Singapore banks’ net capital-bond supply, which comprises additional tier 1 (AT1s) and tier 2 (T2) bonds, looks negative this year, says Bloomberg Intelligence analyst Rena Kwok in a Jan 22 note.
This is due to these lenders’ low refinancing needs, given solid capital cushions that buffer modest credit losses and sluggish loan growth potential amid economic headwinds, she adds.
Total capital-bonds issued by Singapore’s banks, both onshore and offshore, will likely be low in 2024, and net bond supply could be negative.
According to management guidance, the implementation of final Basel III reforms in 2024 may provide Singapore banks’ common equity tier-1 (CET-1) a “transitional uplift”, possibly limiting net issuance needs, says Kwok.
As of Jan 19, Singapore’s banks have about US$1 billion ($1.34 billion) of AT1s and T2s in total that are callable in 2024, led by United Overseas Bank U11 (UOB), according to Bloomberg data. This compares to about US$335 million of total onshore and offshore issuance so far this year.
Capital reserves
That said, Kwok highlights Singapore banks’ “robust” capital base. Each of Singapore’s three banks have at least $10 billion in excess CET-1 capital over the minimum regulatory hurdle of 9% in 3Q2023, she adds.
This “could stay robust in 2024 due to muted growth in risk-weighted assets and resilient earnings despite market expectations for rate cuts”, says Kwok.
In addition, material M&A deals that could erode the lenders’ capital cushion look unlikely in the near term, says Kwok, as the economic outlook becomes more uncertain.
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Oversea-Chinese Banking Corporation’s (OCBC) peer-leading group CET-1 ratio of 14.8% in 3Q2023 puts it in a better position to weather economic headwinds, according to Kwok.
Meanwhile, UOB’s expanded Asean franchise with the consolidation of Citi’s retail unit may improve its earnings, possibly narrowing its CET-1 gap compared to peers.
Among the three banks, DBS will be the first to report its results for FY2023 ended December — on Feb 7. UOB will follow on Feb 22 and OCBC will round up the reporting season a week later on Feb 28.
Prior to the midday trading break, shares in DBS were trading 13 cents lower, or 0.41% down, at $31.92; while shares in UOB were trading 12 cents higher, or 0.43% up, at $27.97; and shares in OCBC were trading 2 cents higher, or 0.16% up, at $12.93.
