Oversea-Chinese Banking Corporation Limited - 2008

MARC has assigned a AAA rating to Oversea-Chinese Banking Corporation Limited’s (OCBC) RM2.5 billion redeemable subordinated bonds. Although the proposed issuance is junior in ranking to deposits and senior debt, the well protected position of the rated debt in OCBC’s capital structure and OCBC’s strongly positioned senior unsecured rating within the ‘AAA’ rating category lead MARC to conclude that there is no necessity to notch down from the rating of the issuer’s long-term deposit and senior unsecured debt ratings of AAA on our domestic scale. The rating reflects OCBC’s very strong banking and “Great Eastern” life insurance franchises in the combined Singapore and Malaysian market, its clear focus on core competencies and improving operating efficiency which continues to underpin its earnings potential, the promising results from its regional strategy and its excellent financial profile. The rating also factors in the high implied level of potential support from the Singapore government and authorities, as well as the low likelihood of reliance on external support. The rating outlook is stable.

OCBC, established in 1932, is a dynamic financial services group which derives substantial synergies as a universal bank. Its core competencies and strengths in retail and consumer banking are complemented by its dominant position in life insurance and related wealth management business in the combined Singapore and Malaysian market. OCBC has one of the strongest banking franchises in the combined Singapore and Malaysian market and is also a leading banking group in Southeast Asia.

Great Eastern Holdings Limited (GEHL), the life insurance business of the group has a very well-recognised, established and leading life insurance-wealth management franchise which contributed a significant 25% of the group’s core operating profit in FY2007. The group derives significant synergies from cross-selling of the bank and the life insurer’s products. GEHL maintains a dominant position in the life insurance market in Singapore and Malaysia with a 22.5% market share in each market. MARC views the significant added diversity and stability the insurer brings to the revenue and earnings base of the group as a strong positive rating factor.

The bank’s income is largely derived from its Singapore and Malaysian operations which account for 66% and 23% of the group’s total income respectively for FY2007. Although Malaysia firmly remains OCBC’s major overseas market, the bank has made inroads in Indonesia, China and Vietnam to take advantage of the more promising medium to long-term growth prospects for financial services in these markets. The bank has enlarged its geographical reach while keeping to its strategy of transferring successful business models and product offerings from Singapore and Malaysia to its branches and strategic partnerships in those countries. In August 2007, the bank locally incorporated its existing operations in China by establishing a wholly-owned subsidiary. In Indonesia, OCBC intends to grow 72%-owned PT Bank NISP into a top-tier nationwide bank which is focused on SME and consumer finance.

The group’s performance for FY2007 was strong and sustained with net profit growing by 3.7% to SGD2.2 billion (FY2006: SGD2.1 billion) despite the bank making a provision of SGD226 million for 85% of its Asset Backed Securities Collateralised Debt Obligations (ABS CDO) exposure during the year. The bank’s loan portfolio, although concentrated in the property sector, is generally well-diversified by customer, industry segments and country. OCBC’s excellent credit quality and low credit costs are partly a reflection of the effects of strong economic growth on the financial health of corporate sector and households’ balance sheets, particularly in its home market of Singapore. Non-performing loan (NPL) levels are generally expected to remain low and fairly well contained, although upward pressure on NPLs could potentially develop as a result of slowdown in the economic growth of export-dependent East Asia. Compared to its other large banking group peers, OCBC generates a sizeable portion of income in the form of fee income and income from insurance operations. OCBC’s highly diversified earnings base, on a geographic and segmental basis imparts resilience to its  income stream. The bank’s favourable access to stable customer deposit funding is reflected in its strong liquidity position. The bank has consistently demonstrated efficient and prudent management of its capital and OCBC’s very strong capital strength is reflected in its high proportion of Tier 1 capital and a relatively high Tier 1 ratio of 11.5% as at end of FY2007.

At the present, the bank has been able to maintain its strong performance and position in a rather benign credit environment. However, risks to the growth outlook of OCBC’s key markets have risen in recent months which may pose challenges to banks generally in terms of sustaining loan growth, asset quality and profitability. The stable outlook on the rating reflects MARC’s expectations that its overall operating environment will remain relatively resilient to volatility in global financial markets in the near to intermediate term, allowing the  bank’s credit metrics to remain consistent with the assigned rating.

Strengths

• One of the largest consumer financial services provider in the combined Singapore and Malaysian market;
• Significantly diversified earnings from wealth management and life insurance activities;
• Very strong financial profile with respect to asset quality, profitability and capitalization;
• Clear focus on core competencies in the consumer and SME finance segments; and
• Promising results of overseas expansion initiatives within Southeast Asia and China.

Challenges

• Increased competition in two of its key markets, i.e. Singapore and Malaysia; and
• Sustaining recent financial performance in the light of slower GDP growth for Singapore and continuing domestic price pressures.