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Rating Action:

Moody's revises outlook of large Singapore banking groups to negative

31 Mar 2016

Singapore, March 31, 2016 -- Moody's Investors Service has today revised to negative from stable the rating outlook on four Singapore financial institutions.

The institutions affected are DBS Bank Ltd. (DBS), DBS Group Holdings Ltd, Oversea-Chinese Banking Corporation Limited (OCBC) and United Overseas Bank Limited (UOB).

The rating action reflects Moody's expectation that a more challenging operating environment for banks in Singapore in 2016, and possibly beyond, will pressure the banks' asset quality and profitability.

Moody's expects credit conditions for banks in Singapore will continue to weaken against the backdrop of slower economic and trade growth, both domestically and in the region. The more challenging operating environment has been reflected in Moody's change of Singapore's Macro Profile to "Very Strong-" from "Very Strong".

Despite these headwinds, Singapore banks maintain very strong buffers in terms of capital, loan loss provisions and pre-provision income. Their funding and liquidity profiles are also robust. As a result, Moody's has affirmed the four institutions' credit ratings, baseline credit assessments (BCAs, where available), adjusted BCAs, and counterparty risk assessments (CR Assessments).

Rating outlooks provide an opinion on the likely rating direction over the next 12-18 months, and are assigned only to banks' long-term deposit, issuer and senior unsecured debt ratings.

A list of all affected ratings is provided at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE

The increasing challenges posed by the weakening operating and credit conditions in Singapore, and more broadly in the region, will likely weigh on the credit profiles of DBS Bank, DBS Group, OCBC and UOB, leading Moody's to revise their ratings outlooks to negative from stable.

The rating agency expects that Singapore banks will report higher problem loan levels and will need to increase loan loss provisions, leading to lower bottom-line profitability.

Reflecting the operating environment challenges, Moody's has changed its assessment of Singapore's Macro Profile to "Very Strong-" from "Very Strong". In particular, Moody's considers that weakening credit conditions in Singapore -- including a 15 percentage point increase in private sector credit as a share of GDP to 130% at end-2015 from 115% at end-2012 -- present increasing risk to the banks' asset quality and profitability.

Although domestic credit growth moderated substantially in 2015, overall leverage in the economy remains elevated compared to that of the previous decade.

Against the backdrop of weaker economic growth and banks' tighter credit underwriting, Moody's expects a challenging deleveraging cycle in the corporate sector in Singapore.

Domestic firms are affected by slowing economic and trade growth in Asia and the drop in oil and other commodity prices. This has led to deteriorating corporate profitability, and in turn to lower credit metrics for corporates across several industries, including manufacturing, oil and gas, shipping, ship and rig building, and metals and mining.

The Singapore banks are also facing increased headwinds from slowing growth in regional economies, because foreign loans constitute around one-half of their gross loans. Major foreign markets for Singapore banks include China (Aa3 negative), Hong Kong (Aa1 negative), Malaysia (A3 stable), Indonesia (Baa3 stable), Thailand (Baa1 stable) and India (Baa3 positive). Economic and/or credit conditions have weakened in China, Hong Kong and Malaysia, leading Moody's to recently lower its Macro Profiles for these countries.

A looming risk for Singapore banks' asset quality is their large exposure to oil and gas borrowers, including services companies, which were the most affected by the collapse in oil prices. Singapore banks' exposures to oil and gas services firms are significant and ranged from 13% to 24% of their common equity Tier 1 capital at end-2015.

RATIONALE BEHIND THE AFFIRMATION OF BANK RATINGS

Despite the headwinds, the three large Singapore banking groups maintain very strong buffers in terms of capital, loan loss provisions and pre-provision income. Their funding and liquidity profiles are also robust. As a result, Moody's has affirmed the four institutions' credit ratings, BCAs, adjusted BCAs, and CR Assessments.

