March 21, 2017 / 1:30 PM / 3 years ago

Fitch Assigns Final 'AAA' Rating to OCBC's Inaugural Covered Bonds; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Oversea-Chinese Banking Corp - Mortgage Covered Bonds here SEOUL, March 21 (Fitch) Fitch Ratings has assigned a final 'AAA' rating to Oversea-Chinese Banking Corp's (OCBC; AA-/Stable/F1+) inaugural issue of EUR500m of mortgage covered bonds. The Outlook is Stable. The covered bonds have been issued in line with the requirements of the Monetary Authority of Singapore's (MAS) Notice 648. The assignment of the final rating follows the issuance of the covered bonds and the final rating is the same as the expected rating assigned on 23 November 2016. KEY RATING DRIVERS The 'AAA' rating is based on OCBC'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) of 86.0% that Fitch relied upon in analysis is equal to Fitch's 'AAA breakeven AP of 86%. This AP supports a 'AA+' tested rating on a probability-of-default basis and a 'AAA' rating after giving a one-notch credit for recoveries from the cover assets given default of the covered bonds. The Stable Outlook on the programme reflects the four-notch buffer against the downgrade of the bank's IDR. The IDR uplift of zero notches is based on the fact that, under the banking regulations in Singapore, the option to resolve an authorised bank is possible as part of MAS' supervisory powers; however, the power to bail in creditors is not contemplated under the current bank resolution framework. The PCU of six notches for OCBC's covered bond programme reflects the programme's liquidity protection in the form of soft-bullet issuance with a 12-month maturity extension. The programme also provides for a three-month reserve for interest payments and senior expenses. The recovery uplift assigned was capped at one notch, as Fitch views the programme as 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 can be 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 'AAA' breakeven AP of 86.0% corresponds to a breakeven overcollateralisation (OC) of 16.3% and is driven by the asset disposal loss of 17.8%. This reflects the significant asset and liability mismatch in the programme. The weighted average (WA) life of the cover assets is 11 years and five years for the liabilities. The credit loss contributes 3.4% and the cash flow component reduces the OC by 4.9%, due to positive excess spread modelled by Fitch in the programme. At 31 January 2017, the cover pool consisted of 8,319 prime Singapore private residential mortgages equivalent to SGD5.7bn. The OCBC-calculated WA indexed loan-to-value ratio is 57.9%, and the portfolio is 59.5 months seasoned. By current balance, 38.9% of the loans are for investment purpose and 69.0% of the loans are linked to the Central Provident Fund (CPF). The cover pool comprises 59.5% of loans secured by condominium units, 28.1% by apartments and 12.4% by houses and others. Fitch has applied a variation from its cover asset Refinancing Spread Level (RSL) assumptions, which provide for refinancing stress on standard mortgage cover assets in Singapore should they be sold to meet covered bond payments. A portion of the cover pool is linked to the CPF; such loans are subject to potentially higher sales costs because they require CPF Board consent or court approval to transfer the CPF-linked loans to a third party. Fitch believes that 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. In a 'AA+' stress scenario, Fitch tested the cash flows 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. SINGAPOREAN OCBC AND DBS BANK LTD (DBS) BESPOKE COVERED BOND RATING CRITERIA Fitch has made certain assumptions for the asset analysis of OCBC's covered bond programme that are not published in its APAC Residential Mortgage Criteria, which was used to assess the mortgage portfolio's performance. The key rating drivers are common to those included in the APAC Residential Mortgage Criteria and the Covered Bonds Rating Criteria. The assumptions for this covered bond programme include the following: Foreclosure Frequency (FF): The FF reflects the risk of a standard mortgage loan defaulting, and is intended to reflect typical borrower and product characteristics. Fitch has derived the base FF on the historical performance data provided by the issuer and industry performance index. The data provided by DBS, another Singapore-based bank that has issued covered bonds, and OCBC cover eligible private residential mortgage loans to individuals with full-time employment and full income verification, as well as fully amortising loans. Fitch has developed a base default matrix for the cover pools of DBS and OCBC as below: Base FF for each rating stress (unit % and starting from AAAsf, AAsf, Asf, BBBsf, BBsf, Bsf) For LTV 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: Fitch adjusts the base FF to assess the risk profile of non-standard DBS and OCBC mortgage loans. Further adjustments can be made depending on the specifics of the transaction or programme structure, taking into account all available evidence and data. The adjustments are as follows. -- Lender adjustment: Increase to the base default probability (DP) of 10%. This has been applied for OCBC. -- Investment property: Increase to the base DP of 25% -- Treatment of loans in arrears: Borrowers in arrears are more likely to default. Fitch will increase the DP based on how long the borrowers have been in arrears and then use the higher of the adjusted DP and the floor value. Fitch will increase the base DP of loans 30-59 days in arrears by 20% and that for loans 60-89 days in arrears by 50%. The floor for loans 30-59 days in arrears is 20%, that for loans 60-89 days in arrears is 66% and that for loans over 90 days in arrears is 100%. Loss Severity: In determining the loss severity for a portfolio of residential mortgage loans, Fitch calculates