MARC AFFIRMS ITS AAA RATING ON OVERSEA-CHINESE BANKING CORPORATION LIMITED'S RM2.5 BILLION REDEEMABLE SUBORDINATE BONDS; OUTLOOK STABLE

Oct 13, 2011 -
MARC has affirmed its issue rating of AAA on Oversea-Chinese Banking Corporation Limited's (OCBC) redeemable subordinated bond of up to RM2.5 billion with a stable outlook. The affirmed issue rating reflects the franchise strength of the financial services group, its relatively good earnings stability, and very strong regulatory capitalisation. MARC further notes that the continued deepening of OCBC's banking franchise in Indonesia and China has been achieved in the context of robust risk management framework and good overall control of costs. The issue rating does not reflect any notching for subordination on the basis of the well secured position of the subordinated bonds in OCBC's capital structure.

The bank enjoys a strong business position in its home market of Singapore with a market share of 18% in loans and 15% in deposits. Its insurance subsidiary, Great Eastern Holdings (GEH), maintains a market leading position in life insurance in Singapore and Malaysia and continues to show profitable organic growth. The group's bancassurance strategy continues to provide important growth opportunities for its life business.

OCBC Group reported a marginally lower core net profit of SGD1,173 million for the first six months to June 30, 2011 (1H2011) compared to last year's first half profit of SGD1,179 million. In 1H2011, the group posted a year-on-year increase in net interest income of 13% on robust loan growth in Singapore and key markets overseas, led mostly by corporate loans. The rapid loan growth in the 1H2011 helped mitigate the impact of net interest margin compression and provide earnings momentum. Also observed was strong growth in its revenue from insurance, private banking, and other asset and wealth management activities. MARC believes that the group's core profitability should be sustained by balanced loan growth combined with stable asset quality and good overall cost management.

The improvement in the bank's asset quality in recent periods follows a fairly mild deterioration in 2009. The relative resilience of its asset quality to the economic downturn owes in large part to its granular credit portfolio with its small and medium-sized enterprises (SME) and retail banking focus. MARC views the bank's asset quality indicators as robust. In line with the general trend in the industry, OCBC's gross non-performing loans (NPL) declined by SGD82 million in 1H2011, translating into a gross NPL ratio of 0.8% at June 30, 2011.The bank's loan loss reserve coverage of total NPAs has increased to 123.2% as at June 30, 2011 mostly on account of general provisions set aside to support its strong loan growth.
OCBC has consistently maintained a very strong capital position, with Tier 1 and total capital adequacy ratios of 15.4% and 17.0% respectively as at June 30, 2011. The present high levels of regulatory capital in its operating insurance subsidiaries in Singapore and Malaysia provides some added comfort. Management has indicated that OCBC's transition to new Basel III rules (under which Tier 1 capital requirements will increase to 7% by 2013) will be aided, amongst others, by earnings retention, capital preservation measures such as its scrip dividend scheme.

The stable rating outlook reflects MARC's expectations that OCBC is likely to maintain its strong financial profile and that the rating is comfortably positioned at its current rating level.

Contacts:
Ahmad Rizal Farid, +603-2082 2253/ arizal@marc.com.my;
Anandakumar Jegarasasingam, +603-2082 2250/ kumar@marc.com.my.