Two credit rating agencies have sounded a negative note on OCBC Bank's planned takeover of Hong Kong's Wing Hang Bank, which the Singapore lender announced on Tuesday.
Fitch Ratings said on Thursday it has placed OCBC's issuer default and viability ratings on "watch negative", indicating that these ratings could be downgraded.
The action "reflects Fitch's expectations that the acquisition of Wing Hang will increase OCBC's exposure to Greater China, where credit and operating risk is higher than in OCBC's home market of Singapore," the agency said.
"This could potentially lead to deterioration in OCBC's credit profile." OCBC's long-term issuer default rating is currently AA- while its viability rating is aa-.
Fitch expects to decide on whether to downgrade these ratings when OCBC reveals more details about how it plans to finance the acquisition of Wing Hang.
Meanwhile, Moody's Investors Service has also put its ratings of OCBC on review for a possible downgrade.
"Although the acquisition offers OCBC potential benefits in business and revenue diversification, the deal's financing structure poses significant transitional risk and prompted us to put OCBC's ratings on review for downgrade," it said in a report on Thursday.
In contrast, the agency placed Wing Hang's ratings on review for an upgrade. "For Wing Hang, the transaction is credit positive because we expect it to benefit from the support of a strong parent," it added.
Moody's said OCBC's main challenge is executing its financing plans. "The success of the new capital raise will be important for OCBC if it is to maintain capitalisation on par with similarly rated peers. Furthermore, the bank provided no public information on the timing of the financing, its size and its components," it said.
Unlike Fitch, however, Moody's does not expect OCBC's increased exposure in China following this acquisition to significantly raise its risks.
"According to the bank, it has no plans to aggressively expand in mainland China. We also note that Wing Hang's exposure to China is small," the agency said.