Ratings On Three Singapore Banks Affirmed At #AA-/A-1+# With Stable Outlooks

Stocks and Financial Services Press Releases Tuesday May 22, 2018 17:11
SINGAPORE--22 May--S&P Global Ratings
SINGAPORE (S&P Global Ratings) May 22, 2018--S&P Global Ratings today said that it affirmed the issuer credit ratings on three Singapore-based banks:
DBS Bank Ltd.
Issuer Credit Rating AA-/Stable/A-1+
Oversea-Chinese Banking Corp. Ltd. (OCBC)
Issuer Credit Rating AA-/Stable/A-1+
United Overseas Bank Ltd. (UOB)
Issuer Credit Rating AA-/Stable/A-1+
(See "Ratings List" below for more details).

The ratings are underpinned by the sound fundamentals of the three Singapore banks. In our opinion, 2017 was the turning point in the credit cycle; we expect nonperforming loans (NPLs) to stabilize in 2018, and credit costs to revert to their long-run average of 20-25 basis points (bps) of loans. Although the troubled upstream oil and gas sector continues to face overcapacity, the recovery in commodity prices has mitigated further downside risks. All three banks have also set aside prudent provisions for their vulnerable exposures.

We believe the NPL ratios of the three Singapore banks will remain low and stable, averaging about 1.7% in 2018. The bulk of new NPLs from the previous two years originated from the vulnerable oil and gas support services. Singapore banks' exposure to this sector accounts for 2%-3% of total system loans. The rally in oil prices to almost US$80 per barrel, from the January 2016 low of US$28 per barrel, has provided a much-needed respite to this sector. Although charter rates remain low, offshore support vessels and operators have seen business volumes pick up and improvements in cash flows. We believe Singapore banks have identified most of the vulnerable exposures, and have rehabilitated or restructured weak loans.

We expect the Singapore banking system to see mid to high single-digit loan growth of 5%-8% in 2018, broadly in line with bank guidance. The growth outlook is based on improving economic prospects driven by export demand and business optimism. We expect interest income, a major component of total income, to benefit from rising interest rates.

S&P Global Ratings forecasts four U.S. rate hikes of 25 bps each by the end of 2018. We estimate that every 25 bps hike in the U.S. rates could translate to 3 bps-5 bps uplift in net interest margins (NIMs) for Singapore banks. Higher NIMs and low provisioning costs will likely characterize Singapore banks' earnings in 2018, culminating in profit growth in the high single digits to low teens. In our view, modest appreciation of interest rates is unlikely to have a negative impact on asset quality.

We expect capitalization to remain adequate over the next 18-24 months. The 2017 results season was dominated by special dividends; DBS and UOB had offered a special dividend of 50 and 20 Singapore cents, respectively, reflecting one-off return of capital buffers built up in anticipation of Basel IV requirements, which have since been relaxed. Going forward, some gradual increase in dividend payout ratios is likely. Ultimately, we believe retained earnings will keep pace with loans growth such that capital levels remain broadly stable.

Liquidity will remain robust due to banks' strong franchises and low reliance on wholesale sources, with the liquidity coverage and net stable funding ratio comfortably 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 dominant market position, adequate capital and earnings buffer, satisfactory risk position, as well as strong funding and liquidity profile in the next 18-24 months.

We believe DBS will continue to be a strong beneficiary of the ongoing interest rate normalization in the region given its substantial pool of low-cost deposits, especially in Singapore. We expect the bank's NIM expansion to more than offset the incremental credit costs associated with a higher interest rate--a view we share on the other two Singapore banks. DBS' bottom line will be further supported by its diversification into more stable fee income businesses such as wealth management and bancassurance, as well as the enhanced cost efficiencies from its digitization strategy.

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, possibly due to a material deterioration of its mainland China portfolio as the country deleverages its debts and rebalances its growth model, which makes an adequate risk assessment inappropriate for DBS. A lower SACP will lead to downgrades of those hybrid securities which we notch down starting from its SACP. However, this is not our base-case scenario.

Conversely, we may revise the SACP upward if we upgrade the economic risk score of Singapore BICRA to '2' from '3' currently as the economic imbalance risk in the system wanes. But this is not our base case in the next 18-24 months.

OVERSEA-CHINESE BANKING CORP. LTD.

The affirmed rating on OCBC reflects 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. OCBC has built a comprehensive wealth management platform--including private banking services via Bank of Singapore and insurance products through Great Eastern Holdings--to drive fee income growth and complement its core lending business.

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 may revise downward our assessment of OCBC's SACP if its asset quality weakens substantially, particularly due to cyclical sectors such as real estate. A lower SACP for OCBC will lead to downgrades of those hybrid securities that we notch down starting from its SACP. However, this is not our base-case scenario.

Conversely, we may revise the SACP upward if we upgrade the economic risk score of Singapore BICRA to '2' from '3' currently as the economic imbalance risk in the system wanes. But this is not our base case in the next 18-24 months.

UNITED OVERSEAS BANK LTD.

Our rating on UOB reflects 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. We believe UOB will continue to dominate the local higher-yielding SME segment, while pursuing measured and organic regional growth. Likewise, we also believe the bank will benefit in margin expansion and credit cost normalization in our forecast period as the region's interest rates increase gradually from the historical low bases.

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 or if we observe increasing credit risk from the regional SME sector as the economic growth slows and interest rate rises, which leads us to believe the current adequate risk position assessment no longer holds. A downward revision of UOB's SACP will lead to downgrades of those hybrid securities that we notch down starting from its SACP. However, this is unlikely to happen in our base case.

Conversely, we may revise the SACP upward if we upgrade the economic risk score of Singapore BICRA to '2' from '3' currently as the economic imbalance risk in the system wanes. But this is not our base case in the next 18-24 months.


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