The additional capital would balance the banks' higher risk appetite for China-related activities.
Fitch Ratings does not believe the disposal of stakes in Hong Kong Life Insurance Limited by OCBC Wing Hang Bank Ltd, Shanghai Commercial Bank Ltd and Chong Hing Bank Limited will have an immediate effect on the banks' ratings, but the one-off gains of up to 100% of the banks' annual profit, if retained, will support organic growth and help offset rising credit costs.
The capital boost from the disposal is significant; 1.6% of risk-weighted assets for WHB, 1.1% for CHB and 1.0% for SCB.
"We calculate that the Fitch Core Capital ratios would increase to 20% for WHB and SCB and 15% for CHB, assuming the banks retain the entire proceeds as capital. All three banks' capital levels remain comfortably above their regulatory requirements and are in line with those of bigger Hong Kong peers," said Fitch.
Here's more from Fitch Ratings:
Fitch considers WHB and SCB as having more scope to declare a portion of the proceeds as special dividends, given their stronger capital positions, while lower-rated CHB seems more poised to retain the gains to finance China-related growth.
CHB's total loans increased by 11.1% in 2016, compared with 6.5% for the banking system. The capital buffers will protect all three entities against potential negative impacts when the International Financial Reporting Standard 9 is implemented in 2018.
Fitch believes the sale of Hong Kong Life will not change the banks' business or earnings profiles, as the banks can continue to distribute the insurer's products. Hong Kong Life's 2016 profit before tax was insignificant against the banks' profits.
First Origin International Limited, a wholly owned subsidiary of China-based financial services group, UCF Group, acquired 100% of Hong Kong Life, including a 33.3% stake from WHB, 16.7% from SCB and 16.7% from CHB's insurance subsidiary. The HKD7.1 billion consideration equates to a substantial price/carrying value of 12.4x and may be driven by higher Chinese demand for offshore insurance products.
In 2016 China's JD Capital bought FTLife Insurance Company Limited (formerly known as Ageas Insurance Company (Asia) Limited) and Dah Sing Bank sold its life insurance business to Fujian Thai Hot Investment Company Limited. In 2012 The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited sold their general insurance operations to AXA Group and QBE Insurance Group Limited, while retaining their life insurance operations.
Media reports indicate that Singapore-listed Great Eastern Holdings, an insurance company controlled by WHB's owner, Oversea-Chinese Banking Corp, and China-based YueXiu Financial Holdings, which owns CHB, were among the potential bidders for Hong Kong Life.
Do you know more about this story? Contact us anonymously through this link.