Asia Credit Research

DBS Bank Ltd.

Friday, February 14, 2014 Credit Event
Yesterday, DBS Bank Ltd (DBS) released a notice of redemption for the remaining S$895mn outstanding of its 4.7% non-cumulative non-convertible non-voting class st N preference shares on 21 March 2014. Holders of the DBSSP 4.7% perp-c20 as th at close of business on 14 March 2014 will receive par together with the accrued nd and unpaid dividend from 22 October 2013 to early redemption date. We saw the indicative price of DBSSP 4.7% perp-c20 shave off around 30 cents to 100.38 (4.6%YTM) as of market close. Meanwhile, the new DBSSP 4.7% perp-c19 moved higher to 102.5/103.25 (4.17%/4.01%) as of this morning as investors switched into the new Basel III compliant paper.

S&P: AA-/Stable Moodys: Aa1/Stable Fitch: AA-/Stable

Implications
We do not think this should be a big surprise to the market. DBS pointed out that a Change of Qualification Event has occurred and is continuing for this old-style bond when it announced its exchange offer for the new Basel III-compliant DBSSP 4.7% perp-c19 bonds in November 2013. We note that the bank identified this Tier 1 capital instrument as one of its subordinated bonds having an occurrence of Change of Qualification Event as of its 9M2013 results disclosure. From Figure 6, we highlight that a Change of Qualification Event has occurred and is continuing for old-style DBSSP 3.3% 2022-c2017 and 3.1% 2023-c18 Lower Tier 2 subordinated bonds, too. With this as precedence, there is also a possibility of an early redemption for these bonds in the future. (Please see Figure 6 for the complete list of DBS bonds and their corresponding regulatory call language.) Thus, the new Basel III compliant bank papers may continue to gain favor as investors look to switch out of old-style paper and the current limited options of bank subordinated bonds in the market. Following DBS 2013 results announcement this morning, we remain comfortable with the banks resilient credit profile . (Please refer to the succeeding pages for more details.) Among DBS bank capital instruments, we still like DBSSP 4.47% 21-c16 Tier 2 and 5.75% perp-c18 Tier 1 bonds on a relative value basis (Figure 2). While these two bonds do not meet Basel III requirements given its step-up coupon and lack of loss absorption clause, the bank has not yet flagged that a Change of Qualification Event had occurred for them. Thus, the likelihood of a regulatory call event appears to be lower for these bonds in the near-term.

Ticker: DBSSP

Overweight

Treasury Advisory Corporate FX & Structured Products Tel: 6349-1888 / 1881 Fixed Income & Structured Products Tel: 6349-1810 Interest Rate Derivatives Tel: 6349-1899 Investments & Structured Products Tel: 6349-1886

Marie-Anne Garcia +65 6530 7340 MarieAnneGarcia@ocbc.com

14 February 2014

Bank Credit: DBS Bank Ltd.

On the back of this event, we reiterate our view published in our Singapore Credit Outlook 2014. We think old-style capital instruments with a more definitive regulatory call languagei.e., in whole or in part would not qualify as regulatory capitalappear to have a higher likelihood that a regulatory call may be exercised, especially for banks with a good credit profile and/or excess capital as seen in this case. Meanwhile, one may argue that the old-style subordinated bonds with a more general languagei.e., do not qualify as regulatory capitalmay have a lower likelihood and thus, lower risk of an early redemption event. On the other hand, given the ambiguity of the language and as may be subject to the regulators interpretation, pronouncement and/or approval, we cannot entirely ignore the potential surprise and downside riskeven if it were a remote possibility at the momentparticularly if the bond is trading with a high premium over its early redemption price. (Please refer to page 114 of our Singapore Credit th Outlook 2014 report dated 16 January 2014 for the complete list of SGD bonds with their regulatory call language.)
Figure 1: Summary of indicative pricing

Status

Subordinated bonds

Issue Size (in S$ m n)

S&P/Moody's/Fitch Offer price

YTC

UT2 LT2 LT2 AT1 (old) AT1 (old) AT1 (new)

DBSSP 4.47 '21-c'16 DBSSP 3.3 '22-c'17 DBSSP 3.1 '23-c'18 DBSSP 5.75 perp-c'18 DBSSP 4.7 perp-c10/2020 DBSSP 4.7 perp-c'19

