May 25, 2017 / 7:50 AM / 2 months ago

Fitch Affirms Major Singapore Banks at 'AA-'; Outlook Stable

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(The following statement was released by the rating agency) SINGAPORE, May 25 (Fitch) Fitch Ratings has affirmed the ratings of three Singapore banks - DBS Bank Ltd. (DBS), Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank Limited (UOB) - and the bank holding company of DBS, DBS Group Holdings (DBSH). Their Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'AA-' with Stable Outlook, and the Viability Ratings (VRs) at 'aa-'. A full list of rating actions is at the end of this rating action commentary. The ratings on DBS's and OCBC's covered bond programmes and covered bond issuances are unaffected by this review. KEY RATING DRIVERS VRS AND IDRS The Long-Term and Short-Term IDRs are driven by the VRs, and reflect the entities' strong funding profiles, entrenched domestic franchises, large loss-absorption buffers, steady profitability and stringent regulatory oversight. These rating strengths should mitigate risks to the banks' balance sheets from higher credit costs amid a still-challenging economic environment and rising exposures to emerging markets in the Asia-Pacific. Strong domestic deposit franchises are one of the Singapore banks' strengths. This is reflected in their high Singapore dollar liquidity coverage ratios (LCR). The banks have also gained significant traction in gathering US dollar deposits, with such deposits increasing at a compounded annual growth rate of 27% from end-March 2013 to end-March 2017. While economic headwinds appear to be abating, an uncertain Singapore GDP outlook, low oil prices and potential market volatility caused by the Fed funds rate hikes continue to present asset-quality risks. Domestic and offshore lending growth has slowed in recent years and Fitch expects it to remain subdued due to sustained softness in the domestic property market and easing demand for cross-border trade finance. Singapore banks' offshore loan exposures have remained stable at an average of 52% of total loans at end-March 2017, although the average loan exposure to Greater China fell to 23% of total loans at end-March 2017 from 25% at end-2015 as China-related trade loans shrank. The effect of commodity-price weakness on Singapore banks' credit quality has been relatively modest thus far. On a positive note, new NPL formation has eased since 2H16 and we expect this to be sustained in 2017. Fitch expects the impaired loan ratios for the Singapore banks to remain steady in the near to medium term with marginal upward bias given their reasonably disciplined underwriting standards. The weighted average NPL ratio for the three banks remained low at 1.4% as at end-March 2017, representing an increase from 1.1% at end-2015. The banks' healthy provision buffer of 108% of NPLs and 238% of unsecured NPAs should help cushion any significant credit slippage arising from a renewed weakness in the global economy. The banks' balance sheets and earnings have proven resilient through past economic cycles, and Fitch expects any significant deterioration in asset quality to have a moderate impact on the three banks given their adequate profitability and strong capitalisation buffers. All three banks aim to continue expanding their regional footprints over the medium term to capture the earnings opportunities available in faster-growing emerging markets. This would expose them to the more challenging operating environments, but will help them diversify away from Singapore's mature, saturated and competitive environment. Fitch does not expect any major shift in the gradual regionalisation trend, but any significant expansion without offsetting steps could weigh on ratings. DBSH is a bank holding company with DBS as its sole operating entity. The ratings on DBSH are equalised with those of DBS due to the close integration between the two entities, their common branding, board and management, and a common jurisdiction and regulator. The ratings also reflect DBSH's simple balance sheet structure and Fitch's expectation that double leverage should remain low in the medium term. SUPPORT RATINGS (SRS) AND SUPPORT RATING FLOORS (SRFS) The SRs and SRFs for the three Singapore banks reflect Fitch's view of an extremely high probability of extraordinary state support for the banks, if necessary. This is due to their high systemic importance, with around 60% of the Singapore dollar deposit base, and the sovereign's strong financial ability to provide support, as indicated by its ratings of 'AAA'. DBSH's SR and SRF reflect our view that sovereign support for the holding company is possible, but cannot be relied upon. This is due to the low systemic importance of DBSH, as a non-operating bank holding company. DEBT RATINGS The medium-term note programmes, senior notes and commercial paper programmes are rated at the same levels as the Long-Term and Short-Term IDRs of banks and DBSH. This is because such instruments constitute direct, unsubordinated and unsecured