SHARES of China Merchants Bank dropped yesterday because investors are worried the controlling stake it bought in Hong Kong's Wing Lung Bank may eat into its capital adequacy ratio in the short term.

Merchants Bank tumbled 3.1 percent to 28.77 yuan yesterday in Shanghai while the benchmark Shanghai Composite Index lost 1.94 percent to 3,369.91.

Standard & Poor's Ratings said yesterday that it had placed its BBB-long-term counterparty credit rating and A-3 short-term ratings on Merchants Bank on credit watch with negative implications following then bank's purchase of Wing Lung.

"In the short term, the acquisition may cut Merchants Bank's capital adequacy ratio and the acquisition prices are slightly overvalued," said Wu Yonggang, a Guotai Jun'an Securities Co analyst. "In the long run, however, the move is good for Merchants Bank's internationalization and expansion as a universal financial player. The long-term impact is relatively positive.''

Merchants Bank said it will pay a combined HK$19.3 billion (US$2.47 billion) for 53.12 percent of 75-year-old Wing Lung, which has 35 branches in Hong Kong. It will pay HK$156.50 for each Wing Lung share, a 6.17-percent premium over the closing price of HK$147.40 on May 29 before Wing Lung suspended trading of its shares. The price paid also marks a 9.27-percent premium on the average price of HK$142.64 in the 30 trading days before the deal closed.

The acquisition, pending shareholder and regulatory approval, should be completed in the third quarter. Merchants Bank would then be required to make a general offer for all issued Wing Lung shares, leading to a total cash consideration of 32.4 billion yuan for the whole deal.

Wu has kept the "add" rating on Shenzhen-based Merchants Bank with a six-month target price of 43 yuan.

Moody's Investors has affirmed the A2/Prime-1 deposit ratings of Wing Lung as well as its C+ bank financial strength rating following the acquisition. The outlook for all ratings is stable, it said.