500 1000 1000 1500 1700 805

BBB+/A1/A+ A+/Aa3/A+ A+/Aa3/A+ BBB+/A3/BBB BBB+/A3/BBB NR/Baa1/BBB

104.75 101.33 100.53 105.23 99.88 102.35

2.43 2.83 2.96 4.41 4.66 4.20

Source: OCBC indicative pricing

Figure 2: Relative value of DBSSP SGD subordinated bonds

8.00 T2 sub bonds 7.00 6.00 5.00 4.00 3.00 2.00 1.00 MAYMK 6 perp-c'18 DBSSP 4.7 perp-c'19 UOBSP 4.75 perp-c'19 T1 perp bonds UCGIM 5.5 '23-c'18

YTC (%, mid)

DBSSP 5.75 perp-c'18

ABNANV 4.7 '22-c'17 UOBSP 4.9 perp-c'18 DAHSIN 4.875 '22-c'17 BNKEA 4.25 '22-c'17 MAYMK 3.8 '21-c'16 DBSSP 3.3 '22-c'17 DBSSP 3.1 '23-c'18 UOBSP 3.45 '21-c'16 DBSSP 4.47 '21-c'16 UOBSP 4.1 '19-c'14 UOBSP 3.15 '22-c'17 STANLN 4.15 '21-c'16

0.00 0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

years to call date

Source: OCBC, Bloomberg indicative pricing

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14 February 2014

Bank Credit: DBS Bank Ltd.

Background
DBS Bank Ltd (DBS) was established in 1968. With primary operations in Singapore and Hong Kong, the bank is one of the leading financial services group in Asia with a regional network of more than 200 branches across 15 markets and a growing presence in Greater China, Southeast Asia and South Asia. DBS is a 100% owned subsidiary of investment holding company DBS Group Holdings Ltd. (DBSH). DBSH has a market capitalization of S$40.3bn as th of 14 February 2014. Temasek Holdings Pte Ltd owns a 29.2% stake as of end-2013.
Figure 3: 2013 loan portfolio breakdown
South and South-East Asia 9%
Rest of the world 8%

Figure 4: Liabilities structure as of end 2013

100%

Singapore 47%

90%

80%

Rest of Greater China 19%

70%

60%

Hong Kong 17%

4Q12 Customer deposits Subordinated debts

3Q13 Due to banks Other liabilities

4Q13 Other debts issued

Source: Company

Source: Company

Key credit considerations

Solid operating performance continues in FY2013: DBS posted a net profit of S$3.7bn for full year 2013. This was a decline of 3.6% y/y given the higher one-off item in 2012. Excluding one-off items, the banks net profit was up 4.2% y/y to S$3.5bn on the back of a solid operating performance. Topline grew 10.7% y/y, mainly on a 20.8% rise in non-interest income. Net interest income saw a moderate increase of 5.4% y/y as strong loan growth had offset the 8bp contraction in NIM. NIM was slightly lower at 1.62% on lower loan yields and yields on securities. Meanwhile, double digit growth rates for all fee segments and a higher treasury customer income and trading gains contributed to the overall increase in non-interest income. The overall total income growth was partly tempered by a modest rise in operating expenses and the jump in provisions. Nonetheless, the banks cost-to-income ratio slightly improved y/y to 43.9%. Divestment of remaining stake in The Bank of the Philippine Islands (BPI): In November 2013, DBS announced that it has divested its remaining 9.9% stake in BPI for a total cash consideration of S$850mn. The 9.9% stake will be acquired in two parts: 5.6% to GIC and 4.3% to Ayala, BPIs biggest stakeholder. The deal is expected to have a net gain of S$447mn and will be expected to be completed in 1Q2014. This marks the completion of DBS divestment of its stake in BPI which began in 2012, in line with its plans to streamline to its key markets in Singapore and Hong Kong. Boosting its private banking arm: With the lapse of the Danamon deal, DBS has set its sights on acquiring Societe Generale SAs private banking arm in Asia. According to Bloomberg, DBS is one of the five remaining bidders for the division which oversees about US$13bn and would add onto DBS existing AUM of US$46bn as at end-2012. The proposed US$400mn acquisition would help to boost DBS private banking arm which has been its fastest growing non-interest income segment, with 18% y/y increase to S$924mn in 2013. Asset quality remained healthy: NPL ratio and allowance coverage ratios were largely unchanged at 1.1% and 122% respectively, as the increase in loans (up 17.9% y/y) saw a corresponding increase in NPL (up 9.7% y/y). The increase in NPLs were primarily from the

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14 February 2014

Bank Credit: DBS Bank Ltd.

