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Press Release: S&PGR Affirms 'AA-/A-1+' Ratings On Three Singapore Banks

24 May 2017 4:24 am
 
 
The following is a press release from Standard & Poor's: 
 
     -- The sound financial profiles of the three Singapore banks that we rate 
should buffer against further pressure on their asset quality, particularly 
from upstream oil and gas exposures. 
     -- We expect DBS Bank Ltd., Oversea-Chinese Banking Corp. Ltd. and United 
Overseas Bank Ltd. to maintain adequate capitalization, sound liquidity 
profiles, and provisioning buffers, which they had built over many years. 
     -- We are affirming the 'AA-' long-term and 'A-1+' short-term issuer 
credit ratings on the three Singapore banks. We are also affirming the 
'axAAA/axA-1+' ASEAN regional scale ratings on the banks. 
     -- The outlooks on the issuer credit ratings are stable. 
 
SINGAPORE (S&P Global Ratings) May 24, 2017--S&P Global Ratings today affirmed 
the issuer credit ratings on three Singapore-based banks: 
 
DBS Bank Ltd. 
 Issuer Credit Rating                   AA-/Stable/A-1+ 
 ASEAN Regional Scale                   axAAA/--/axA-1+ 
Oversea-Chinese Banking Corp. Ltd. 
 Issuer Credit Rating                   AA-/Stable/A-1+ 
 ASEAN Regional Scale                   axAAA/--/axA-1+ 
United Overseas Bank Ltd. 
 Issuer Credit Rating                   AA-/Stable/A-1+ 
 ASEAN Regional Scale                   axAAA/--/axA-1+ 
 
(See 'Ratings List' below for full list of affected ratings). 
 
We affirmed the ratings because we believe Singapore banks are coming from a 
position of strength and have sufficient buffers against downside risks. Net 
profits of Singapore banks have lost some momentum due to weakening asset 
quality and higher provisioning costs. The nonperforming loan (NPL) ratio of 
these banks increased to 1.4% in 2016, from 1.1% in 2015. 
 
The bulk of new NPLs originated from the vulnerable offshore oil and gas (O&G) 
support services sector. We believe that O&G-related NPLs are not yet over. 
Although the rally in oil prices to US$50 per barrel, from the January 2016 
low of US$28, is positive, it is unlikely to resurrect the offshore O&G 
services industry. The oil price slide had also deterred upstream activity by 
oil majors, denting the profitability of upstream services providers. This is 
compounded by overcapacity as these companies had made investments for future 
growth before 2014 until oil prices took a steep dive. We also expect credit 
costs to remain elevated to cover potential O&G collateral shortfalls from 
constrained valuations. In our opinion, downside risks from upstream O&G 
services sector exposures--at about 2% of total system loans--are manageable. 
Singapore banks have identified most of the vulnerable exposures, and are 
working to rehabilitate or restructure the loans. 
 
Loan exposures outside of offshore O&G support industry have continued to 
perform well, and will likely continue to remain so in 2017. Our base-case 
assumptions incorporate the following: 
     -- Modest, but positive, economic growth of 2.0% in 2017 and 2.1% in 2018 
for Singapore. 
     -- Controlled lending rate hikes from a low base and low unemployment 
conditions, which will continue to support private sector debt repayment. 
 
We forecast Singapore banks' loan growth to remain subdued in 2017 at 
mid-single digit, broadly in line with bank guidance. We expect the banks' 
interest margins to improve moderately with a time lag, given a higher 
probability of more rate hikes in the U.S. We estimate that every 25 basis 
points (bps) hike in U.S. rates could translate to a 3 bps-5 bps uplift in net 
interest margins (NIMs) for Singapore banks. Sluggish loan growth and higher 
credit costs, offset by higher NIMs, will characterize Singapore banks' 
earnings in 2017. This will culminate in modest to flattish profit growth. 
 
We expect capitalization to remain stable over the next 18-24 months because 
slower capital utilization from still-moderate loan growth together with 
somewhat brighter NIM upside will offset asset quality pressure on the 
bottom-line. Liquidity will remain robust due to banks' strong franchises and 
low reliance on wholesale funding sources, with the liquidity coverage ratio 
well over 100%. Also, we continue to factor in a high likelihood of 
extraordinary government support for Singapore banks. Singapore's resolution 
scheme for financial institutions reflects a circumspect approach to bail-ins. 
 
DBS BANK LTD. 
 
Our rating affirmation on DBS reflects our expectation that the bank will 
maintain its predominant market position, adequate capital and earnings 
buffer, satisfactory risk position, as well as strong funding and liquidity 
profile in the next 18-24 months, regardless of rising asset quality 
challenges and economic uncertainties. 
 
