Singapore Banks - Maybank Kim Eng 2017-01-17: Covered Bonds ~ Diversify Source Of Funding

Singapore Banks - Maybank Kim Eng 2017-01-17: Covered Bonds: Diversify Source Of Funding Singapore Banking Sector DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

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.

Competitive pricing 

  • 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.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-17
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 15.680 Same 15.680
SELL Maintain SELL 7.400 Same 7.400
HOLD Maintain HOLD 18.360 Same 18.360