OVERSEA-CHINESE BANKING CORPORATION LIMITED
Fitch Ratings has affirmed
The Outlook on the Long-Term IDR is Stable.
Key Rating Drivers
Ratings Reflect Standalone Strength: OCBC's Long-Term IDR is driven by its VR. The VR is in line with the implied VR and is underpinned by the bank's strong domestic franchise, diversified business model and resilient financial performance throughout economic cycles.
Stable Operating Environment: We expect the operating environment for
Improved Profitability: OCBC's operating profit/risk-weighted assets rose to a record 3.0% in 2022 (2021: 2.5%), as improved lending margins more than offset a decline in non-interest income. Similarly strong momentum has carried into 1Q23. We expect the net interest margin to narrow in 2H23 as funding costs rise more quickly than asset yields at this stage of the global rate hike cycle, but net interest income for the full year should remain robust. We see further modest improvements in the bank's profitability core metric as non-interest income also continues to recover.
Sound Asset Quality: The non-performing loan ratio declined to 1.1% in 1Q23 (2021: 1.5%) and annualised credit costs remained below the historical average, as stronger portfolio performance in OCBC's south-east Asian markets kept new impaired asset formation low. We expect credit impairments to rise moderately in 2H23, as the sharp rise in interest rates weighs on some borrowers' ability to service debt. However, we believe the bank maintains adequate general provisions against unexpected credit losses.
Capital Headroom Highest of Peers: OCBC's common equity Tier 1 ratio of 15.9% at end-1Q23 remained the highest among domestic bank peers. Subdued loan growth and healthy internal capital generation should keep the ratio above 15% over the next year or two, providing the bank with a larger buffer of loss-absorption capacity amid heightened global uncertainty. This cushion may diminish if OCBC makes a large acquisition, although this is not our base case and we expect any acquisition to be bolt-on in size.
Stable Risk Profile: OCBC has kept up steady underwriting standards amid rising global economic uncertainty to maintain healthy asset-quality performance. The 'a+' risk profile score is a notch lower than the business profile score, partly due to the bank's large overseas operations, most of which are in markets that are rated lower than its home market of
Solid Franchise, Diversified Business: OCBC commands a strong market position in
Comfortable Liquidity Buffer: The loans/deposits ratio declined to 79% in 1Q23 (2022: 83%) amid a deceleration in loan growth and a continuation of robust growth in fixed deposits. The liquidity coverage ratio of 152% and net stable funding ratio of 120% at end-1Q23 were comfortably above regulatory requirements and we have affirmed the funding and liquidity score at 'aa-' with a stable outlook.
Reliable State Support: The Government Support Rating (GSR) reflects the state's strong propensity to support OCBC, given its high systemic importance as a domestic systemically important bank. It also takes into account
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs and VR
A lower operating environment score of 'a+', due to a sharp economic slowdown in OCBC's key markets or significantly larger exposure to high-risk markets, may see a downgrade of the VR and Long-Term IDR. OCBC has the largest proportion of overseas loan exposure among local peers, resulting in the least headroom in its operating environment score before additional overseas expansion into regions with weaker scores than
OCBC's VR and IDRs could also come under pressure should financial metrics deteriorate significantly, for example, if:
the CET1 ratio declines and remains significantly below 14% without a credible plan to restore it to around this level, along with a weakening in the
the four-year average impaired-loan ratio worsens and stays above 2.0%;
the four-year average operating profit/risk-weighted assets (RWA) ratio falls below 2.0% for a sustained period.
Any downgrade of the Long-Term IDR would be limited to two notches unless the GSR is also downgraded.
Downgrades of the Short-Term IDR and short-term senior debt ratings appear unlikely in the near term, as it would require the Long-Term IDR to be downgraded by at least two notches to 'A' or worse, and the funding and liquidity score to be lowered by at least one notch to 'a+'.
GSR
Any decline in the propensity of the authorities to provide extraordinary support could result in the GSR being downgraded. This could arise from a reduction in OCBC's systemic importance or from the introduction of senior debt bail-in requirements. However, we consider these developments to be improbable in the near term.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDRS and VR
An upgrade of the VR and Long-Term IDR appears unlikely, as the ratings are already near the top of Fitch's global rated-bank universe. Long-term upward rating momentum would involve a stronger capital position and franchise outside
The Short-Term IDR is already at the highest level of the scale and cannot be upgraded.
GSR
The GSR may be upgraded if
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
OCBC's senior unsecured debt instruments represent its unsubordinated obligations and are equalised with its Long- and Short-Term IDRs.
OCBC's Basel III Tier 2 subordinated notes are rated two notches below the VR to account for loss severity risk, which reflects the notes' subordinated status, the absence of going-concern loss-absorption feature, and the partial or full write-down feature at the point of non-viability, as determined by the
The Basel III Additional Tier 1 securities are rated four notches below the VR, comprising two notches for non-performance risk and two notches for loss severity risk. This reflects the securities' deep subordination status and fully discretionary distributions.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The senior debt ratings are sensitive to OCBC's Long-Term IDR. The subordinated and Additional Tier 1 securities are sensitive to the VR.
VR ADJUSTMENTS
The business profile score of 'aa-' has been assigned above the 'a' category implied score for the following adjustment reason: business model (positive).
The capitalisation and leverage score of 'aa-' has been assigned above the implied category of 'a' for the following adjustment: leverage and risk-weight calculation (positive).
The funding and liquidity score of 'aa-' has been assigned above the implied category of 'a' for the following adjustment: deposit structure (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
OCBC's GSR is linked to
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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