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 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).

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.

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

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