KUALA LUMPUR: Standard & Poor's Ratings Services says the integration process of HONG LEONG BANK BHD [] with EON CAPITAL BHD [] faces some execution risks.
The rating agency's credit analyst Ivan Tan said on Wednesday, May 11 the concern was the 'historically defensive nature of HL Bank's strategy, and its lack of a track record in mergers and acquisitions'.
"A successful execution will allow the combined entity to leverage on its enlarged domestic footprint to grow its market share and compete more effectively with its larger peers,' he said.
Standard & Poor's had affirmed its unsolicited long-term and short-term counterparty credit ratings on HL Bank at 'BBB+' and 'A-2', respectively. The outlook is stable.
It also affirmed the unsolicited 'C+' bank fundamental strength rating on HLBB, and the unsolicited 'BBB' issue rating on the subordinated notes issued by the bank.
"The rating affirmation reflects our opinion that the financial profile of HL Bank has deteriorated following its acquisition of the financially weaker EON Capital," said Tan.
"We lowered the stand-alone credit profile to 'bbb' from 'bbb+'. While we believe HL Bank has opportunities to realize revenue and cost synergies, the bank does not have a track record of mergers and acquisitions. Its ability to successfully manage the integration process, therefore, remains to be seen,' he said.
Tan said nevertheless, the acquisition will propel HL Bank to the fourth largest bank in the country and increase its share of loans and deposits in the system.
'In our opinion, the enlarged HL Bank is of moderate systemic importance and qualifies for one notch of government support," he said.
Standard & Poor's said based on pro forma calculations, the acquisition would weaken the merged entity's financial profile, including its asset quality.
HL Bank's nonperforming asset ratio is healthy compared with its peers'. The ratio was 2.1% at end-December 2010 compared with EON Cap's 3.6%.
HL Bank is also more profitable than EON Cap, with a return on assets of 1.24% as at end-December 2010, compared with EON Cap's 0.83%.
The combined entity will also have a higher proportion of risk assets. It said 70% of EON Cap's balance sheet consists of lower quality loans.
In comparison, HL Bank has about 50% of its total assets in loans, 23% in lower risk cash and interbank deposits, and 26% in securities (predominantly government bonds).
Meanwhile, non-innovative Tier 1 capital that HL Bank raised in May 2011 will largely offset the immediate capital impact arising from the cost of acquisition.
Standard & Poor's believed the merged entity's financial profile will be driven by: (1) how HL Bank executes its merger and integration plans to realize revenue and cost synergies; and (2) whether HL Bank can effectively implement its more conservative risk culture across the organization.
The rating agency's credit analyst Ivan Tan said on Wednesday, May 11 the concern was the 'historically defensive nature of HL Bank's strategy, and its lack of a track record in mergers and acquisitions'.
"A successful execution will allow the combined entity to leverage on its enlarged domestic footprint to grow its market share and compete more effectively with its larger peers,' he said.
Standard & Poor's had affirmed its unsolicited long-term and short-term counterparty credit ratings on HL Bank at 'BBB+' and 'A-2', respectively. The outlook is stable.
It also affirmed the unsolicited 'C+' bank fundamental strength rating on HLBB, and the unsolicited 'BBB' issue rating on the subordinated notes issued by the bank.
"The rating affirmation reflects our opinion that the financial profile of HL Bank has deteriorated following its acquisition of the financially weaker EON Capital," said Tan.
"We lowered the stand-alone credit profile to 'bbb' from 'bbb+'. While we believe HL Bank has opportunities to realize revenue and cost synergies, the bank does not have a track record of mergers and acquisitions. Its ability to successfully manage the integration process, therefore, remains to be seen,' he said.
Tan said nevertheless, the acquisition will propel HL Bank to the fourth largest bank in the country and increase its share of loans and deposits in the system.
'In our opinion, the enlarged HL Bank is of moderate systemic importance and qualifies for one notch of government support," he said.
Standard & Poor's said based on pro forma calculations, the acquisition would weaken the merged entity's financial profile, including its asset quality.
HL Bank's nonperforming asset ratio is healthy compared with its peers'. The ratio was 2.1% at end-December 2010 compared with EON Cap's 3.6%.
HL Bank is also more profitable than EON Cap, with a return on assets of 1.24% as at end-December 2010, compared with EON Cap's 0.83%.
The combined entity will also have a higher proportion of risk assets. It said 70% of EON Cap's balance sheet consists of lower quality loans.
In comparison, HL Bank has about 50% of its total assets in loans, 23% in lower risk cash and interbank deposits, and 26% in securities (predominantly government bonds).
Meanwhile, non-innovative Tier 1 capital that HL Bank raised in May 2011 will largely offset the immediate capital impact arising from the cost of acquisition.
Standard & Poor's believed the merged entity's financial profile will be driven by: (1) how HL Bank executes its merger and integration plans to realize revenue and cost synergies; and (2) whether HL Bank can effectively implement its more conservative risk culture across the organization.
No comments:
Post a Comment