Oversea-Chinese Banking Corporation Limited - 2009

MARC has affirmed the AAA rating of Oversea-Chinese Banking Corporation Limited’s (OCBC) redeemable subordinated bonds. The rating factors in OCBC’s well-entrenched business presence in Singapore and Malaysia, its sound capitalisation, diversified earnings streams and strong risk management capabilities. MARC also derives comfort from the high level of support afforded to Singapore-based banks by the Government of Singapore and the Monetary Authority of Singapore. While subordination was taken into account in the affirmed rating, the one-grade notching that would usually be applied to subordinated issues at the present rating level was dispensed with on account of the well-secured position of the rated debts in OCBC’s capital structure and OCBC’s strongly positioned deposit and senior unsecured debt ratings within the ‘AAA’ rating category on MARC’s domestic rating scale. The rating outlook is stable.

With assets of SGD180.2 billion (MYR438.4 billion) as at March 31, 2009, OCBC is Singapore’s second largest bank by assets. It operates across 15 countries, mostly in the Southeast Asian region. OCBC’s Malaysian operations have consistently contributed towards a quarter of the group’s profits and accounted for 11% of group’s assets at end-FY2008.

OCBC has established a track record of generating stable income, which MARC believes will assist in moderating the adverse effects of the challenging operating environment. In FY2008, OCBC recorded a 24% growth in net interest income supported by loan growth. Non-interest income on the other hand, fell by 19% attributable to the weaker financial markets, resulting in lower gains from investment securities and lower net trading income as well as lower profit contribution from Great Eastern Holdings Limited (GEHL) - the 87%-owned insurance entity in the OCBC group. GEHL’s net profit declined to SGD272 million in FY2008 from SGD547 million in FY2007. On the whole, the net profit of the OCBC group declined by 16% to SGD1.75 billion in FY2008, leading to a ROA of 1.05% in 2008 (2007: 1.51%).

Meanwhile, the group’s non-performing loan (NPL) ratio steadily improved to 1.5% in December 2008 from 5.0% in December 2004, supported by its conservative collateral-based lending strategy as well as its  disciplined  and  prudent  underwriting  standards. That  said, OCBC’s asset  quality  is likely to  come under stress going forward as delinquencies emanate from the SME sector, affected by the prevailing challenging economic conditions. Nevertheless, MARC believes that OCBC’s strong pre-provision profits should allow the bank to absorb the higher loan charge-offs without impairing its capital. In addition, OCBC’s capitalisation, as measured by its total capital adequacy ratio (CAR) of 15.1% and Tier-1 CAR of 14.9% in FY2008, remains strong.

MARC considers OCBC’s funding profile to be stable, underpinned by the bank’s core deposit funding, while significant liquidity is held in the form of government securities and other liquid money market instruments, accounting for 10% of the group’s assets as at year-end 2008. Even if the pressure on asset quality and profitability does not subside in the near-term, MARC believes that OCBC should remain resilient to the effects of economic slowdown in its key markets, supported by its established business franchise, enhanced risk management and strong capitalisation. This underpins the stable outlook on the ratings.

Strengths

Challenges