Increased appetite for regional expansion and rapid growth, coupled with tighter foreign currency liquidity underpin outlook
Singapore, August 23, 2012 -- Moody's Investors Service has confirmed all of DBS Bank's (DBS) ratings
and has assigned a negative outlook.
The affected ratings are: global local currency (GLC) deposit of
Aa1; foreign currency long-term senior debt and deposit of
Aa1; foreign currency subordinated debt of Aa2; foreign currency
junior subordinated debt of A1(hyb); preferred stock of A3(hyb) and
the bank's standalone financial strength rating (BFSR) of B which
maps to a baseline credit assessment (BCA) of aa3.
These actions conclude a review initiated on 2 April 2012, following
parent DBS Group Holdings' (DBSGH; not rated) announcement
that it would purchase up to 99% of the shares in Bank Danamon
Indonesia (Baa3 deposit rating, D/ba2/positive standalone bank financial
strength rating/baseline credit assessment/outlook) for SGD9.1
billion.
In Moody's evaluation, the potential financial impact of this
acquisition on the bank's creditworthiness -- based on the
reported terms of the deal -- is manageable when taken in
isolation. However, the proposed transaction provides further
evidence of the group's expansion ambitions and changing credit
profile due to its rapid growth in size and geographic scope in recent
years, a trend that underpins our negative outlook.
For the time being, the central bank of Indonesia has announced
new restrictions and conditions on bank ownership that have raised uncertainties
over the closing and timing of the proposed transaction. Moody's
will closely follow the evolution of the planned transaction and its final
terms, should it occur, as well as the trajectory of the bank's
overall risk profile. DBS' ratings would be downgraded if
the balance of future developments leads Moody's to believe that it would
be at a higher risk of default than it is today, taking into account
the likely risk exposures and the loss-absorbing buffers of the
bank over a full economic cycle.
RATINGS RATIONALE
DBS remains a very strong credit with its B/aa3 standalone rating,
among the highest assigned to any financial institution globally.
This rating is driven by the bank's leading domestic franchise and
strong balance sheet, including healthy asset quality, ample
liquidity particularly in SGD, and relatively consistent earnings.
In particular, the bank has impressive capital strength by global
standards, with a large capacity to absorb loss even under Moody's
highly adverse stress scenario.
In addition, Moody's assesses the likelihood of systemic support
for DBS in the event of a crisis to be very high, based on its significance
as the largest domestic bank in the country. As such, the
GLC deposit rating of Aa1 benefits from 2 notches of uplift from the aa3
standalone rating.
However, DBS' changing risk profile in recent years may be
indicating an increased risk tolerance that could make the bank's
credit profile inconsistent with its high standalone rating over time.
By definition, Moody's Aa ratings imply a very high certainty
of outcome and, as such, are sensitive to relatively small
increases in risk.
The negative outlook, therefore, incorporates some concerning
trends in DBS' recent performance which may threaten its creditworthiness:
DBS' increased appetite for regional expansion and rapid growth
and -- to some extent-- its tightening funding
profile, particularly in foreign currency.
More particularly, DBS' credit profile continues to evolve
with the changing geographic mix of its business. The proportion
from regional Asian markets is rising, in line with its long-term
strategy to generate more income from these sources. While Moody's
acknowledges the benefits of diversification, the bank is growing
its exposure to high growth emerging markets that do carry higher risks.
Furthermore, its expansion ambitions appear to be greater than those
of the other Singapore banks.
Notwithstanding the fact that recent rapid growth was due to opportunities
opened up by the retreat of European banks in Asia, and largely
in trade finance, most of this growth was in USD, thereby
pushing DBS' USD loan to deposit ratio (LDR) well above the 100%
level for the past two and half years. Although the high USD LDR
is partially mitigated by DBS raising foreign currency funds in the wholesale
markets, there is little scope at this rating level for any funding
or refinancing uncertainty in the event of a global liquidity crunch.
WHAT COULD DRIVE THE RATINGS DOWN/UP
DBS' ratings are unlikely to move up given the assigned negative
outlook.
The ratings could be downgraded if: (i) the bank's overall risk
profile increased significantly as a result of aggressive expansion into
higher-risk markets or sizeable acquisitions without sufficient
funding to maintain its strong capital ratios. A core Tier 1 ratio
materially weaker than the 11.0% reported in June 2012 with
full deduction for Basel III could be negative for the rating; (ii)
asset quality deteriorated such that the capital cushion after incorporating
potential losses fell below the levels for similarly rated banks in the
aa3 standalone rating band. A non-performing loans ratio
greater than 2.0% would be a negative rating factor;
or (iii) the bank grew its capital market activities in such a way that
it could cause a significant increase in earnings volatility.
The methodology used in these ratings was Moody's Consolidated Global
Bank Rating Methodology published in June 2012. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
DBS Bank, headquartered in Singapore, had assets of SGD353
billion as of June 2012. It is the largest bank by assets in the
country.
The following ratings were unaffected:
- Short-term deposits: P-1
- Foreign currency commercial paper: P-1
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
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the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
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Consequently, Moody's provides a date that it believes is
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for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Moody's confirms DBS Bank's ratings and assigns a negative outlook
