Moody's Investors Service placed the B2 deposit and issuer ratings of Saigon-Hanoi Commercial Joint Stock Bank (SHB) on review for a possible downgrade on May 18.
Moody's places SHB on review for possible ratings downgrade after a merger with Habubank
The bank's standalone bank financial strength rating (BFSR) of E+, was also placed on review for possible downgrade.
The decision followed an announcement by the bank, on May 5, that its shareholders had approved a plan to merge with Hanoi Building Commercial Joint Stock Bank (Habubank). Habubank's shareholders had already approved the merger, on 28 April. The State Bank of Vietnam, had also indicated that it supported the deal.
Moody's said that the review was a result of the weak credit profile of Habubank and the materiality of the transaction relative to SHB's, placing downward pressure on the credit quality of the bank and, ultimately, on the merged entity compared to the relatively healthier profile of SHB pre-merger.
SHB's reported non-performing loan (NPL) ratio was 2.2% at end-2011, while Habubank's NPL ratio was 4.4%. If loans to the troubled Vietnam Shipbuilding Industry Group (Vinashin) had been included, Habubank's NPL ratio would have been closer to 17%. The liquidity ratio of Habubank is substantially weaker than that of SHB, with a gross customer loans-to-gross customer deposits ratio of 120%, as reported at the end of last year, while SHB reported 84%.
Besides the troubling credit profile of the new bank after-merger, Moddy’s anticipated that SHB's management would face challenges from the magnitude of the transaction. All of Habubank's holdings currently amount to about 58% of SHB's total assets. In addition, it has a limited distribution network, restricting cross-selling opportunities in the short-term.
The review of SHB' ratings will evaluate the financial impact of this relatively large transaction on the bank's creditworthiness. Among other factors, Moddy’s said that it would make a detailed review of how the transaction is funded and how the merged entity intends to manage provisions for its NPLs going forward. Moddy’s view SHB as having a limited earnings capacity. However, they added, "Any Government support to manage the merged entity's risk from Vinashin will also be taken into account."
Overall, Moddy’s assessment will focus on the extent to which responsible management of the bank can be realistically expected to improve liquidity while maintaining profitability and capital ratios at their current levels.
