Singapore Banks

Kim Eng on 26 Aug 2014

• Singapore banks may soon be able to issue covered bonds. Additional source of long-term funding. 
• Issue size could be SGD26b, or 3% of their interest-bearing liabilities. Positive on liquidity with marginal EPS impact.
• Sector still a Neutral. DBS our top pick, with catalysts from higher interest rates, followed by UOB.

Low-cost and stable funding source
Singapore banks may soon be able to issue covered bonds (CBs). These are already popular in Australia, Europe and the US. CBs are secured against a specific asset pool, primarily residential mortgages. Given the regulatory cap on the amount of assets backing the bonds at 4% of a bank’s assets, the size of CBs that can be issued by our three Singapore banks works out to SGD26b, or 3% of their total interest-bearing liabilities.
Two features are: 1) a minimum 3% overcollateralisation of the face value of all CBs; and 2) the requirement for adequate risk-management processes and internal controls by the issuers.
Positive on liquidity with marginal EPS impact
In our view, CBs are a low-cost and stable funding alternative for Singapore banks, coming at a time of tightening local liquidity. Secured against a specific asset pool, they may be considered liquid assets under Basel 3. They could be introduced as early as year-end. Though it is too early to quantity their NIM impact, this is likely to be miniscule.
Neutral; DBS our top pick. DBS remains our top pick as it should be best-positioned to benefit from rising interest rates.