SHB’s credit rating has still been maintained at B2 for deposit and issuer ratings and E+ for its standalone bank financial strength rating.
Moody’s said the rating reflects its view on the merged entity’s plan on tackling and making provisions for bad debts particularly those incurred by the troubled Vietnam Shipping Industry Group (Vinashin) following SHB’s recent merger with of Habubank, coded HBB.
The rating agency said its downgrade decision also came from said the negligible amount of cash for the acquisition that would be carried out by a share swap agreement, and the funding improvement of the combined entity observed as yet.
It also reckoned further possible downgrades in the time to come on uncertainties associated with the merger with HBB in terms of the post-merger entity’s asset quality and profitability.
Though the current ratings incorporate, to some extent, the likely degree of deterioration of SHB’s financial figures and business environment, assessment of actual post-merger financial health would require a monitoring period of between 12 months and 18 months.
Moody’s said the credit outlook was negative primarily due to the weak credit profile of HBB, larger scale of the deal compared to SHB’s which would place pressures on credit quality of this bank and ultimately the merged one.
SHB saw non-performing loan ratio as of end-2011 staying at 2.2 percent compared with its partner’s rate of 4.4 percent which could jump to 16.7 percent with loans to Vinashin included.
However, the merged bank’s risk exposure to bad debts could be partly mitigated by making full provisions over a five-year period, said Moody’s.
Notably, all of this giant’s loans have been secured against collateral, part of which could be recovered in 6-12 months to come.
However, it remains unknown whether the merged entity will be able to generate sufficient net income for 2012 to cover the potential worst scenario provisions of around VND1.8 trillion including provisions for Vinashin’s debts (amortized over five years), and other distressed loans.
Also, what concerns this rating agency is Habubank’s poorer profitability compared to SHB’s with the net income-to-average risk weighted assets ratio of less than 1 percent versus 2.3 percent of SHB.
Since the deal will be carried out through a share swap agreement, SHB will issue 405 million new shares at par value of VND10, 000 per share totaling Tier 1 capital of VND4.05 trillion.
The combined Tier 1 capital ratio of the merged bank is estimated to be around 13.3 percent that is very much similar to SHB’s end-2011 rate of 13.2 percent.
Additionally, Moody’s revealed much lower liquidity ratio of Habubank versus SHB’s with the former’s loan-to-deposit ratio of 120 percent and the latter’s 84 percent in the end of 2011.
However, the above ratios are likely to drop to 90 percent for Habubank and 75 percent for SHB on slower credit growth.