TEXT-S&P summary: United Overseas Bank Ltd.

Thu Nov 22, 2012 2:23am EST

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(The following statement was released by the rating agency)

Nov 22 -

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Summary analysis -- United Overseas Bank Ltd. --------------------- 22-Nov-2012

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CREDIT RATING: AA-/Stable/A-1+ Country: Singapore

Primary SIC: Commercial banks,

nec

Mult. CUSIP6: 911271

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Credit Rating History:

Local currency Foreign currency

01-Dec-2011 AA-/A-1+ AA-/A-1+

23-Jul-2001 A+/A-1 A+/A-1

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Ratings Score Snapshot

Issuer Credit Rating AA-/Stable/A-1+

SACP a-

Anchor bbb+

Business Position Adequate (0)

Capital and Earnings Adequate (0)

Risk Position Adequate (0)

Funding and Liquidity Above Average

and Strong (+1)

Support +3

GRE Support 0

Group Support 0

Sovereign Support +3

Additional Factors 0

Outlook

The stable outlook on UOB reflects our belief that the bank will maintain its high systemic importance in Singapore and that its SACP will stay within the 'a-' category over the next one to two years. The outlook also reflects the outlook on the sovereign credit rating on Singapore.

We could downgrade UOB if: (1) we lower the sovereign credit rating on Singapore; (2) we no longer believe UOB has high systemic importance in Singapore; or (3) we lower the bank's SACP by one notch. We could lower UOB's SACP if the bank's risk-adjusted capital ratio is likely to decline below 7% due to aggressive expansion, particularly in higher risk emerging markets, or if the bank's asset quality declines substantially. We believe this is an unlikely scenario given the bank's strategy of measured overseas expansion.

A positive rating action is unlikely in the next one to two years. We could raise the rating if the bank significantly strengthens its capitalization and business position, such that we raise the SACP by three notches.

Rationale

Standard & Poor's Ratings Services bases its ratings on United Overseas Bank Ltd. (UOB) on the bank's "adequate" business position, "adequate" capital and earnings, "adequate" risk position, "above-average" funding, and "strong" liquidity, as our criteria defines those terms. The stand-alone credit profile (SACP) is 'a-'. The issuer credit rating on UOB is three notches higher than the SACP, reflecting the bank's high systemic importance in Singapore and our view of a high likelihood of support from the government of Singapore (unsolicited ratings AAA/Stable/A-1+; axAAA/axA-1+).

Our 'bbb+' anchor for UOB draws on our Banking Industry Country Risk Assessment methodology and our view of the economic and industry risks in the countries where the bank operates. UOB's economic risk score of '4' is based on the weighted average of the bank's private-sector loans to nonbanks in each country in which it operates. Singapore accounts for about 65% of such loans, Malaysia about 15%, with the rest of Asia accounting for the rest. Our economic risk assessment of Singapore reflects the sovereign's high income, and diverse and resilient economy. However, we believe some potential imbalances are building up in the property sector. UOB's industry risk score of '2' benefits from Singapore's well-developed institutional framework, prudent banking practices, and stable funding support of core customer deposits.

Our assessment of UOB's business profile balances its strong competitive position in its domestic core market with its adequate diversification and management. The bank has traditionally focused on the small business segment and has a strong franchise as the third-largest domestic bank in Singapore. It has a market share of about 19% of system loans and 20% of deposits. However, UOB has less business diversification compared with domestic peers', particularly in the insurance and wealth management segments, where it has relatively smaller market shares. We also believe that UOB benefits less from its regional operations due to its weaker market position abroad. We consider the bank's management team to be prudent and expect the bank to continue its emphasis on funding and capitalization to provide a buffer against macroeconomic uncertainties.

We expect UOB's risk-adjusted capital ratio to stay above 7% over the next two years. This is based on the assumption that loan growth will be in high single digits and that the bank's profit generation and retention will keep pace with the growth. In our view, UOB's net interest margin will remain under pressure, especially in consumer lending. We believe the bank's efforts to reprice business loans upwards will partially mitigate this pressure. Our expectation is also based on our view that UOB will maintain a reasonable dividend payout and continue to maintain capital buffers.

Our assessment of UOB's risk position reflects our view of the bank's straightforward commercial banking business model. In our view, UOB will continue to pursue measured expansion in emerging markets, particularly in Indonesia and Greater China, while trying to realize synergies from its existing subsidiary in Thailand. In our view, overseas expansion will offset domestic pressure on the bank's interest margins, but it will also increase exposure to inherently more risky systems. However, we expect UOB's asset quality to remain sound due to a combination of prudent credit risk management and stability in the bank's key markets of Singapore and Malaysia.

UOB's large, stable retail deposit base and established franchise in Singapore underpin its funding profile. The bank benefited from deposit inflows during periods of financial turmoil, when smaller foreign banks were scaling back and losing deposit share. In addition, we assess UOB's liquidity as strong because of the bank's rich pool of liquid assets. UOB's retail customer funded model reduces the need for short-term wholesale funding and supports our view.

Related Criteria And Research

-- Hong Kong And Singapore Banks' Credit Quality Can Withstand A Mild Recession In Europe, May 17, 2012

-- Banking Industry Country Risk Assessment: Singapore, March 16, 2012

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

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