At end-2015, the three large Singapore banking groups reported good core capital ratios ranging from 12.2% to 14.8%, as defined by the ratio of Tangible Common Equity to risk-weighted assets (TCE/RWA). The banks also posted solid returns on assets (ROA) for 2015 of around 1%. Finally, the reserve coverage against problem loans exceeded 120% for the three banks, providing an additional buffer.

The three large banking groups maintain solid funding and liquidity profiles. Their reliance on wholesale funding decreased in 2015, and the banks scaled down the issuance of commercial paper against the backdrop of slower regional trade finance business. Buffers of liquid assets remained healthy, as highlighted by all currency liquidity coverage ratios of above 120% for the three banks.

Moreover, Singapore banks' asset quality remains solid. Despite some deterioration, the banks posted very low problem loan levels at end-2015, ranging from 0.9% for DBS Bank and OCBC, to 1.4% for UOB.

GOVERNMENT SUPPORT REMAINS VERY STRONG

The Aa1 deposit and senior unsecured debt ratings of DBS Bank, OCBC and UOB continue to incorporate two notches of uplift, reflecting Moody's expectation of a "very high" probability of government support in case of need.

The Aa2 issuer and senior unsecured debt ratings of DBS Group -- a holding company -- also incorporate Moody's "very high" public support assumptions. However, the ratings of this issuer are positioned one notch lower than those of DBS Bank, to reflect the structural subordination of creditors at the holding company level relative to the creditors at the operating bank.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The affected banks' ratings could be lowered if their financial fundamentals deteriorate significantly. All other rating factors constant, the BCAs of the banks would come under adverse pressure if any of these conditions is met: (1) non-performing loans increase by around 50 basis points from current levels, (2) TCE/RWA ratios decrease by around 50 basis points, (3) ROA decrease by around 20 basis points.

The rating agency will also monitor the extent to which any weakening in asset quality and profitability is balanced by higher buffers, notably in the form of core capital or decreased risk-weighted assets.

In view of their negative outlooks, Moody's does not expect any upward pressure on the ratings of these institutions in the medium term.

However, their outlooks could be revised to stable if macro-economic conditions in Singapore and in the region improve and these banks maintain sound financial metrics.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

DBS GROUP HOLDINGS LTD

• Long-term local and foreign currency issuer rating affirmed at Aa2;

• Short-term local and foreign currency issuer rating affirmed at P-1;

• Foreign currency other short term program rating affirmed at (P)P-1;

• Local and foreign currency senior unsecured debt rating affirmed at Aa2;

• Foreign currency senior unsecured medium-term note (MTN) program rating affirmed at (P)Aa2;

• Local and foreign currency subordinated debt ratings affirmed at A2 (hyb);

• Foreign currency subordinated MTN program rating affirmed at (P)A2;

• Local currency preferred stock rating affirmed at A3(hyb);

• Outlook for the company revised to negative from stable.

DBS BANK LTD.

• Long-term local and foreign currency bank deposit ratings affirmed at Aa1;

• Short-term local and foreign currency bank deposit ratings affirmed at P-1;

• Short-term foreign currency commercial paper rating affirmed at P-1;

• Short-term senior unsecured commercial paper rating affirmed at (P)Aa1;

• Foreign currency other short term program rating affirmed at (P)P-1;

• Foreign currency senior unsecured debt rating affirmed at Aa1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• Local and foreign currency subordinated debt ratings affirmed at Aa3;

• Foreign currency subordinated MTN program rating affirmed at (P)A2;

• Local and foreign currency junior subordinated debt ratings affirmed at A1 (hyb);

• Local currency preferred stock rating affirmed at A3 (hyb);

• BCA and adjusted BCA affirmed at aa3;

• CR Assessment affirmed at Aa1(cr)/P-1(cr);

• Outlook for the bank revised to negative from stable.

DBS BANK LTD., AUSTRALIA BRANCH

• Short-term foreign currency commercial paper rating affirmed at P-1.