South and South-east Asia regions which more than doubled y/y and consequently, provisions rose 85%y/y to S$770mn. Well-capitalized position with sufficient liquidity: As of end-2013, DBS capital position remained strong with its Basel III CE Tier 1 ratio at 13.7%, up 20bp y/y as risk-weighted assets only increased 4.8% y/y following internal credit ratings. Meanwhile, under the transitional arrangements for Basel III, the banks preference shares and subordinated debt have been subjected to grandfathering with effect from Jan 2013. In order to maintain their capital position, DBS carried out an exchange offer for the old 4.7% preference shares (non-Basel III compliant), in exchange for S$805mn worth of new Additional Tier 1 issue with a coupon of 4.7%. In terms of the banks liquidity position, overall LDR was at 85% which continues to be underpinned by its strong depositor base in Singapore. We also note that non-S$ LDR has also been trending down from 101.0% in FY2012 to 96% in FY2013.

Related research reports:

DBS Bank Ltd Singapore Fixed Income Outlook 2014, 16 January 2014, pages 95-96. rd DBS Bank Ltd Singapore Mid-year 2013 Credit Compendium, 3 July 2013, pages 87-88.
th

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14 February 2014

Bank Credit: DBS Bank Ltd.

Figure 5: Creditstats

Year ended 31st Decem ber Incom e Statem ent (S$ m n) Net interest Income Non-interest Income Operating expense PPOP Provisions Other Income Pre-tax income Income taxes One off items Net income Balance Sheet (S$ bn) Total Assets Total Loans (net) Total Loans (gross) Total NPLs Total NPAs Total Deposits Total Equity Key ratios NIM Cost-income ratio LDR LDR (Non S$) NPL ratio NPA ratio Allow ance/NPLs Allow ance/NPA Credit costs CETier 1 ratio (full) Tier 1 ratio Total CAR ROE ROA
Source: Company

FY2011 4,825.0 2,806.0 3,303.0 4,328.0 722.0 127.0 3,733.0 698.0 0.0 3,035.0 340.8 194.7 197.8 2.6 2.9 225.3 28.8 1.8% 43.3% 87.8% 116.0% 1.3% 0.9% 119.0% 126.0% 0.4% NA 12.9% 15.8% 10.5% 0.9%

FY2012 5,285.0 2,779.0 3,614.0 4,450.0 417.0 124.0 4,157.0 798.0 450.0 3,809.0 353.0 210.5 213.8 2.6 2.7 253.5 31.7 1.7% 44.8% 88.0% 101.0% 1.2% 0.8% 129.0% 142.0% 0.2% 13.5% 14.0% 17.1% 12.0% 1.1%

FY2013 5,569.0 3,358.0 3,918.0 5,009.0 770.0 79.0 4,318.0 615.0 171.0 3,672.0 402.0 248.7 252.2 2.9 3.0 292.4 34.2 1.6% 43.9% 85.0% 96.0% 1.1% 0.7% 122.0% 135.0% 0.3% 13.7% 13.7% 16.3% 10.7% 0.9%

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14 February 2014

Bank Credit: DBS Bank Ltd.

Figure 6: Summary of regulatory call language for DBS subordinated bonds

Ticker Issuing entity ISIN Size (S$ mn) Announce date Maturity date Call date Coupon (%) Step-up coupon? Coupon reset Cumulative or Noncumulative? Use of proceeds Initial spread at pricing S&P/Moody's/Fitch (Outlook) TERMS & CONDITIONS: Regulatory Event? None None Yes, at redemption price. May be redeemed in whole but not in part once the subordinated notes, in whole or in part, would not qualify as Tier 2 Securities or as Eligible Capital of the Issuer Has occurred and is continuing. Yes, at redemption price. Yes, at redemption price. May be redeemed in whole but not in part once the subordinated notes, in whole or in part, would not qualify as Tier 2 Securities Has occurred and is continuing. Yes, at redemption price.

