October 23, 2013 / 9:00 AM / 4 years ago

RPT-Fitch Affirms DBS, OCBC & UOB at 'AA-'; Outlook Stable

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Oct 23 (Reuters) - (The following statement was released by the rating agency)

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). Their Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'AA-' with Stable Outlook and their Viability Ratings (VRs) at 'aa-'. A full rating action breakdown is provided below. The rating review does not encompass the overseas subsidiaries of Singapore banks. These entities will be reviewed based on Fitch's normal review cycle.

KEY RATING DRIVERS - IDRs and VRs

The affirmation of the Singapore banks' IDRs and VRs, and Stable Outlooks reflect Fitch's view that their strong intrinsic risk profiles will remain comparable with highly rated global peers over the medium term. Notable credit strengths are the banks' core capitalisation, domestic funding franchises and close regulatory oversight. Sound risk management and generally diversified loan books and earnings also contribute to the banks' proven resilience through economic cycles. These strengths are, however, tempered by potential challenges arising from Singapore's elevated property prices, and banks' regional aspirations, as exposures to less developed markets are likely to gradually climb over the long term.

RATING SENSITIVITIES - IDRs and VRs

The banks' ratings have limited upside, as they are among the highest of banks in developed countries.

Downward rating action could arise from a protracted economic downturn leading to heightened risks in asset quality and capital impairment for the banks. Rising challenges in the operating environment, both in Singapore banks' home and overseas markets, are likely to continue into 2014, alongside persistent global headwinds and increased market volatility amid concerns of Fed quantitative tapering. However, Fitch views the likelihood of widespread stress within the banking sector as remote, considering the Singapore government's demonstrated willingness to mitigate downside risks during difficult times and curb excesses during buoyant periods. As such, Fitch believes cyclical credit costs will be manageable and easily absorbed by earnings alone, thus posing little risk to capital.

Regionalisation will over time add pressure to the banks' VRs. Expansion into fast-growing but riskier Asian economies is ongoing and likely to continue. To date, this trend has been backed by a conservative record in overseas markets, the maintenance of high core capitalisation and deposit-funded discipline, and Singapore's conservative regulator. In the medium term, however, downward rating risks could increase from the growing influence on the banks' credit fundamentals of high-growth, higher-risk markets such as China, India and Indonesia, through their regional expansion, and these economies' rising interconnectedness with many other Asian economies, especially Hong Kong and Singapore. The rating impact could vary depending on the geographical mix, economic dynamics over time, the respective banks' balance sheet strengths and track record as well as on how the Singapore regulator would be adapting to a changing environment.

Deposits will remain central to the funding base in all their core markets, with the overall loan/deposit ratio stable within 85%-90%. Wholesale borrowings have remained modest. Core capital is around 11% of risk-weighted assets and 7% of tangible assets, among the highest of highly rated banks globally. This, together with other strict prudential banking standards, highlights the conservative track record of the Monetary Authority of Singapore. These factors will continue to play a role in ensuring that Singapore banks have strong loss absorption qualities and that they will remain resilient through economic cycles.

KEY RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Rating Floors

The Support Ratings and Support Rating Floors reflect Fitch's view of a very high probability of extraordinary state support, if needed, for Singapore banks. This view stems from the banks' high degree of systemic importance, as they collectively account for around 60% of SGD deposit base. The government's strong ability to extend support is underpinned by its 'AAA' ratings.

A change in the willingness and ability of the government to provide timely support would be negative for the Support Ratings and Support Rating Floors. One development that could lead to such an outcome is the global initiative to reduce implicit state support available to banks.

KEY RATING DRIVERS AND SENSITIVITIES - Debt Ratings

The ratings on senior notes and commercial paper programmes are the same as the banks' respective Long-Term and Short-Term IDRs. This is because these instruments constitute direct, unsubordinated and senior unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations. A change in the IDRs would affect these issue ratings.

Subordinated Lower Tier 2 notes are rated one notch below the banks' 'aa-' VRs to reflect their subordination status and the absence of any going-concern loss-absorption features. The ratings on Upper Tier 2 notes and preference shares are three and five notches, respectively, below the banks' VRs, reflecting the presence of subordination and going-concern loss-absorption mechanisms. The ratings of these securities 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+'

- Subordinated Lower Tier 2 notes affirmed at 'A+'

- Preference shares affirmed at 'BBB'

OCBC

- 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 programmes affirmed at 'F1+'

- Subordinated Lower Tier 2 notes affirmed at 'A+'

- Preference shares affirmed at 'BBB'

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-'

- Subordinated Lower Tier 2 notes affirmed at 'A+'

- Subordinated Upper Tier 2 notes affirmed at 'A-'

- Preference shares affirmed at 'BBB'

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