Singapore banks' interest margins are likely to improve, given a higher 
probability of more rate hikes in the U.S., with DBS being a strong 
beneficiary given its substantial pool of low-cost deposits. Separately, the 
bank has made noticeable progress in diversifying into more stable fee income 
businesses such as wealth management and bancassurance, effectively 
strengthening its top-line revenue growth. 
 
The stable outlook on DBS reflects our expectation that the bank will maintain 
its high systemic importance in Singapore and that its stand-alone credit 
profile (SACP) will remain 'a' over the next one to two years. 
 
We believe both positive and negative rating actions are unlikely over the 
next one to two years because we would need to adjust the SACP by at least two 
notches before the rating is affected. 
 
We may revise the SACP downward if DBS' asset quality weakens substantially, 
either as a result of its exposure to the offshore O&G support services sector 
or due to a material deterioration of its mainland China portfolio, which 
makes an adequate risk assessment inappropriate. However, this is not our 
base-case scenario. 
 
Conversely, we may revise the SACP upward if DBS' risk-adjusted capital ratio 
sustainably exceeds 10%. But we also view this as unlikely, due to the bank's 
current capital conservation strategy. 
 
OVERSEA-CHINESE BANKING CORP. LTD. 
 
The affirmed ratings on Oversea-Chinese Banking Corp. Ltd. (OCBC) reflect our 
view that the bank is likely to maintain its strong business position, 
adequate capital and earnings, adequate risk position, as well as strong 
funding and liquidity positions in the next 18-24 months, despite ongoing 
external headwinds. 
 
OCBC has built a comprehensive wealth management platform--including private 
banking services via Bank of Singapore and insurance products via Great 
Eastern Holdings--to drive fee income growth, which we believe could offset 
the bank's modest lending opportunities. 
 
The stable outlook on OCBC reflects our expectation that the bank will 
maintain its high systemic importance in Singapore and that its SACP will stay 
within the 'a' category over the next one to two years. A positive or negative 
rating action is unlikely over the next two years because the SACP needs to 
move by at least two notches before the rating is affected. This is because of 
our view of the high likelihood of extraordinary government support that the 
bank will receive should it be under financial stress. 
 
We could revise downward our assessment of OCBC's SACP if its asset quality 
weakens substantially due to worsening problems in the upstream O&G sector, or 
broadening of asset quality stressors to other parts of the loan portfolio, 
particularly to cyclical sectors such as real estate. However, this is not our 
base-case scenario. 
 
UNITED OVERSEAS BANK LTD. 
 
Our ratings on United Overseas Bank Ltd. (UOB) reflect our view that the 
bank's well-established market position, particularly in the small and midsize 
enterprise (SME) segment, adequate capital and earnings buffer, satisfactory 
risk position, as well as strong funding and liquidity profile will stay 
intact in the next 18-24 months, despite asset quality challenges and economic 
uncertainties. We believe UOB will continue to dominate the local 
higher-yielding SME segment, while pursuing measured and organic regional 
growth. 
 
The stable outlook on UOB reflects our expectation that the bank will maintain 
its high systemic importance in Singapore and that its SACP will stay within 
the 'a' category over the next one to two years. 
 
An upgrade or downgrade is unlikely over the rating horizon because the SACP 
needs to move by at least two notches before the rating is affected. 
 
We may revise downward the SACP if UOB's asset quality deteriorates 
significantly due to either its exposure to offshore O&G support services 
sector or if we observe increasing credit risk from the regional SME sector as 
the economic downturn deepens, which leads us to believe the current adequate 
risk position assessment no longer holds. However, this is unlikely to happen 
in our base case. Similarly, we see limited SACP upside at the moment for UOB. 
 
RATINGS LIST 
 
Ratings Affirmed 
 
DBS Bank Ltd. 
 Issuer Credit Rating                   AA-/Stable/A-1+ 
 ASEAN Regional Scale                   axAAA/axA-1+ 
 
 Subordinated                           A+ 
 Subordinated                           BBB 
 Preference Stock                       BBB 
 Commercial Paper                       A-1+ 
 Commercial Paper                       AA- 
 
DBS Capital Funding II Corp. 
 Preferred Stock                        BBB 
 
Oversea-Chinese Banking Corp. Ltd. 
 Counterparty Credit Rating             AA-/Stable/A-1+ 
 ASEAN Regional Scale                   axAAA/axA-1+ 
 
 Senior Unsecured                       AA- 
 Subordinated                           A+ 
 Subordinated                           BBB+ 
 Junior Subordinated                    BBB- 
 Junior Subordinated                    axA- 
 Preference Stock                       BBB 
 Commercial Paper                       A-1+ 
 Commercial Paper                       AA- 
 
OCBC Capital Corp. (2008) 
 Preference Stock                       BBB 
 
United Overseas Bank Ltd. 
 Counterparty Credit Rating             AA-/Stable/A-1+ 

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May 24, 2017 00:24 ET (04:24 GMT)
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