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Fitch Affirms DBS, DBSH, OCBC and UOB at 'AA-'; Outlook Stable
August 27, 2014 / 8:47 AM / in 3 years

Fitch Affirms DBS, DBSH, OCBC and UOB at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, August 27 (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). The Long-Term Issuer Default Ratings (IDRs) for the four entities have been affirmed at 'AA-' with Stable Outlook, and the Viability Ratings (VRs) have been affirmed at 'aa-'. The rating actions follow a periodic review of the Singapore banking groups and include the resolution of the Rating Watch Negative (RWN) on OCBC. A full list of rating actions is at the end of this commentary. The rating review does not encompass the overseas subsidiaries of the Singapore banks, other than Wing Hang Bank (WHB) and Banco Wing Hang. Fitch's ratings actions on the latter two banks are discussed in a separate press release. The RWN on OCBC's IDRs has been resolved following its successful acquisition of a 97.52% stake in Wing Hang Bank (WHB), and the announcement of its funding plans for the transaction, which include a rights issue of about SGD3.3bn and two issues of Basel III Tier 2 subordinated notes amounting to USD2bn (approximately SGD2.5bn) issued earlier in April and June this year. WHB is likely to become OCBC's fully owned subsidiary after the latter completes the compulsory acquisition of the remaining shares within the next two to three months. WHB will be renamed OCBC Wing Hang Bank Limited from 1 October 2014 in Hong Kong and Macau. WHB China will be renamed and merged at a later stage, pending regulatory approvals. KEY RATING DRIVERS - VRs and IDRs Following the acquisition and rights issue, Fitch estimates that OCBC's Fitch core capital ratio and fully-implemented core equity Tier 1 capital adequacy ratio will fall to about 10% on a pro-forma basis (local peers: 12%-13% for both ratios currently). Fitch expects OCBC to manage its capital levels actively and rebuild its capital buffers over time. Earnings are likely to be the main source of capital generation for OCBC, supplemented by the continued use of a scrip dividend scheme and the potential sale of non-core assets. Post-acquisition, OCBC's loan exposure to mainland China will rise by only 1pp to about 12% of total loans. The bank's total loan exposure to Greater China will increase to around 25% of total loans from 15%, mostly from WHB's Hong Kong loan portfolio, which has proven to be relatively low risk in nature. Overall, WHB's asset quality appears reasonably healthy. The WHB acquisition will also give OCBC better access to deposits in international currencies, such as the Chinese yuan and US dollar, and the domestic currency, the Hong Kong dollar. It will also help OCBC improve its ability to capture increased trade and investment flows between OCBC's four core markets - Singapore, Malaysia, Indonesia and Greater China. The affirmation of the IDRs and VRs of the four entities reflects Fitch's view that their strong credit profiles will continue to place them within the range of other highly rated peers globally. Their key rating strengths are their stable funding profiles, which are underpinned by significant domestic franchises, a robust regulatory environment and healthy capitalisation buffers (taking into account OCBC's plans to rebuild its capitalisation levels). Balance sheets and earnings have been resilient through economic cycles, owing to the entities' prudent risk management and diversified loan portfolios. These positives are balanced against potential risks from rapid growth in household credit and property prices over the past few years, and the banks' rising exposures to less-developed and potentially more volatile markets in the region. DBS is DBSH's 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. RATING SENSITIVITIES -VRs and IDRs There is limited upside to the ratings of the Singapore banks, as they are already among the highest-rated banks in Fitch's universe. A prolonged economic downturn resulting in greater asset quality and capital impairment risks would be negative for the banks' ratings. Economic growth around the region continues to slow amid a gradual tightening of global liquidity and a moderate rise in interest rates, and rising private-sector leverage in recent years may render the banks more vulnerable in the future. However, Fitch does not expect the banks to come under severe stress as the Singapore government has been willing to cushion downside risks in times of severe weakness and rein in excessive risk-taking in times of higher growth in the past. Fitch estimates that the banks will have sufficient earnings to absorb a cyclical rise in credit costs and avoid capital impairment under most scenarios. Higher risk appetites would be negative for the banks' credit profiles. Examples of this include sustained rapid loan growth, increased appetite for large acquisitions, disproportionate exposure to certain economic sectors such as property or building and construction, and geographic concentration. Regional expansion is likely to continue. The banks have been disciplined in their regional growth thus far, although VRs could be pressured over time with rising exposures to higher-growth but also higher-risk markets