Asia banking on expansion
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E-mail China Daily, May 5, 2014
"OCBC Bank has been focusing its operations on capturing capital, trade, investment and people flows associated to China through its close relationship with its customers in the region, both onshore and of shore," says OCBC in a statement.
The impact of the deal on OCBC's bottom line will be almost immediate. For starters, it will increase the profits the bank earns in China from 6 to 16 percent. In large part, this is due to Hong Kong's role as the largest of shore yuan market.
But there are dangers, in particular the exposure to new groups of borrowers with uncertain prospects.
The day after the OCBC Wing Hang deal, rating agencies Fitch Ratings and Moody's expressed doubts. The former put OCBC on "watch negative" and the latter downgraded the Singapore bank.
Standard & Poor's, another rating agency, gave OCBC a "stable" grade and pointed out that the bank could benefit from its strong market position and solid funding profile.
"At this early stage, the deal is credit-negative for OCBC because it needs to raise new capital for this large acquisition, and there is a risk that its capital raising might be delayed or reduced," says Eugene Tarzimanov, a Singapore-based vice-president at Moody's.
"If OCBC successfully completes its financing plan for the acquisition, its creditworthiness should return to pre-acquisition levels. In the longer-term, this acquisition should improve OCBC's geographical diversification and product offering."
Founded in 1937, Wing Hang has 70 branches in Hong Kong, Macao and the Chinese mainland.
On April 8, the International Monetary Fund warned in a report that such exposure includes a series of potential risks.
"While deepening integration suggests that financial linkages will continue to grow, the large exposure requires close monitoring and cooperation with mainland supervisors," the report said.
Part of the problem is concern over bad loans.
"The recent surge in bank lending across most of Asia leaves economies and financial systems at risk," says Matthew Circosta, an economist at Moody's Analytics.
Across Asia, the burden of private debt compared to GDP has grown by between 10 and 20 percent in the last five years. Bad loans officially account for less than 5 percent of all loans across Asia, below the rate that caused problems in the United States and Europe. But that is not the whole story.
"To avoid classifying a loan as bad, many Chinese banks roll over debt or repackage it and sell it … or they extend the deadlines for repayment, explains Circosta. "Unofficial estimates put China's non-performing loan ratio at more than 10 percent."
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