More S'pore-issued Basel III bonds in the offing: Moody's

SINGAPORE banks are expected to issue more Basel III compliant securities, with about 25 per cent of their Basel II securities callable, or reaching maturity, this year, Moody's Investors Services said in a research report yesterday.

For a new instrument to qualify as bank capital under the Basel III framework, it must be able to absorb losses - either through write-downs or conversion into common equity - in the event of the issuing bank reaching a "point of non-viability".

In Singapore, this point will be when the Monetary Authority of Singapore (MAS) notifies a bank that it would become non-viable as a going concern without such a write-down, or when the MAS decides to inject government capital to maintain the bank's viability, said the report.

Most of these instruments are non-cumulative in nature, meaning that the bank can skip coupon payments at its sole discretion.

Banks in Singapore had $22.2 billion of outstanding Basel II securities at the end of last year, of which $5.9 billion will be callable this year. The rest will be callable or mature by 2019.

"We expect banks in Singapore, as elsewhere, to replace 'old-style' securities that do not have such loss-absorption features with new Basel III compliant securities," said Gene Fang, a Moody's vice-president and senior analyst.

The issuance of Basel III securities will be credit-positive for local bank depositors and senior bondholders, since these new securities will absorb losses when the banks are in distress, he said.

"For investors in the instruments, Basel III securities carry more risk than similar Basel II securities for the same reason. Our ratings of the securities reflect this differential."

Thus far, more than $3 billion worth of Basel III compliant instruments have been issued by Singapore banks, most of which were issued by United Overseas Bank. None are from Oversea-Chinese Banking Corporation yet.

UOB got the ball rolling in July 2013, issuing $850 million worth of capital securities with a distribution rate of 4.9 per cent a year.

These bonds are perpetual in nature - meaning they have no expiry date - and cannot be converted into stock.

It was the first bank in Asia to sell Basel III compliant debt, with these mostly sold to private-bank clients.

This was followed by a sale of $500 million worth of non-convertible perpetual bonds by UOB late last year. They had a distribution rate of 4.75 per cent.

Both bonds were rated Baa1, and qualify as additional Tier-1 capital - which means it counts as Tier-1 capital, but not core equity Tier-1 (CET1).

In 2011, MAS imposed higher capital standards than the minimum requirements under Basel III: Singapore banks must hold a minimum ratio of 6.5 per cent in CET1, 8 per cent for Tier-1 capital, and 10 per cent for total capital adequacy ratio (CAR), by next year.

The CET1 measures the bank's core equity capital as a ratio to the bank's total risk-weighted assets. CAR then measures the combination of Tier-1 and Tier-2 capital, against total risk-weighted assets.

As a sign of tougher regulatory requirements, Basel III rules note that capital deductions must, by 2018, come entirely from CET1 capital. Previously, deductions could be taken from Tier-1 capital, or a combination of first and second tier capital.

UOB was also the first in South-east Asia to issue US dollar-denominated Basel III securities this month, when it sold US$800 million in fixed-rate subordinated notes at a rate of 3.75 per cent.

Unlike the Basel III compliant debt instruments UOB issued earlier, there is no option to skip coupon payment with these notes, which are rated A2 and qualify for Tier-2 capital.

DBS Group also issued $805 million worth of non-convertible perpetual bonds - with a distribution rate of 4.7 per cent - in December. They qualify as additional Tier-1 capital, and are rated Baa1.

The perpetuals were offered in exchange for an outstanding $1.7 billion worth of preference shares issued in 2010 that had a coupon rate of 4.7 per cent.

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