Oversea-Chinese Banking Corporation Limited - 2010

MARC has affirmed its AAA rating on Oversea-Chinese Banking Corporation Limited’s (OCBC) redeemable subordinated bonds of up to RM2.5 billion. The rating affirmation takes into account OCBC’s established financial services franchise in Singapore and Malaysia, its strong capitalisation, diversified sources of income and improved risk management procedures. While MARC factors in the subordination of the debt, the one-grade notching usually applied to subordinated debt issuances at the current rating level was not adopted due to the well-secured position of the subordinated bonds in OCBC’s capital structure and its correspondingly strong position of deposit and senior unsecured debt ratings within the ‘AAA’ rating category on MARC’s domestic rating scale. The rating outlook is stable.

Commanding a total asset size of SGD208.7 billion as at end-March 2010, OCBC stands as the second largest Singaporean bank by asset size compared to the other domestic banks, namely DBS Group Holdings (DBS) and United Overseas Bank Limited (UOB). Meanwhile, OCBC’s recently acquired ING Asia Private Bank, which has since been renamed Bank of Singapore, is expected to support the growth of its private banking and wealth management services from combined assets under management of some USD23.0 billion as at year-end December 31, 2009 (FY2009). As at end-2009, OCBC’s operations in Singapore and Malaysia accounted for a combined 86.5% (FY2008: 86.3%) of its total assets, while the two countries contributed 63% (FY2008: 66%) and 31% (FY2008: 27%) of consolidated pre-tax profit respectively in FY2009. Contribution from OCBC’s operations in other locations remains small at this point.

Despite the challenging economic environment in Singapore and Malaysia during the first half of 2009, OCBC’s operating performance remained resilient. The bank reported a marginal increase in its net interest income of 1.5% to SGD2,825.2 million (FY2008: SGD2,783.4 million) on the back of much lower funding costs, which benefited from a low interest rate environment. Meanwhile, life insurance profits doubled to SGD726.7 million on account of higher profit from non-participating funds which also included a one-off pre-tax gain of SGD201.0 million arising from the adoption of the new risk-based capital framework in Malaysia. On the whole, reported net profit grew by 12% to SGD2.0 billion with the bank’s ROA increasing to 1.35% (FY2008: 1.23%), the highest compared to its Singapore peers; UOB and DBS reported ROA of 1.06% and 0.79% respectively.

For the group, non-performing loans (NPL) were marginally higher at 1.7% compared to the previous year due to the effects of the weaker economic environment which saw an increase in NPLs stemming from Malaysia and ‘other ASEAN’ locations. However, OCBC’s NPL remained the lowest compared to the other domestic banks (UOB NPL: 2.2%; DBS NPL: 3.0%) at end-2009, and the NPL ratio has since improved to 1.5% as at end-March 2010. OCBC’s capitalisation remains strong, with its Tier-1 and total CAR standing comfortably above regulatory levels at 15.9% and 16.4% respectively at end-2009. In addition to its strong retained earnings, OCBC’s capitalisation is enhanced further by the issue of new ordinary shares amounting to approximately SGD684.5 million in lieu of cash dividends under its Scrip Dividend Scheme in respect of the final and interim dividend for FY2008 and FY2009 respectively.

The stable outlook on OCBC’s rating continues to be underscored by the bank’s ability to maintain its stable income generation, which leaves it well positioned to comfortably accommodate any increase in credit costs against a weaker economic backdrop. MARC also notes that OCBC has also proved its resilience during and in the immediate aftermath of the economic downturn thanks to its improved standards of risk management, franchise strength and the emphasis on a strong capital buffer.

Major Rating Factors
Strengths

• Entrenched market position in Singapore and Malaysia thanks to established financial services franchise;
• Diversified and stable income generation; 
• Robust financial profile evident from strong capitalisation, sound asset quality and stable profitability; and
• Strong presence and focus on core competencies in the business (SME) and consumer finance segments.

Challenges

• Growth prospects in main operating markets tempered by a high level of competition; and
• Managing asset quality in the aftermath of the global economic downturn.