Oversea-Chinese Banking Corporation’s (OCBC) non-call Singapore dollar (SGD)-denominated additional tier 1 (AT1) subordinated perpetual notes may have tightening potential, say Bloomberg Intelligence’s credit analyst Rena Kwok and senior associate analyst Sheenu Gupta.
The bank proposed to issue the 5.75-year perp at an initial price guidance of 4.375% in early January. The first call date and first reset date for the perps will fall on October 2029.
OCBC, on Jan 10, announced that it priced $450 million worth of perps with a coupon of 4.05% per annum.
“The new issuance may lift OCBC’s peer-leading Tier 1 capital ratio, which stood at 15.3% as at 3QFY2023 and above the 14.8% average of [its] local banking peers,” write the analysts, adding that comparable bonds are OCBC's existing 4.5% SGD AT1 trades at 4% yield to call and local lenders' AT1 curve of 4.1% yield to call.
In their Jan 9 report, the analysts note that OCBC’s peer-leading capital as well as solid funding profile are key credit strengths. This offsets the bank’s credit quality in the small- and medium-sized enterprises (SME) segment, which lags behind its peers.
“The credit quality of OCBC's loans to SMEs, which is weaker than peers', could warrant caution amid economic headwinds,” they write in a Jan 5 update.
“Still, overall asset quality may worsen only slightly in 2024. Spreads of OCBC's dollar Tier 2s (T2s) may stay range-bound even if economic risks rise, thanks to defensive characteristics such as a peer-leading capital position and ample provisions,” they add.
At present, the analysts see that robust credit is priced into the bank's bonds and limited refinancing needs are positive for its technicals.
The bank’s non-performing loan ratio (NPL) for its greater China business may also improve in 2024 despite the country’s bumpy reopening.
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“In the medium term, OCBC's focus on capturing flows between Asean and Greater China, as well as potential mergers and acquisitions (M&A) in key target markets might help it capitalize on revenue opportunities and improve profitability versus [its] peers,” say Kwok and Gupta.
On Jan 22, Kwok and Gupta released a note to say that any risks posed to UOB’s solid asset quality by its bigger-than-peer SME book look manageable. The risks, which are also lower than OCBC’s due to UOB’s improving risk profile on tighter underwriting, are also offset by high provisions.
“Non-call risks are low for T2s callable over the next 12 months even if rates are high for longer, thanks to ample capital,” the analysts write.
On Jan 25, UOB Malaysia announced a very tight pricing for its debut Islamic debt, a RM500 million ($141.6 million) Basel III-compliant Tier 2 subordinated Islamic medium term note (Tier 2 Sukuk Wakalah). The Tier 2 Sukuk Wakalah is due in February 2034 and callable in February 2029.
During a book-building exercise, the Islamic debt offering received an overwhelming response from the market and was oversubscribed by approximately 3.39 times. The final order book of RM1.7 billion enabled UOB Malaysia to close at a fixed profit rate of 4.01% per annum. At 45 bps above the benchmark Malaysian Government Securities (MGS), this was the tightest spread ever recorded for a Tier 2 capital instrument in the Ringgit-denominated market.
As at 4.06pm, shares in OCBC and UOB are trading at $12.90 and $28.12 respectively.
