November 22, 2017 / 5:43 AM / a year ago

Fitch Rates DBS Series 6 EUR500m Mortgage Covered Bonds 'AAA'; Outlook Stable

(The following statement was released by the rating agency) SEOUL/SYDNEY, November 22 (Fitch) Fitch Ratings has assigned DBS Bank Ltd.'s (AA-/Stable/F1+) Series 6 EUR500 million mortgage covered bonds a rating of 'AAA'. The Outlook is Stable. The Series 6 bonds are due November 2024, and have a 12-month extension period. This issuance brings total outstanding covered bonds on issue out of DBS's covered bonds programme to the equivalent of SGD5.0 billion. KEY RATING DRIVERS The programme's rating is based on DBS'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 85.0% used in the programme's asset coverage test, which Fitch relies upon in its analysis. The relied-upon 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 was capped at one notch as the programme is significantly exposed to foreign-exchange risk in the recoveries given default of the covered bonds. This is because the assets are denominated in Singapore dollars, while the covered bonds issued are 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 Outlook on the covered bond rating reflects the Stable Outlook on DBS's Long-Term IDR and a four-notch buffer against downgrade of the issuer's IDR. Based on our cash flow analysis of the cover pool at 9 October 2017, the 'AAA' breakeven AP of 85.0% is equivalent to a breakeven overcollateralisation (OC) of 17.6%. This is driven by the asset disposal loss of 17.4%, which reflects the significant asset and liability mismatches in the programme, with the weighted-average (WA) life of the cover assets at 11.9 years and the liabilities at 3.5 years. The credit loss component contributes 3.4% to breakeven OC, and the cash flow component reduces it by 3.1% due to the available excess spread modelled by Fitch in the programme. DBS has incorporated new assets into the cover pool on 23 October 2017, which almost doubles the size of the existing cover pool. The characteristics of the newly incorporated loans and their cash flows are broadly in line with that of the previously published cover pool. Hence, Fitch's breakeven OC and its components are as described above. Fitch applied a variation to the APAC Residential Mortgage Rating Criteria, which does not include an analytical treatment for asset basis risk. Fitch deems the risk relevant to the enhancement level of DBS's programme as 49.3% of the cover pool's mortgage assets are linked to floating rate market-linked indices. The indices are: the one-month, three-month and 12-month Singapore Interbank Offered Rate (SIBOR) and the three-month Swap Offer Rate (SOR), all of which reset at regular intervals. Fitch bases its assumption on the one-month SOR, as this is the index used for the liability swaps on the issued covered bonds. We deduct 7bp on average from the mortgages' spreads linked to the market rates described above, based on our analysis of the historical movement of the market indices over 17 years. There is no rating impact from this criteria variation. RATING SENSITIVITIES The 'AAA' rating on DBS Bank Ltd.'s (DBS) mortgage covered bonds are vulnerable to a downgrade if the relied-upon asset percentage (AP), used in the asset coverage test, rises above Fitch's 'AAA' breakeven AP of 85.0% 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% AP allowed by the Monetary Authority of Singapore, the rating on the programme would be downgraded to 'AA', one notch above the bank's 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 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 Carmen Munoz Senior Director +34 93 323 8408 - The source of information used to assess these ratings was 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:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) here Covered Bonds Rating Criteria (pub. 30 Oct 2017) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel File (pub. 30 Oct 2017) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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