MARC AFFIRMS ITS AAA RATING ON OVERSEA-CHINESE BANKING CORPORATION LIMITED’S RM2.5 BILLION REDEEMABLE SUBORDINATED BONDS

Oct 29, 2012 -

MARC has affirmed the 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 rating action takes into account OCBC’s sizable retail and corporate banking franchise in Singapore and Malaysia, its excellent asset quality, its good core earnings profitability, and strong regulatory capitalisation. The rating also incorporates OCBC’s observed ability to date to maintain strong credit metrics and weather periods of global financial uncertainty well, which MARC attributes to the banking group’s conservative practices and sound financial management.

OCBC’s recurring and stable core earnings capacity is underpinned by its strong banking franchise in Singapore and widening presence in strategic overseas markets. The group’s continued efforts to diversify its revenue streams, both in terms of products and geographic mix, and plans to increase cross-selling efforts within the financial services group, should benefit its earnings and capital generation capacity in future years.

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.

OCBC is the second largest banking group in Singapore and the second largest financial services group in Southeast Asia by assets. OCBC conducts its banking business through OCBC Bank, Bank OCBC NISP (in Indonesia) and Bank of Singapore. OCBC operates commercial banking operations in 15 countries and territories; its key markets are Singapore, Malaysia, Indonesia and Greater China. 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 robust underlying businesses and franchises of OCBC and its significant subsidiaries have been reflected in the bank’s strong customer deposit-based funding profile and consistently strong non-consolidated and consolidated pre-provision earnings.

For the first six months to June 30, 2012 (1H2012), OCBC’s group level core net profit increased 23% year-on-year to SG$1.5 billion from SG$1.2 billion in the previous year’s corresponding period. Net interest income and non-interest income increased year-on-year by 17% and 15%. The increases were driven by loan growth, notwithstanding sustained interest margin compression, and higher wealth management income. Operating expenses increased only by 7% year-on-year, which helped improve OCBC’s cost-to-income ratio to 39.4%.

Loan loss provisioning charges moderated sharply from SG$96 million in the first quarter of 2012 (1Q2012) to SG$38 million in the second quarter (2Q2012), reflecting lower non-performing assets (NPA) in absolute terms while operating expenses edged up by 6%. OCBC posted a lower core net profit for 2Q2012 compared to 1Q2012, which represented an 18% decline quarter-on-quarter. Net interest income was slightly down as a result of increased interbank placements while strong fee income growth was offset by reduced trading income and life assurance profit amid a more challenging investment environment.

MARC views OCBC’s loan book to be of high quality; its non-performing loan (NPL) ratio of 0.9% as of end-June 2012 continues to be lower than that of its peer Singapore banking groups, although its peers have been more aggressive at building loan loss reserves. MARC views the current level of incremental NPAs as very manageable and notes that portfolio allowances had risen in FY2011 on account of faster loan growth, lower recoveries and write-backs. New NPAs dropped to SG$156 million in 2Q2012 from SG$303 million in 1Q2012. Provisioning costs in respect of specific and portfolio allowances also declined significantly quarter-on-quarter in 2Q2012. The banking group’s current credit exposure continues to be geographically concentrated with 52% and 16% of its total customer lending accounted for by its traditional markets of Singapore and Malaysia respectively as of end-June 2012. Going forward, the agency expects the bank to maintain strong asset quality given the overall weight of high credit quality Singapore-based lending exposures in its loan book and its prudent credit risk management practices.

As a result of brisk loan growth in recent periods, OCBC’s consolidated Tier-1 and total capital adequacy ratios are down from end-2010 levels to 14.1% and 15.5% but remain very strong. Capital generation remains supported by the quality of its earnings, while the group’s low risk appetite and conservative risk management provide comfort that capital will continue to be prudently managed.

The stable outlook reflects expectations that OCBC will maintain its sound financial profile over the intermediate term at the entity level as well as on a consolidated basis. MARC expects the credit profile of Singapore’s domestic banks to remain sound and banking system losses to remain low on account of the still healthy domestic household and corporate balance sheets which should continue to support debt affordability. Additional comfort is provided by Singapore’s high prudential standards and rigorous supervision of the banking sector.

Contacts:

Milly Leong, +603-2082 2288/ milly@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.