 negative) in 2008.

Currently, only five mainland banks own Hong Kong operating subsidiaries: Bank of China (Hong Kong) Limited (Aa3 stable, C+/a2 stable), China Construction Bank (Asia) Corporation Limited (A2 stable, C/a3 negative), China CITIC Bank International Limited (Baa2 stable, D+/baa3 stable), Industrial and Commercial Bank of China (Asia) Limited (A2 stable, C-/baa2 negative), and Wing Lung Bank Limited

Other mainland banks operate in Hong Kong through branch offices that mainly serve the offshore financing needs of large mainland corporates. 

They have limited staffing and rely largely on their domestic onshore branches for customer referral and credit evaluation. They also rely largely on confidence-sensitive wholesale funding to finance their operations.

By purchasing a Hong Kong-based bank such as Wing Hang, a mainland bank can gain a retail presence in the city, reduce its reliance on wholesale banking business and diversify its funding sources.

In addition to serving Chinese corporates, they can also serve the increasing offshore banking needs of mainland individuals and small enterprises.