DBSSP
DBS Bank Ltd SG7I40931099 500 4-Jul-06 15-Jul-21 15-Jul-16 & every interest payment date thereafter 4.47 Yes. 6-month SGD SOR + 158bp Cumulative Upper Tier 2 Jr. Subordinated 58bp BBB+ / A1 / A+ (Stable/Stable/Stable)

DBSSP
DBS Bank Ltd SG6T16978999 1,000 13-Feb-12 21-Feb-22 21-Feb-17 & every interest payment date therafter 3.3 No. 5-year SGD SOR+214.7bp Cumulative Lower Tier 2 Subordinated 214.7bp A+/ Aa3 / A+ (Stable/Stable/Stable)

DBSSP
DBS Bank Ltd SG6W11984344 1,000 6-Aug-12 14-Feb-23 14-Feb-18 & every interest payment date therafter 3.1 No. 5-year SGD SOR+208.5bp Cumulative Lower Tier 2 Subordinated 208.5bp A+/ Aa3 / A+ (Stable/Stable/Stable)

Regulatory call language:

Change of Qualification Event? Tax Event?

None Yes, at redemption price.

Ticker Issuing entity ISIN Size (S$ mn) Announce date Maturity date Call date Coupon (%) Cumulative or Noncumulative? Step-up coupon? Coupon reset Fully/partially discretionary or mandatory Use of proceeds Initial spread at pricing S&P/Moody's/Fitch (Outlook) TERMS & CONDITIONS: Dividend stopper Alternative Coupon Settlement Mechanism Regulatory Event?

DBSSP
DBS CAPITAL FUNDING II SG7R06940349 1,500 16-May-08 Perpetual 15-Jun-18 5.75 Noncumulative Yes 3-month SGD SOR + 341.5bp Fully discretionary Tier 1 capital N.A.

DBSSP
DBS BANK LTD SG7Y03962859 895 (oustanding, issue: 1.7bn) 14-Oct-10 Perpetual 22-Oct-20 4.7 Noncumulative No N.A. Fully discretionary Tier 1 capital N.A.

DBSSP
DBS BANK LTD SG2C54964409 800 10-Nov-10 Perpetual 22-Nov-20 4.7 Noncumulative No N.A. Fully discretionary Tier 1 capital N.A.

DBSSP
DBS GROUP HOLDINGS LTD SG59H0999851 805 26-Nov-13 Perpetual 3-Jun-19 4.7 Noncumulative No 5-year SOR + 306.1 bp Fully discretionary Additional Tier 1 306.1 bp NR / Baa1 / BBB (NR/Stable/Stable)

BBB+ / A3 / BBB (Stable/Stable/Stable) BBB+ / A3 / BBB (Stable/Stable/Stable) BBB+ / A3 / BBB (Stable/Stable/Stable)

Yes. None.

Yes. None.

Yes. None.

Yes. None. Yes, at redemption price. Redeemed at Issuer's option in whole but not in part at any time a Change of Qualification event has occurred and is continuing

Regulatory call language:

Yes, at redemption price. Yes, at redemption price. Yes, at redemption price. Redeem the SPV pref shares, in whole Subject to regulatory approval, the Pref Subject to regulatory approval, the Pref but not in part on any day while Change shares, in whole or in part, would not shares, in whole or in part, would not of Qualification Event continues (i.e., qualify as T1 capital securities qualify as T1 capital securities SPV pref shares would not qualify as Tier 1 capital securities of DBS Bank. SPV pref shares may also be subject to subsitution.

Change of Qualification Event?

No mention

Yes, has occurred and is continuing

Yes, has occurred and is continuing

Basel III-compliant; in relation to: (i) qualification of capital securities as AT1 capital securities; or (ii) inclusion of the capital securities in the calculation of CAR; Yes, at redemption price.

Tax Event?

Yes, at redemption price.

Yes, at redemption price.

Yes, at redemption price.

Source: Company

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14 February 2014

Bank Credit: DBS Bank Ltd.

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