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Rating Action:

Moody's confirms OCBC's ratings; concludes review for downgrade

20 Aug 2014

NOTE: On August 22, 2014, the press release was corrected as follows: In the list of affected ratings for Oversea-Chinese Banking Corp Ltd, “local currency” was changed to “foreign currency” for the three following ratings: senior unsecured MTN program ratings, Basel III-compliant subordinated MTN program ratings, and junior subordinated MTN program ratings. Revised release follows.

Singapore, August 20, 2014 -- Moody's Investors Service has concluded its review for downgrade of Oversea-Chinese Banking Corporation Ltd (OCBC) and confirmed the bank's long-term debt, deposit and standalone ratings.

The outlook on the ratings is stable.

The rating actions follow OCBC's announcement on 18 August 2014 that it launched a SGD3.3 billion fully underwritten rights issue for its acquisition of Wing Hang Bank in Hong Kong.

The review for downgrade on OCBC's ratings was initiated on 2 April 2014, following OCBC's announcement that it made a general offer to acquire 100% of Wing Hang Bank's shares.

The full list of confirmed ratings, including the deposit ratings of Bank of Singapore, OCBC's subsidiary, is presented at the end of this press-release.

For Wing Hang Bank's ratings, please refer to www.moodys.com.

RATINGS RATIONALE

The main reason for the confirmation of OCBC's ratings is its announcement this week of a SGD3.3 billion rights issue, following the bank's acquisition of 97.52% of Wing Hang Bank's shares in early August 2014.

The rights issue will result in OCBC's pro-forma transitional common equity Tier 1 ratio (CET1) amounting to 13.2%, compared to 14.7% at 30 June 2014. The post-transaction capital buffer is in line with similarly rated global peers, while slightly weaker when compared to its domestic peers, DBS Bank Ltd. (DBS, Aa1 stable, B/aa3 stable) at 13.5% and United Overseas Bank Limited (UOB; Aa1 stable, B/aa3 stable) at 13.9%.

While the rights issue will only be fully completed at the end of September 2014, Moody's considers that the capital raising exercise is highly likely to succeed, due to its fully underwritten status, and the 25% discount offered on the proposed new shares relative to the bank's share price in mid-August 2014.

The rights issue involves a 27% irrevocable undertaking from the Lee Group Companies, OCBC's current majority shareholders. The other 73% is fully underwritten by Merrill Lynch (Singapore) Pte. Ltd., the Hongkong and Shanghai Banking Corp. Ltd (Singapore branch) and J.P. Morgan (S.E.A) Limited.

The price paid by OCBC for Wing Hang Bank is equivalent to around 1.77 times Wing Hang Bank's consolidated net book value at 31 December 2013; valuing 100% of Wing Hang's shares at SGD6.2 billion.

OCBC is financing 60% of the transaction through common equity, and 40% through Tier 2 capital. The details are as follows:

1. Fully underwritten SGD3.3 billion rights issue.

2. Around SGD2.5 billion in Basel III compliant Tier 2 capital raised through two transactions in April and June 2014.

3. Dividend reinvestment scheme (scrip dividend), whereby OCBC received SGD486 million in common equity.

OCBC WILL BENEFIT FROM WING HANG BANK'S PLATFORM IN GREATER CHINA

OCBC's acquisition of Wing Hang Bank materially improves its Greater China platform, notably in Hong Kong.

The bank's Greater China loans now account for around 25% of its gross loans, an increase from 15%. The largest increase comes from loans provided to Hong Kong borrowers, which are low risk, given Wing Hang Bank's 0.44% problem loans ratio at end-2013.

OCBC has also acquired access to new customer groups in Hong Kong, including mass and affluent retail, and small- and medium-sized enterprises. Important cross-selling opportunities will also materialize, including fee-based products, insurance, wealth management, and some higher-margin retail offerings like credit cards and auto loans.

