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Fitch Affirms DBS's Bank's Mortgage Covered Bonds at 'AAA'; Outlook Stable
June 30, 2017 / 8:48 AM / 6 months ago

Fitch Affirms DBS's Bank's Mortgage Covered Bonds at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/SYDNEY, June 30 (Fitch) Fitch Ratings has affirmed DBS Bank Ltd.'s (AA-/Stable/F1+) SGD3.25 billion mortgage covered bonds at 'AAA'. The Outlook is Stable. The covered bonds are issued through DBS and covered bonds payments are guaranteed by Bayfront Covered Bonds Pte. Ltd. (CBG) upon a covered bonds event of default. KEY RATING DRIVERS The affirmation is based on DBS's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches, a recovery uplift of one notch and the asset percentage (AP) used in the programme's asset coverage test, which the issuer intends to decrease to at least our revised breakeven AP of 85.0%. Fitch has revised its 'AAA' breakeven AP to 85.0%, from 85.5%, due to the lower asset margin of DBS's cover pool against swap funding costs in the liabilities - Singapore dollar swap offer - of one month than in January 2017. The revised 'AAA' breakeven AP of 85.0% is equivalent to a breakeven overcollateralisation (OC) of 17.6%. This is driven by the asset disposal loss of 18.0%, which reflects the significant asset and liability mismatches in the programme, with the weighted-average (WA) life of the cover assets at 12.0 years and the liabilities at 3.3 years. The credit loss component contributes 3.4% to breakeven OC and the cash flow component reduces it by 3.7% due to the available excess spread modelled by Fitch in the programme. The relied upon AP equals Fitch's 'AAA' breakeven AP and corresponds to an 'AA+' tested rating on a probability of default basis and a one-notch recovery uplift. The recovery was capped at one notch as the programme is significantly exposed to foreign-exchange risk from the recoveries given default of the covered bonds. This is because the assets are denominated in Singapore dollars, while the covered bonds issued are denominated in other currencies. Currency risk is hedged for the length of the liabilities, but we expect those hedges to terminate in the event of a covered bond default so that the longer-dated Singapore-dollar asset cash flows would provide recoveries in a different currency than the initial covered bond. The Outlook on the covered bond rating reflects the Stable Outlook on DBS's Long-Term IDR and a four-notch buffer against downgrade of the issuer's IDR. VARIATION FROM CRITERIA Fitch has applied a variation from its cover asset refinancing spread level (RSL) assumptions for Singapore, which provide for refinancing stress on standard mortgage cover assets, simulating their sale to meet covered bond payments. Fitch incorporated a loan sale assumption of 0.25% as an add-on to the standard RSL for Singapore for loans linked to Central Provident Fund (CPF) amounts used for the purchase of residential property. This is because the portion of the cover pool comprising CPF-linked loans is subject to potentially higher sales costs as CPF board consent or court approval is required to transfer the CPF-linked loans to a third party. Fitch believes a potential buyer would want to be compensated for the additional cost of purchasing these CPF-linked loans. Fitch adds a stressed refinancing rate differential of 25bp above Singapore's mortgage RSL for CPF-linked loans. Fitch tested the cash flow in an 'AA+' stress scenario for timely payment by applying an RSL of 251bp instead of 234bp, based on the pro-rata value of the CPF-linked loans to the cover pools. BESPOKE ASSUMPTIONS: SINGAPORE RESIDENTIAL MORTGAGE Fitch has used the APAC Residential Mortgage Rating Criteria in conjunction with bespoke Singapore-specific assumptions for its asset analysis as set out below: Foreclosure Frequency (FF): Fitch has developed a base default matrix for the cover pool of DBS as follows: Base FF for each rating stress (unit % and starting from AAAsf, AAsf, Asf, BBBsf, BBsf, Bsf) For LTV of less than 30%: 2.3, 1.7, 1.2, 0.9, 0.6, 0.4 For LTV from 30% to less than 40%: 2.9, 2.2, 1.5, 1.1, 0.8, 0.5 For LTV from 