OREANDA-NEWS. August 17, 2015. Fitch Ratings has affirmed the ratings of three Singaporean banks - DBS Bank Ltd. (DBS), Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank Limited (UOB) - and the bank holding company of DBS, DBS Group Holdings (DBSH). Their Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'AA-' with Stable Outlook, and the Viability Ratings (VRs) at 'aa-'. A full list of rating actions is at the end of this rating action commentary.

The ratings on DBS's covered bond programme and covered bond issuance are unaffected by this review.

KEY RATING DRIVERS
VRS AND IDRS
The Long-Term and Short-Term IDRs are driven by the VRs, and reflect the entities' resilient funding profiles, which stem from their stable domestic franchises, healthy capitalisation buffers and strong regulatory oversight. These rating strengths currently mitigate risks to the banks' balance sheets from rising exposures to emerging markets in the Asia-Pacific region and high loan growth - including in property-related lending - in recent years.

The banks' strong domestic funding profiles underpin their balance sheet liquidity, as indicated by loan-to-deposit ratios of 84%-93% and all-currency liquidity coverage ratios of 109%-142% at end-June 2015. However, funding and liquidity - particularly in foreign currency - has required more active management in recent years amid faster growth offshore, frequently in US dollars.

Rapid growth in domestic and offshore lending over the past few years has started to moderate amid a slowing domestic property market, easing demand for cross-border trade finance and a softer economic outlook in many of the countries where the banks operate. This helps to relieve the pressure on the banks' funding and risk profiles, which had started to build up in recent years, although some asset quality deterioration is expected.

Fitch believes asset quality has benefited from favourable credit conditions over the past five or so years, and impaired loan ratios of 0.7%-1.2% of gross loans at end-June 2015 are close to cyclical lows. Slowing macroeconomic growth in Singapore and other key markets, lower commodity prices and potentially higher interest rates and market volatility present cyclical risks to asset quality and headwinds to profitability over the next 12-18 months, particularly in light of the strong loan growth in recent years and rising leverage in some markets.

However, the banks' balance sheets and earnings have proven reasonably resilient through past economic cycles, and Fitch expects any deterioration in asset quality to be manageable in light of the banks' adequate profitability, healthy capitalisation and reasonable property portfolio collateral coverage.

OCBC's capitalisation was negatively affected by the acquisition of Wing Hang Bank in 2014. Following the acquisition and associated rights issue, OCBC's Fitch Core Capital (FCC) ratio and fully-implemented core equity Tier 1 (CET1) capital adequacy ratio (CAR) fell to 10.4% and 10.1% respectively at end-September 2014. Since then, OCBC has accumulated capital steadily, aided by healthy profitability, strong participation in its discounted scrip dividend scheme and slower risk-weighted asset growth. The FCC ratio and CET1 CAR stood at 11.5% and 11.2% respectively at end-June 2015, close to the levels before the acquisition.

OCBC's capital ratios remain below those of its Singapore peers due largely to capital deductions for its insurance subsidiary and goodwill on other past acquisitions. However, Fitch expects OCBC's management to remain focused on capital accretion in order to bring capitalisation more in line with that of its peers.

DBSH is a bank holding company with DBS as its sole operating entity. The ratings on DBSH are equalised with those of DBS due to the close integration between the two entities, their common branding, board and management, and a common jurisdiction and regulator. The ratings also reflect DBSH's simple balance sheet structure and Fitch's expectation that double leverage should remain low in the medium term.

SUPPORT RATINGS AND SUPPORT RATING FLOORS
The SRs and SRFs for the three Singapore banks reflect Fitch's view of an extremely high probability of extraordinary state support for the banks, if necessary. This is due to their high systemic importance, with around 60% of the Singapore-dollar deposit base, and the sovereign's strong financial ability to provide support, as indicated by its ratings of 'AAA'.

DBSH's SR and SRF reflect our view that sovereign support for the holding company is possible, but cannot be relied upon. This is due to the low systemic importance of DBSH, as a non-operating bank holding company.

