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February 19, 2008 |
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DBS BANK: Moody's Affirms 'B' Bank Financial Strength Rating Moody's Investors Service says DBS Bank Ltd's ratings have not been affected by the announcement of additional provisions relating to its collateralized debt obligations and other investment exposures during 4Q2007, or by its recent acquisition of Taiwan-based Bowa Commercial Bank. The ratings affirmed are DBS': -- long-term/short-term deposit ratings of Aa1/P-1; -- bank financial strength rating of B; -- subordinated and junior subordinated debt rating of Aa2; and -- preference share rating of Aa3. The outlook on all ratings is stable. "While DBS took additional provisions as a result of the global market turmoil, the amount is within Moody's stress-testing scenarios and the bank's core business remains sound, which provides support for its current ratings," says Christine Kuo, a Moody's VP/Senior Analyst. "Also, given the small size of Bowa Bank, we do not expect its acquisition to create significant pressure on DBS' strong balance sheet," adds Kuo. "However, as the global financial markets remain turbulent, Moody's will closely monitor market conditions and the bank's performance. Should DBS' core businesses be affected as a result of the spill-over of the US economic slowdown and/or the losses on the bank's investment portfolios increase significantly, we will need to review its outlook and possibly ratings," says Kuo. DBS' 2007 net profit of SGD2,278 million was flat compared with a year ago, despite the SGD240 million specific allowance taken for its CDOs with exposures to US sub-prime assets, and the SGD264 million impairment charges for its stake in Thailand- based TMB Bank. However, its core businesses remain resilient, with profit before provisions rising 19% YoY on higher net interest income and fee income and on a lower cost-to-income ratio. In addition, of the bank's total CDO exposure of SGD1.5 billion as at the end of January 2008 most consisted of corporate CDOs, with only SGD267 million relating to asset-backed securities that have exposure to US sub-prime mortgages. Including the additional provision of SGD170 million taken during 4Q2007, DBS' cumulative provisions cover 90% of its ABS CDO exposures, which Moody's deems prudent. Moreover, 4% general allowances were taken for the bank's SGD1.2 billion of corporate CDOs in the investment portfolio, 99% of which are rated A or above. DBS also took impairment charges of SGD264 million during 2007 for its stake in TMB Bank, which brought the carrying value down to SGD209 million, reflecting the further reduction in the market valuation of TMB Bank. The bank's 16% stake was reduced to 6.8% in the fourth quarter after DBS decided not to subscribe to its rights in TMB Bank's share offer. On 1st February 2008, DBS won the bid to take over Bowa Bank from Taiwan government's Central Deposit Insurance Corporation. CDIC will pay DBS SGD1.9 billion (NT$44.5 billion) for acquiring Bowa Bank's "good bank assets" of approximately SGD2.9 billion (NT66.3 billion) in net loans, SGD4.1 billion (NT$92.3 billion) in deposits, 43 distribution outlets and over 750,000 depositors. Based on Taiwan's Financial Supervisory Commission data, Bowa had a negative net worth of SGD1.5 billion (NT$34.7 billion) as of 30th November 2007. However, a portion of Bowa Bank's balance sheet was carved out for this sale. DBS has not disclosed the details of the balance sheet to be acquired. The transaction is expected to be closed at the end of May 2008. While Bowa Bank's asset quality is in question, the compensation paid by CDIC will offset a portion of the potential losses. DBS will, however, need to rebuild the franchise of its Taiwanese acquisition, and install infrastructure and systems in the failed bank in order to make it operate effectively and profitably. Given that the balance sheet of Bowa Bank is very small relative to that of DBS, Moody's expects DBS to be able to absorb Bowa Bank's operations without stressing its own balance sheet. Bowa Bank will become part of DBS and not a subsidiary. Also, the 100% ownership of Bowa will enable DBS to execute its business strategy effectively, unlike the case of TMB Bank. However, the bank's management resources could be stretched somewhat as Bowa has 39 branches and DBS is building its mainland Chinese franchise at the same time. DBS' ratings reflect its leading domestic franchise and strong financial fundamentals, as seen in the bank's financial strength rating of B. In addition, the ratings incorporate a very high probability of systemic support, if needed, given the bank's high national market share (26% of deposits) and relative importance to Singapore's banking system. Headquartered in Singapore, DBS Bank is Singapore's largest bank with consolidated group assets of SGD234 billion (US$162 billion) as of 31 December 2007. |
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