obligations of the entities, and rank equally with all their other unsecured and unsubordinated obligations. The Basel II subordinated Lower Tier 2 and Basel III Tier 2 subordinated notes are rated one notch below the entities' 'aa-' VRs to reflect their subordinated status and the absence of any going-concern loss-absorption features. The ratings on the Basel II preference shares and Basel III Tier 1 securities are five notches below the banks' VRs. These ratings reflect the deep subordination and going-concern loss-absorption features of the securities. RATING SENSITIVITIES VRS and IDRS There is limited scope for upward rating action on the VRs and IDRs of the three Singapore banks and DBSH as they are already among the highest of banks rated by Fitch globally. We believe the banks' exposures to developing markets will continue to rise over the medium to longer term. Material changes over time that place a burden on their asset quality and funding profiles - particularly in foreign currency - would weigh on their credit profiles unless counterbalanced by an increase in capital and liquidity buffers. Further downward rating pressure could also arise from added operational complexity following expansion offshore or into more complex product lines. An increase in risk appetite, such as excessive growth and mergers and acquisitions, leading to disproportionate asset concentrations in riskier sectors and countries, or greater pressure on funding or capital positions, may result in negative rating action. Some risk concentrations in the Greater China region, building and construction, and the commodity-related sectors have built up in recent years and any material deterioration would also add pressure on ratings. For DBSH, greater complexity in the corporate structure or significantly higher double leverage would also be negative for the VR and IDR. SUPPORT RATINGS (SRS) AND SUPPORT RATING FLOORS (SRFS) A change in the government's ability or propensity to provide timely support would be negative for the three banks' SRs and SRFs. This may be triggered by global regulatory initiatives aimed at reducing implicit government support available to banks. However, we view this as a longer-term risk for the Singapore banks, in light of the regulator's decision not to include senior debt (as long as it is issued without contractual bail-in terms) under its statutory bail-in powers. DEBT RATINGS The ratings on the medium-term note programmes, senior notes and commercial paper programmes are sensitive to any changes in the IDRs of the banks and DBSH. The ratings on the Basel II subordinated Lower Tier 2 notes, Basel III Tier 2 subordinated notes, Basel II preference shares and Basel III Tier 1 securities are sensitive to changes in the VRs. The rating actions are as follows: DBS - Long-Term IDR affirmed at 'AA-'; Outlook Stable - Short-Term IDR affirmed at 'F1+' - Viability Rating affirmed at 'aa-' - Support Rating affirmed '1' - Support Rating Floor affirmed at 'A-' - Commercial paper programme affirmed at 'F1+' - Medium-term note programme and senior unsecured notes affirmed at 'AA-' and 'F1+' - Market-linked securities affirmed at 'AA-(emr)' - Basel II subordinated Lower Tier 2 notes affirmed at 'A+' - Basel II preference shares affirmed at 'BBB' DBSH - Long-Term IDR affirmed at 'AA-'; Outlook Stable - Short-Term IDR affirmed at 'F1+' - Viability Rating affirmed at 'aa-' - Support Rating affirmed at '5' - Support Rating Floor affirmed at 'No Floor' - Medium-term note programme and senior unsecured notes affirmed at 'AA-' - Basel III Tier 2 subordinated notes affirmed at 'A+' - Basel III Additional Tier 1 securities affirmed at 'BBB' OCBC - Long-Term IDR affirmed at 'AA-'; Outlook Stable - Short-Term IDR affirmed at 'F1+' - Viability Rating affirmed at 'aa-' - Support Rating affirmed '1' - Support Rating Floor affirmed at 'A-' - Commercial paper programmes affirmed at 'F1+' - Medium-term note programme and senior unsecured notes affirmed at 'AA-' - Basel II subordinated Lower Tier 2 notes affirmed at 'A+' - Basel II preference shares affirmed at 'BBB' - Basel III Tier 2 subordinated notes affirmed at 'A+' - Basel III Additional Tier 1 securities affirmed at 'BBB' UOB - Long-Term IDR affirmed at 'AA-'; Outlook Stable - Short-Term IDR affirmed at 'F1+' - Viability Rating affirmed at 'aa-' - Support Rating affirmed '1' - Support Rating Floor affirmed at 'A-' - Medium-term note programme and senior unsecured notes affirmed at 'AA-' - Basel II subordinated Lower Tier 2 notes affirmed at 'A+' - Basel III Tier 2 subordinated notes affirmed at 'A+' - Basel III Additional Tier 1 securities affirmed at 'BBB' Contact: Primary Analysts Wee Siang Ng (DBS, DBSH and UOB) Senior Director +65 6796 7230 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Elaine Koh (OCBC) Director +65 6796 7239 Secondary Analysts Elaine Koh (DBS, DBSH and UOB) Director +65 6796 7239 Wee Siang Ng (OCBC) Senior Director +65 6796 7230 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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