June 1, 2017 / 1:28 AM / a year ago

Correction: Fitch Rates DBS Series 3 EUR750m Covered Bonds 'AAA'

(The following statement was released by the rating agency) SEOUL/SYDNEY, May 31 (Fitch) This announcement replaces the version published on 23 January 2017 to include details of the bespoke criteria applied. Fitch Ratings has assigned DBS Bank Ltd.'s (AA-/Stable/F1+) Series 3 EUR750 million mortgage covered bonds a rating of 'AAA'; the Outlook is Stable. The fixed-rate bond is due January 2024 and has a 12-month extension period. This issuance brings the total outstanding covered bonds on issue out of DBS's covered bonds programme to the equivalent of SGD3.25 billion. KEY RATING DRIVERS The programme's rating is based on DBS's Long-Term Issuer Default Rating (IDR) of 'AA-', an Issuer Default Rating (IDR) uplift of zero notches, a payment continuity uplift (PCU) of six notches, a recovery uplift of one notch and the asset percentage (AP) of 85.5% used in the programme's asset coverage test, which is relied upon by Fitch in its analysis. The 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 uplift is capped at one-notch due to significant foreign-exchange risk, as the covered bonds are denominated in a currency different to the cover assets, which could affect recoveries given the default of the covered bonds. The Outlook on the covered bond rating reflects the Stable Outlook on DBS's Long-Term IDR and a four-notch buffer against the downgrade of the issuer's IDR. The 'AAA' breakeven AP of 85.5% is equivalent to a breakeven overcollateralisation (OC) of 17.0%. This is driven by the asset disposal loss of 17.9%, which reflects the significant asset and liability mismatches in the programme, with the weighted-average (WA) life of the cover assets at 12.2 years (based on DBS's projected cash flow) and the liabilities at 3.7 years. The credit loss component contributes 3.4% to breakeven OC and the cash flow component reduces it by 4.3% due to available excess spread modelled by Fitch in the programme. 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 because 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 in purchasing these CPF-linked loans. For CPF-linked loans, Fitch considered an additional stressed refinancing rate differential of 25bp above Singapore's mortgage RSL. Fitch tested 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. DBS BESPOKE COVERED BOND RATING CRITERIA Fitch has used the APAC Residential Mortgage Rating Criteria in conjunction with bespoke DBS-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. RATING SENSITIVITIES DBS's covered bonds are vulnerable to a downgrade if the relied-upon asset percentage (AP) used in the asset coverage test rises above the 'AAA' breakeven AP of 85.5% or if the bank's Long-Term IDR falls below 'BBB+'. If the AP in the programme rises to the maximum 95.0% contractual AP stipulated in the programme documents, the rating on the covered bonds would fall to 'AA', one notch above the bank's Long-Term IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other things, by the profile of the cover assets relative to the outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will 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 Sources of information used to assess these ratings were from 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: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Criteria - Effective from 31 August 2016 to 27 April 2017 (pub. 30 Aug 2016) here Counterparty Criteria for Structured Finance and Covered Bonds - Effective from 1 September 2016 to 20 March 2017 (pub. 01 Sep 2016) here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds - Effective from 26 October 2016 to 17 February 2017 (pub. 26 Oct 2016) here Fitch's Cover Asset Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 26 Oct 2016) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File - Effective from 17 May 2016 to 17 February 2017 (pub. 17 May 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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