the ratio of the sale proceeds of the property to the outstanding balance of the loans at the time of default loan by loan. The agency determines the indexed value of the property, and then applies a market value decline (MVD). We then take into account foreclosure and carry costs, among other things. Fitch's loss-severity assumptions and the data used to derive these assumptions are detailed below. House Price Assumptions: The largest house-value declines for Singapore occurred during the Asian Financial Crisis (1998-1999). The peak-to-trough house price decline at such time gives Fitch a good approximation for simulating a similar level of stress in relation to house value movements. We use the same MVD assumption regardless of location as property-value movements are relatively similar across the city state due to the small size of Singapore's population. The median peak-to-trough MVD was 41% during the Asian Financial Crisis. Based on the historic variance of house value movements, we apply further adjustment of 1.4 times the historic-high MVD to derive the 'AAA' 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 updated MVD adjustments are refined to reflect the Urban Redevelopment Authority of Singapore's (URA) data format. Adjustments to the above MVDs apply where the security property is for the landed property (detached and semi-detached house and terrace: 1.1x) and non-landed properties (apartment and condominium: 1.0x) based on the market value volatility and severity seen in the market. Illiquid property adjustments are applies as per the APAC Residential Mortgage Criteria. Property Price Indexation: Most lenders do not update the value of properties securing their residential loans unless these loans become non-performing or borrowers are granted a further advance on the same property. To estimate the current value of a property, Fitch indexes the property value using the URA's property price index data, the properties' location and the date of the original valuation. Fitch's methodology assumes 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 takes into account the costs related to foreclosing the property of a defaulted borrower. We apply foreclosure and carry cost assumptions of 5% and 4%, respectively. Fitch assumes recovery will take 24 months. This provides a buffer in legal cases relating to hardships in a period of economic stress, as there is a lack of data on recoveries. Minimum Loss Severity and Credit Enhancement: Fitch's observations of losses indicate they can occur randomly at all LVR levels. To capture these potential losses, even in very conservative RMBS pools, the agency applies a minimum loss severity at the individual loan level. The level of minimum loss severity is as follow: AAAsf - 25% AAsf - 23% Asf - 21% BBBsf - 19% BBsf - 17% Bsf - 15% Notch-specific default rate stresses are derived by linear interpolation between the stresses applicable to adjacent rating categories. Minimum credit enhancement is 4% at 'AAAsf' and this might be increased in specific cases if the agency deems it appropriate. Where the minimum credit enhancement has been utilised at 'AAAsf', a proportionate uplift to credit enhancement at lower rating levels will be utilised. Cash Flow Modelling: Cash flow modelling is generally based on a set of cash flow modelling assumptions described in Fitch's Covered Bonds Rating Criteria, dated 26 October 2016. Prepayment assumptions for Singapore from year 1 to beyond year 5 are 5% and 30% for low and high constant prepayment rate (CPR) stress, respectively. Limitations: Ratings, including Rating Watches and Outlooks, that are assigned by Fitch are subject to the limitations specified in Fitch's Ratings Definitions, which are available here In addition, ratings within the scope of these criteria are subject to the following specific limitations. Specific asset-level and operational risks may prevent Fitch from rating a transaction, or may limit the highest achievable ratings in the agency's analysis. The core areas where such restrictions may apply are generally those detailed in the report Criteria for Rating Caps and Limitations in Global Structured Finance Transactions. Examples for APAC RMBS transactions are provided in the APAC Residential Mortgage Criteria. RATING SENSITIVITIES Oversea-Chinese Banking Corp's covered bonds would be vulnerable to downgrade if the relied-upon asset percentage (AP) rises above the 'AAA' breakeven AP of 86% 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% contractual AP stipulated in the programme documents, 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 others, 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. Data Sources for Criteria Development: -- DBS' mortgage arrears data from 2009 to 2015 -- DBS's mortgage restructuring rate from 1Q13-1Q16 -- OCBC's mortgage arrears data from 2011 to 2015 -- Monetary Authority of Singapore's Financial Stability Review Report: Industry Mortgage Arrears Rates from 2Q04 to 3Q15 -- URA's property price index from 1993 to 2015 -- Statistics Singapore's unemployment rate from 1Q10 to 2Q16 Data Sources for Credit Analysis -- OCBC's loan by loan data; OCBC's cash flow data of the mortgage pool Contact: Primary Analyst Keum Hee Oh Director +82 2 3278 8373 Fitch Australia Pty Ltd, Korea Branch 9F, 97Uisadang dae-ro Youngdeungpo-Gu Seoul, 150-737, Republic of South Korea Secondary Analyst Claire Heaton Senior Director +61 2 8256 0361 Committee Chairperson Carmen Munoz Senior Director + 34 93 323 8408 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 Criteria (pub. 30 Aug 2016) 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. 20 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 20 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020852 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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