such as China, India and members of the Association of Southeast Asian Nations (ASEAN). The effect of this on bank ratings would depend on the geographical mix, the strength of the banks' respective balance sheets and the development of these economies over time, as well as any build-up of concentration risks. Downward rating actions could also result if the banks do not retain stable funding structures and sufficient liquidity in key offshore currencies, as well as capital buffers that are commensurate with risks as they expand regionally. However, Fitch expects the banks to maintain sufficiently conservative funding, liquidity and capital profiles in the medium term, particularly in light of more comprehensive regulatory requirements under the Basel III framework. Negative rating triggers for OCBC could include heightened risk appetite, rapid expansion and higher concentration in mainland China, which may lead to a greater deterioration in asset quality. The ratings could also be downgraded if capitalisation does not improve from existing levels to be in line with peers' over the medium term as is expected. DBSH's IDR and VR may come under pressure if Fitch assesses that the rationale for equalising its ratings with DBS, as mentioned above, has weakened. This may occur if the holding company's balance sheet complexity or double leverage increases materially. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs) The SRs and SRFs for the three Singapore banks reflect Fitch's view that the state is extremely likely to provide extraordinary support to 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, based on its 'AAA' ratings. DBSH's SR and SRF reflect our view that sovereign support for the holding company may be forthcoming, but cannot be relied upon. This is due to the low systemic importance of DBSH, being a non-operating bank holding company. 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. International developments regarding the enforcement of bank holding company structural subordination during the resolution process may further limit the SR and SRF for DBSH. On the other hand, ratings upside could arise on evidence that DBSH may benefit from some degree of extraordinary state support, possibly resulting from a perceived increase in DBSH's importance within its banking group, or through more explicit banking laws, although Fitch believes that the latter is unlikely to occur in the medium term. KEY RATING DRIVERS AND SENSITIVITIES - DEBT RATINGS The ratings on senior notes and commercial paper programmes are the same as the banks' and DBSH's respective Long-Term and Short-Term IDRs. This is because these instruments constitute direct, unsubordinated and unsecured obligations of the entities, and rank equally with all their other unsecured and unsubordinated obligations. A change in the IDRs would affect these issue ratings. 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 subordination status and the absence of any going-concern loss-absorption features. The ratings on Basel II Upper Tier 2 notes are three notches below the banks' VRs, while the ratings on Basel II preference shares and Basel III Tier 1 securities are five notches below the banks' VRs. These ratings reflect the subordination and going-concern loss-absorption features of the securities and they are sensitive to changes in the VRs. The list of rating actions is 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-' - Senior unsecured notes affirmed at 'AA-' - Commercial paper programme affirmed at 'F1+' - 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 '5' - Support Rating Floor affirmed at 'No Floor' - Senior unsecured notes affirmed at 'AA-' - Basel III Tier 1 securities affirmed at 'BBB' OCBC - Long-Term IDR affirmed at 'AA-'; Outlook Stable; Removed from RWN - Short-Term IDR affirmed at 'F1+'; Removed from RWN - Viability Rating affirmed at 'aa-'; Removed from RWN - Support Rating affirmed '1' - Support Rating Floor affirmed at 'A-' - Senior unsecured notes affirmed at 'AA-'; Removed from RWN - Commercial paper programmes affirmed at 'F1+'; Removed from RWN - Basel II subordinated Lower Tier 2 notes affirmed at 'A+'; Removed from RWN - Basel II preference shares affirmed at 'BBB'; Removed from RWN - Basel III Tier 2 subordinated notes affirmed at 'A+'; Removed from RWN 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-' - Senior unsecured notes affirmed at 'AA-' - Basel II subordinated Lower Tier 2 notes affirmed at 'A+' - Basel II subordinated Upper Tier 2 notes affirmed at 'A-' - Basel II preference shares affirmed at 'BBB' - Basel III Tier 2 subordinated notes affirmed at 'A+' - Basel III Tier 1 securities affirmed at 'BBB' Contacts: Primary Analysts Elaine Koh (DBS, DBSH and UOB) Director +65 6796 7239 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Mikho Irawady (OCBC) Associate Director +65 6796 7230 Secondary Analysts Mikho Irawady (DBS, DBSH and UOB) Associate Director +65 6796 7230 Elaine Koh (OCBC) Director +65 6796 7239 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 Financial Institutions Rating Criteria", dated 31 January 2014; "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014; and "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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