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Rating Action:

Moody's: Multiple rating actions on DBS Bank and Bank Danamon Indonesia

Global Credit Research - 02 Apr 2012

Acquisition announcement prompts rating actions

Singapore, April 02, 2012 -- Moody's Investors Service has placed all of DBS Bank's (DBS) ratings on review for downgrade.

At the same time, Moody's has affirmed all of Bank Danamon Indonesia's (Danamon) ratings.

The affected ratings and actions are detailed further below.

On 2 April 2012, DBS Group Holdings (DBSGH; not rated) announced that it will purchase up to 99% of the shares in Danamon for SGD9.1 billion: (1) 67.37% from Temasek Holdings (Aaa stable) for SGD6.2 billion to be funded from a new issuance of DBS Group Holdings shares; and (2) 31.63% from Danamon's current minority shareholders for an amount of up to SGD2.9 billion, which DBSGH intends to fund from internal cash resources and senior debt issuance.

RATINGS RATIONALE

The review of DBS' ratings will evaluate the financial impact of this relatively large acquisition on the bank's creditworthiness. DBSGH -- as a holding company -- has limited earnings capacity whereas it will have higher leverage ratios after this transaction. Therefore, DBS -- as the group's principal earnings contributor -- is expected to play a substantial role in supporting the increased debt burden of its parent. This will likely require DBS to upstream higher dividends to provide the bulk of the funds that DBSGH will need to service debt as well as to pay dividends on its enlarged share capital base.

Importantly, the review will also consider Moody's concerns that DBS' changing risk profile over time may be indicating an increased risk tolerance that would be inconsistent with its standalone bank financial strength (BFSR) of B, which maps to a baseline credit assessment (BCA) of aa3. By definition, this rating band implies a very low risk profile and is therefore sensitive to relatively small increases in risk.

The proposed acquisition of Danamon is consistent with DBSGH' long-term strategy to generate half of revenue from sources outside Singapore. While this strategy will improve the diversification of the group's revenue streams and potentially improve overall profitability, we are mindful that these high growth regional Asian markets also carry higher risks.

Additional evidence of DBS' expansion plans was announced at the same time as the Danamon transaction when DBS also announced that it had received approval from Bank Negara Malaysia to commence discussions with Fullerton Financial Holdings, a wholly owned subsidiary of Temasek Holdings, to acquire its 14% stake in Alliance Financial Group Berhad in Malaysia.

As for Danamon, Moody's does not expect the new shareholder to change its strategy or disrupt its positive financial performance trajectory, especially that Danamon and DBS already affiliates of DBSGH under Temasek Holdings. While Danamon will also likely have to contribute to the transaction's financial servicing, its currently strong financial profile provides a significant buffer. For example it reported a 16.6% Tier 1 capital ratio and 2.6% return on assets in 2011. Therefore, Moody's has affirmed its BFSR of D, mapping to a standalone baseline credit assessment of ba2, with a positive outlook.

The affirmation of Danamon's credit ratings also indicates Moody's unchanged assumptions that the bank would enjoy very high systemic support in times of stress, which largely stems from its significance in the banking system as the fifth largest bank in Indonesia following the transaction.

The principal methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology" published in February 2007, and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology" published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

DBS Bank, headquartered in Singapore, had assets of SGD340.8 billion as of end 2011. It is the largest bank by assets in the country.

Danamon, headquartered in Jakarta, had assets of IDR141.9 trillion as of end 2011. It is the sixth largest bank by assets in the country.

The following ratings were placed on review for possible downgrade:

DBS: 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 BFSR of B which maps to a BCA of aa3.

The following ratings were affirmed:

Danamon: GLC deposit of Baa3; foreign currency deposit of Baa3/Prime-3; and BFSR of D which maps to a BCA of ba2. The BFSR carries a positive outlook and all other ratings a stable outlook.

REGULATORY DISCLOSURES

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on 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 which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on 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 which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com 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
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

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: Multiple rating actions on DBS Bank and Bank Danamon Indonesia
No Related Data.

 

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