Moody's Investors Service has affirmed all the ratings of DBS Bank (Hong Kong) Limited (DBSHK) -- formerly Dao Heng Bank (DHB) -- upon its legal merger with DBS Kwong On Bank (DKOB), saying that the merger with the smaller bank should not significantly change its risk profile. The rating outlook remains stable.
Moody's says the ratings further incorporate the likelihood that a material portion of DHB's abundant capital could be up-streamed to its parent, the Development Bank of Singapore (DBS Bank). Such a step would be consistent with actions adopted previously by DBS Bank -- and other bank holding companies -- to concentrate capital at head office and bolster regulatory capital at the parent.
Nevertheless, Moody's advises investors that DBSHK's ratings would be more vulnerable than before to increases in its risk profile, if less capital cushion is available.
DBS Bank already owned 100% of both DHB and DKOB before the merger. The two banks -- along with DHB's existing wholly owned subsidiary Overseas Trust Bank (OTB) -- are being merged on 21 July 2003 by an ordinance passed by Hong Kong's Legislative Council. As such, no additional consideration is involved. At the same time, DHB assumes its new name of DBS Bank (Hong Kong) Limited and the banking licenses of DKOB and OTB are being returned to the Hong Kong Monetary Authority.
DBSHK's C Bank Financial Strength Rating reflects its comfortable loan loss reserve level and good risk management. DBSHK's risk profile does not materially change with the merger as DKOB represents only about 20% and 23% of post-merger assets and loans, respectively.
Although DBSHK's exposure to riskier industries -- including property development, retail and wholesale trade and manufacturing -- rises slightly with the merger, it is still below the industry average and the combination actually adds to the diversity of its loan portfolio.
Furthermore, DBSHK benefits from DKOB's above-industry average asset quality -- its NPL ratio of 1.9% at end-2002 was slightly better than DHB's 2.4%. At the same time, DBSHK's liquidity and regulatory capital adequacy ratios weaken slightly because of DKOB's riskier asset mix, which has more loans, particularly non-mortgage loans, as a proportion of assets. DBSHK's pro-forma total risk weighted total capital ratio declines to about 22% from DHB's very strong 23.42% for end-2002.
Moody's says that DBSHK's earnings should naturally increase, given the larger size of the combined bank. So should profitability, given the higher returns that accompany DKOB's somewhat greater risk profile. However, due to the extensive operational integration of the two banks, completed over the past two years, no significant added cost savings are anticipated.
DBSHK's local and foreign currency senior deposit ratings of A2 and A3, respectively, reflect all the factors which go into its C BFSR, plus the implied support of it parent, DBS Bank. DBS Bank, Singapore's largest, carries a BFSR of B-, while its senior debt and deposits are rated Aa2, benefiting from the implied support of the Singapore government.
DBSHK with total pro-forma consolidated assets of HK$161.5 billion (US$20.7 billion) as of December 31, 2002, remains Hong Kong's fifth largest bank including DKOB's assets of HK$32.8 billion. The merger should increase their share of system deposits to about 3.6%. The bank has been 100% owned by DBS Bank since January 10, 2003, when the latter exercised option to acquire the remaining 28.4% of DHB, completing the acquisition begun in 2001.