[SINGAPORE] Moody's Investors Service says a number of differences among Singapore's three largest banking group by assets - DBS Bank Ltd (Aa1 stable, aa3), Oversea-Chinese Banking Corp Ltd (OCBC, Aa1 stable, aa3) and United Overseas Bank Limited (UOB, Aa1 stable, aa3) - could lead to credit differentiation over time.
Moody's report points out that DBS, OCBC and UOB exhibit similarly strong financial fundamentals; namely robust asset quality, good capital adequacy levels, and healthy funding and liquidity profiles. As a result, their baseline credit assessments are at the same aa3 level; a category which is among the highest that Moody's assigns to banks globally.
Moody's report says that despite the strong financial fundamentals of DBS, OCBC and UOB, there are differences between the three banks that include factors such as: (1) their geographic mix; (2) their varying appetites for capital market activities; (3) their funding structures; and (4) challenges related to the introduction of Basel III rules.
"The banks' different geographic mixes could increase risks for OCBC and DBS more than they would for UOB, and the banks' varying appetites for capital market activities raise risks for DBS more than for the other two banks," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.
"As for funding structure, DBS is better placed to benefit from higher interest rates than the other two banks, while OCBC faces greater challenges related to Basel III capital deductions," adds Tarzimanov.
Moody's analysis is contained in its just-released report titled "Banking - Singapore - DBS, OCBC, UOB: Peer Comparison" and is authored by Tarzimanov.
According to the report, while all three banks are expanding their cross-border transactions, UOB's proportionately larger exposure to Singapore and lower share of loans in banking markets that Moody's considers riskier than Singapore - such as China, Thailand and Indonesia - lower its exposure to country-related risks when compared to OCBC and DBS.
Moody's report also says that the three banks generally exhibit a low appetite for capital market activities. However, of the three, DBS' market risk appetite is the largest and its earnings exhibit a slightly higher share of trading gains when compared to OCBC and UOB.
As for the banks' funding structures, Moody's report says higher interest rates in the US and Singapore will have a greater positive effect on DBS's earnings, owing to its superior funding structure. Moody's report notes that DBS' cost of funding is lowest, owing to its higher share of low-yielding customer deposits.
As for OCBC in particular, Moody's report notes that the bank's profits are somewhat dependent on the volatile financial performance of its insurance arm, Great Eastern Holdings (GEH, unrated). Despite this volatility, higher interest rates will be generally positive for the financial performance of GEH.
Moody's report says that while life insurance involves low-risks, profits for the sector are associated with some degree of volatility, partly because of complex accounting rules. The contribution of the insurance segment to OCBC's quarterly profits, for instance, has been volatile and ranged from 5 per cent to 32 per cent over the last eight quarters.
On Basel III rules, Moody's report says the rules will introduce a greater challenge for OCBC's capital adequacy in the coming years,because OCBC faces large deductions from the CET1 capital of its investments in GEH, while DBS and UOB face much smaller deductions.
Under Basel III rules adopted in Singapore, banks that own non-consolidated insurance subsidiaries have to fully deduct these investments from their CET1 capital on 1 January 2018.