DBS BANK LTD., HONG KONG BRANCH

• Short-term foreign currency commercial paper rating affirmed at P-1;

• Foreign currency other short term program rating affirmed at (P)P-1;

• Local and foreign currency senior unsecured debt ratings affirmed at Aa1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• CR Assessment affirmed at Aa1(cr)/P-1(cr);

• Outlook for the branch revised to negative from no outlook

DBS BANK LTD., LONDON BRANCH

• Short-term foreign currency commercial paper rating affirmed at P-1;

• Foreign currency other short term program rating affirmed at (P)P-1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• CR Assessment affirmed at Aa1(cr)/P-1(cr).

DBS CAPITAL FUNDING II CORP

• Foreign currency BACKED preferred stock non-cumulative ratings affirmed at A3 (hyb).

• Outlook for the issuer revised to no outlook from stable

OVERSEA-CHINESE BANKING CORPORATION LIMITED

• Long-term local and foreign currency bank deposit ratings affirmed at Aa1;

• Short-term local and foreign currency bank deposit ratings affirmed at P-1;

• Short-term foreign currency commercial paper rating affirmed at P-1;

• Foreign currency other short term program rating affirmed at (P)P-1;

• Foreign currency senior unsecured debt rating affirmed at Aa1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• Foreign currency Basel II-compliant subordinated debt rating affirmed at Aa3;

• Foreign currency Basel III-compliant subordinated debt rating affirmed at A2 (hyb);

• Foreign currency Basel III-compliant subordinated MTN program rating affirmed at (P)A2;

• Foreign currency junior subordinated MTN program rating affirmed at (P)A1;

• Local currency preferred stock rating affirmed at A3 (hyb);

• BCA and adjusted BCA affirmed at aa3;

• CR Assessment affirmed at Aa1(cr)/P-1(cr);

• Outlook for the bank revised to negative from stable.

OVERSEA-CHINESE BANKING CORPORATION LIMITED, SYDNEY BRANCH

• Foreign currency other short term program rating affirmed at (P)P-1;

• Local currency senior unsecured debt rating affirmed at Aa1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• CR Assessment affirmed at Aa1(cr)/P-1(cr).

• Outlook for the branch revised to negative from stable.

OCBC CAPITAL CORPORATION (2008)

• Foreign currency BACKED preferred stock non-cumulative rating affirmed at A3 (hyb).

UNITED OVERSEAS BANK LIMITED

• Long-term local and foreign currency bank deposit ratings affirmed at Aa1;

• Short-term local and foreign currency bank deposit ratings affirmed at P-1;

• Short-term foreign currency commercial paper rating affirmed at P-1;

• Local currency other short term program rating affirmed at (P)P-1;

• Foreign currency senior unsecured debt rating affirmed at Aa1;

• Local currency senior unsecured MTN program rating affirmed at (P)Aa1;

• Local and foreign currency Basel II-compliant subordinated debt ratings affirmed at Aa3;

• Local and foreign currency Basel III-compliant subordinated debt ratings affirmed at A2 (hyb);

• Local currency Basel III-compliant subordinated MTN program rating affirmed at (P)A2;

• Local currency preferred stock rating affirmed at A3 (hyb);

• BCA and adjusted BCA affirmed at aa3;

• CR Assessment affirmed at Aa1(cr)/P-1(cr);

• Outlook for the bank revised to negative from stable.

UNITED OVERSEAS BANK LIMITED, SYDNEY BRANCH

• Foreign currency other short term program rating affirmed at (P)P-1;

• Local currency senior unsecured debt rating affirmed at Aa1;

• Foreign currency senior unsecured MTN program rating affirmed at (P)Aa1;

• CR Assessment affirmed at Aa1(cr)/P-1(cr);

• Outlook for the branch revised to negative from stable.

UOB FUNDING LLC

• Short-term local currency BACKED commercial paper ratings affirmed at P-1

• Outlook for the issuer revised to no outlook from stable

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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 revises outlook of large Singapore banking groups to negative
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