Singapore Banks - Covered Bonds: Diversify Source Of Funding
DBS priced issue of EUR750m covered bonds
- DBS announced it has successfully priced the issue of EUR750m in fixed-rate covered bonds due 2024 under its USD10b Global Covered Bond Programme. These covered bonds will bear a fixed coupon of 0.375% per annum payable yearly in arrears.
- This is DBS’s third issuance of covered bonds, after its USD1b and AUD750m issuance in 2015 and 2016 respectively.
- DBS’s covered bonds issuance will diversify funding source and reduce cost of funding but we think it is unlikely to meaningfully boost the bank’s NIM.
- Covered bonds are debt securities secured by a pool of assets, which consists of primarily residential mortgages in Singapore.
- Coupled with solid credit ratings of triple-A status by Singapore banks, they have attracted strong interest among global investors.
- We think banks will continue to offer competitive pricing (see Fig 1).
Diversification of funding sources
- Covered bonds are a relatively new funding tool for Singapore banks. It allows them to diversify their funding source and helps to lower cost of funding.
- In terms of total debt issuance as of Sep 2016, covered bonds currently form only ~7% and ~4% for DBS and UOB respectively.
- Singapore banks have established their Global Covered Bond Programme, with both DBS’s and OCBC’s programme at USD10b each, and UOB’s at USD8b. At USD8-10b of issuance, we do not expect covered bonds to boost the banks’ NIMs significantly from low cost of funding.
Maintain sector Negative; Prefer UOB
- As such, we maintain a NEGATIVE view on Singapore banks, mainly due to asset quality deterioration amid the turning credit cycle.
- We prefer UOB for its lower exposure to the O&G sector and China, and a bigger general-provision buffer.