DEBT RATINGS
The ratings on the senior notes and commercial paper programmes are the same as the banks' and DBSH's respective Long-Term and Short-Term IDRs. This is because such instruments constitute direct, unsubordinated and unsecured obligations of the entities, and rank equally with all their other unsecured and unsubordinated obligations.

The Basel II subordinated Lower Tier 2 and Basel III Tier 2 subordinated notes are rated one notch below the entities' 'aa-' VRs to reflect their subordination status and the absence of any going-concern loss-absorption features.

The ratings on Basel II preference shares and Basel III Tier 1 securities are five notches below the banks' VRs. These ratings reflect the deep subordination and going-concern loss-absorption features of the securities.

RATING SENSITIVITIES
VRS AND IDRS
The VRs and IDRs on the three Singapore banks and DBSH are already among the highest of banks rated by Fitch globally, and there is limited upside to these ratings.

The banks' ratings are sensitive to rising exposures to developing markets exposing the banks to the more challenging environments in these countries, and burdening their asset quality, funding profiles - particularly in foreign currency - and ultimately their VRs, if offshore expansion is not conducted in a disciplined manner. Expansion in its various forms also adds to operational complexities, which could add to downward rating pressure.

Any perceived increase in risk appetite, including a resumption of above-trend balance sheet growth, leading to disproportionate asset concentrations in riskier sectors and countries, or greater pressure on funding or capital positions, may result in negative rating action. All three banks aim to continue expanding their regional footprint over the medium term, to capture the earnings opportunities available in faster-growing emerging markets in the region, as well as to diversify away from Singapore's mature, saturated and competitive environment.

OCBC could also face negative rating action if it fails to improve its capitalisation to a level closer to that of its peers over the next one to two years as is expected.

For DBSH greater complexity in the corporate structure and/or significantly higher double leverage would also be negative for the VR and IDR.

SUPPORT RATINGS AND SUPPORT RATING FLOORS
A change in the government's ability or propensity to provide timely support would be negative for the three banks' SRs and SRFs. This may be triggered by global regulatory initiatives aimed at reducing implicit government support available to banks. However, we view this as a longer-term risk for the Singapore banks, in light of the carve-out for senior debt that was incorporated within the regulator's proposed statutory bail-in requirements announced in June this year.

Senior debt issued by bank holding companies would also be excluded from statutory bail-in requirements under the regulator's proposals. However, the rules do not preclude contractual bail-in requirements that may be introduced at a later date, and Fitch believes that there continues to be less certainty of support for the holding company compared with the banking entity, due to its lower systemic importance. International developments regarding the enforcement of bank holding company structural subordination during the resolution process are likely to also limit the upside for SR and SRF for DBSH.

DEBT RATINGS
The ratings on the senior notes and commercial paper programmes are sensitive to any changes in the banks' IDRs.

The ratings on the Basel II subordinated Lower Tier 2, Basel III Tier 2 subordinated notes, Basel II preference shares and Basel III Tier 1 securities are sensitive to changes in the VRs.

The rating actions are 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-'
- Commercial paper programme affirmed at 'F1+'
- Senior unsecured notes affirmed at 'AA-' and 'F1+'
- Market-linked securities affirmed at 'AA-(emr)'
- Basel II subordinated Lower Tier 2 notes affirmed at 'A+'
- Basel II preference shares affirmed at 'BBB'

DBSH
- Long-Term IDR affirmed at 'AA-'; Outlook Stable
- Short-Term IDR affirmed at 'F1+'
- Viability Rating affirmed at 'aa-'
- Support Rating affirmed at '5'
- Support Rating Floor affirmed at 'No Floor'
- Senior unsecured notes affirmed at 'AA-'
- Basel III Tier 1 securities 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+'
- Basel II subordinated Lower Tier 2 notes affirmed at 'A+'
- Basel II preference shares affirmed at 'BBB'
- Basel III Tier 2 subordinated notes affirmed at 'A+'

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-'
- Basel II subordinated Lower Tier 2 notes affirmed at 'A+'
- Basel II preference shares affirmed at 'BBB'
- Basel III Tier 2 subordinated notes affirmed at 'A+'
- Basel III Tier 1 securities affirmed at 'BBB'