40% to less than 50%: 4.7, 3.5, 2.3, 1.7, 1.2, 0.9 For LTV from 50% to less than 60%: 7.0, 5.2, 3.5, 2.6, 1.8, 1.3 For LTV from 60% to less than 65%: 8.2, 6.1, 4.1, 3.0, 2.1, 1.5 For LTV from 65% to less than 70%: 9.9, 7.4, 5.0, 3.7, 2.6, 1.8 For LTV from 70% to less than 75%: 11.1, 8.2, 5.5, 4.1, 2.9, 2.1 For LTV from 75% to less than 80%: 12.3, 9.1, 6.1, 4.6, 3.2, 2.3 For LTV from 80% to less than 85%: 15.2, 11.3, 7.6, 5.6, 4.0, 2.8 For LTV from 85% to less than 90%: 23.9, 17.7, 12.0, 8.9, 6.3, 4.4 FF Adjustment: Adjustments are applied as follows. -- Investment property: Increased base FF by 25% -- Loans in arrears: Fitch increased base FF of loans 30-59 days in arrears by 20% and for loans 60-89 days in arrears by 50%. The floor for loans 30-59 days in arrears is 20%, for loans 60-89 days in arrears 66% and for loans over 90 days in arrears 100%. Loss Severity: In determining the loss severity for a portfolio of residential mortgage loans, Fitch calculates the ratio of the property's sale proceeds to the outstanding loan balance at the time of default on a loan by loan basis. The agency determined the property's indexed value then applied a market value decline (MVD), also accounting for foreclosure and carry costs. Fitch's loss-severity assumptions and the data used to derive these assumptions are detailed below. House Price Assumptions: Fitch reviewed historical house-price movements in Singapore, determining that the largest house-value declines occurred during the Asian financial crisis in 1998-1999. The median peak-to-trough MVD was 41% during this period. Based on the historic variance of house-value movements, we applied a further adjustment of 1.4x the historic-high MVD to derive the 'AAAsf' MVD assumption. MVD: Applying the house-price declines described above, the MVDs calculated by Fitch for apartments in Singapore are as follows: AAAsf: 60% AAsf: 55% Asf: 50% BBBsf: 45% BBsf: 40% Bsf: 35%. MVD Adjustments: Fitch's MVD adjustments apply where the security property is for the landed property (detached and semi-detached house and terrace: 1.1x) based on the market value volatility and severity. Illiquid property adjustments are applied as per the APAC Residential Mortgage Rating Criteria. Property Price Indexation: To estimate the value of a property, Fitch indexed the property value using the Urban Redevelopment Authority's property price index data, the property's location and the date of the original valuation. Fitch's methodology assumed indexed property valuations capture 50% of any increased valuation and 100% of any reduced indexed valuation. Foreclosure Cost and Timing: In its loss-severity calculations, Fitch accounts for the costs related to foreclosing the property of a defaulted borrower. We applied foreclosure and carry cost assumptions of 5% and 4%, respectively. Fitch assumes recovery will take 24 months. Minimum credit loss on a portfolio of housing loans is 4% at 'AAAsf'. Cash Flow Modelling: Prepayment assumptions for DBS from year one to beyond year five are 5% for low constant prepayment rate (CPR) stress and 30% for high CPR stress. Servicer fee is 35bp. RATING SENSITIVITIES DBS's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 85% or if the bank's Long-Term Issuer Default Rating (IDR) falls below 'BBB+'. If the AP in the programme rises to the maximum 97% AP allowed by the Monetary Authority of Singapore, the rating on the programme would be downgraded to 'AA', one notch above the issuer's IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time Contact: Primary Analyst Keum Hee Oh Director +82 2 3278 8373 Fitch Australia Pty Ltd, Korea Branch 9F, 97 Uisadang-daero Yeongdeungpo-gu Seoul, 07327 South Korea Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 A full rating report will be available soon at The source of information used to assess these ratings was DBS. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated bonds is public. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 27 Apr 2017) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) 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. 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