OCBC has also gained access to renminbi, Hong Kong dollar and US dollar deposits through Hong Kong, providing valuable funding opportunities for its Greater China assets.

Moody's notes that the consolidation of Wing Hang Bank will improve OCBC's loans-to-deposits ratio, particularly in US dollars.

MAINLAND CHINA RISKS ARE LOW

OCBC's acquisition of Wing Hang Bank enhances its Greater China platform and exposes the bank to manageable levels of Mainland-related risks.

In particular, the acquisition has only moderately increased OCBC's exposure to Mainland China to around 12% of gross loans, from around 11% at 30 June 2014. As such, OCBC's risk profile will not change materially. OCBC's Mainland China loan book exposure compares favorably with Hong Kong banks, and is lower when compared to DBS.

OCBC has no plans to aggressively expand its onshore China business, and will likely continue to grow its offshore transactions with Chinese companies. The risk profile of its onshore and offshore Chinese borrowers -- which are mostly large state-owned enterprises -- is low because they benefit from ongoing government support. In addition, because these exposures are mostly short-term and secured trade finance transactions, they expose OCBC to relatively low credit risks.

WHAT COULD CHANGE THE RATINGS UP/DOWN

OCBC's credit ratings are among the highest globally and adequately capture the cyclical risks inherent to the banking business, even for the strongest banks. They are therefore unlikely to be upgraded.

We would consider downgrading the ratings if: (1) the bank's CET1 ratio decreases below 12%; (2) problem loans exceed 2% of gross loans; (3) funding structure shifts to a greater reliance on wholesale sources, resulting in the loans-to-deposits ratio approaching 100%; or (4) asset growth outside of Singapore accelerates significantly, leading to a material increase in the share of non-Singapore risks in total assets and loans.

OCBC's failure to execute the Wing Hang Bank acquisition smoothly could also result in negative pressure on the ratings.

LIST OF AFFECTED RATINGS

Oversea-Chinese Banking Corp Ltd

• BFSR of B, which is equivalent to aa3 BCA, is confirmed with stable outlook

• Long-term bank deposit ratings of Aa1 are confirmed with stable outlook

• Foreign currency senior unsecured MTN program ratings of (P)Aa1 are confirmed

• Foreign currency senior unsecured debt ratings of Aa1 are confirmed with stable outlook

• Foreign currency Basel II-compliant subordinated debt ratings of Aa3 are confirmed with stable outlook

• Foreign currency Basel III-compliant subordinated MTN program ratings of (P)A2 are confirmed

• Foreign currency Basel III-compliant subordinated debt ratings of A2 (hyb) is confirmed with stable outlook

• Foreign currency junior subordinated MTN program ratings of (P)A1 are confirmed

• Local currency preference stock ratings of A3 (hyb) are confirmed with stable outlook

• Local currency pref. stock non-cumulative ratings of A3 (hyb) are confirmed with stable outlook

OCBC Capital Corporation

• Foreign currency BACKED pref. stock non-cumulative ratings of A3 (hyb) are confirmed with stable outlook

OCBC Capital Corporation (2008)

• Foreign currency BACKED pref. stock non-cumulative ratings of A3 (hyb) are confirmed with stable outlook

Oversea-Chinese Banking Corp Ltd (Sydney)

• Foreign currency senior unsecured MTN program ratings of (P)Aa1 are confirmed

• Local currency senior unsecured debt ratings of Aa1 are confirmed with stable outlook

Bank of Singapore Limited

• Long term bank deposit ratings of Aa1 are confirmed with stable outlook

• Long term issuer ratings of Aa1 are confirmed with stable outlook

The principal methodology used in these ratings was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Oversea-Chinese Banking Corporation Ltd, headquartered in Singapore, held assets totaling SGD348 billion at 30 June 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eugene Tarzimanov
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: (852) 3551-3077

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: (852) 3551-3077

Moody's confirms OCBC's ratings; concludes review for downgrade
No Related Data.
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