Fitch Ratings has affirmed Oversea-Chinese Banking Corporation Limited's (OCBC, AA-/Stable/F1+) SGD0.9 billion equivalent of outstanding mortgage covered bonds at 'AAA'.

The Outlook is Stable.

This follows a periodic review of the covered bond programme.

KEY RATING DRIVERS

The rating of the mortgage covered bonds is based on OCBC's Long-Term Issuer Default Rating (IDR), the various uplifts above the IDR granted to the programme and the overcollateralisation (OC) protection provided through the programme's asset percentage (AP).

The covered bonds are rated three notches above the bank's IDR, at the highest end of the rating scale. This is out of a maximum achievable uplift of seven notches, consisting of a resolution uplift of zero notches, a payment continuity uplift (PCU) of six notches and a recovery uplift of one notch. For its analysis, Fitch relies on the programme's committed AP used in the asset coverage test of 86.5%.

The Stable Outlook reflects a four-notch buffer against a downgrade of the issuer's IDR.

Uplifts

The resolution uplift remains unchanged at zero notches. Covered bonds and senior unsecured debt are exempt from bail-in under the Monetary Authority of Singapore (Amendment) Act 2017. This exemption, however, does not preclude contractual bail-in terms on senior unsecured debt. Given covered bonds and senior unsecured debt are exempted from bail-in, Fitch believes both will rank pari passu in a resolution scenario.

The PCU remains unchanged at six notches and reflects the strength of liquidity protection in the form of a 12-month extension period on the soft-bullet bond. It also reflects rolling three-month interest protection in the form of a reserve fund covering three months of swap and/or interest payments and senior fees, to be funded if OCBC's Long- and Short-Term IDRs are downgraded below 'A' and 'F1', respectively.

The recovery uplift is unchanged and remains capped at one notch, as Fitch believes the programme is significantly exposed to foreign-exchange risk from recoveries given a default of the covered bonds. This is because the assets are denominated in Singapore dollars, while the covered bonds are denominated in other currencies. Currency risk is fully hedged on the liabilities, but we expect those hedges to terminate in a recovery scenario.

'AAA' Breakeven AP

Fitch's 'AAA' breakeven AP remains unchanged at 86.5%, corresponding to 15.6% 'AAA' breakeven OC, which allows the covered bonds to attain an 'AA+' timely payment rating and one notch of recovery uplift to 'AAA'. The ALM loss of 12.1% remains the largest component of breakeven OC for the rating and reflects the modelled asset and liability mismatches, inclusive of the effect of the pro rata sales clause documented in the programme. The ALM loss has decreased slightly from 12.6% at the previous analysis, driven by a higher net present difference amid interest rate hikes and a narrower asset margin, partly offset by lower OC from cost of sales and pro-rata sales constraint. The stressed weighted-average residual life of the cover assets calculated by Fitch is at 7.4 years and that of the liabilities is at 1.2 years. Fitch's cash flow analysis considered the swap index transition scenario for the outstanding bonds that are still referencing to SOR, which was discontinued in June 2023.

The credit-loss component of 3.3% contributes to breakeven OC for the rating. There are no changes to the asset assumptions, as we carried forward the results of our asset analysis from our October 2021 review. The cover pool characteristics have not materially changed since the 2021 review, and we do not expect a material deterioration in performance. Furthermore, our analysis is driven by the application of the portfolio loss floor (4% at AAA) due to the low credit loss calculated on the portfolio. As a result, the WA foreclosure frequency rate assumption remains at 8.5% and the WA recovery rate at 53.2%. The 'AA+' minimum loss assumption of 3.2% translates into the breakeven OC credit loss component of 3.3%.

Cover Pool Summary

As of the last published investor report, the cover pool consisted of 12,863 loans secured by first-ranking mortgages of Singapore residential properties as at 31 July 2023, with a total outstanding balance of SGD7.9 billion. The cover pool's weighted-average unindexed loan/value ratio was 51.5%. Loans secured to investment properties formed 24.8% of the pool.

Fitch considered an additional stressed refinancing rate differential of 25bp above Singapore's base mortgage refinance stresses for Central Provident Fund-linked (CPF) loans, based on the pro rata value of the cover assets linked to CPF, as outlined in the Covered Bonds Rating Criteria.

The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The rating on the covered bonds is at the highest level on Fitch's rating scale and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The covered bond rating is vulnerable to a downgrade if OCBC's IDR is downgraded by five or more notches to 'BBB' or below; or if the relied upon AP considered by Fitch in its analysis provided less protection than Fitch's 'AAA' 86.5% breakeven AP. If the AP in the programme rises to the contractual maximum AP of 97%, the rating on the programme would be downgraded to 'AA', one notch above the issuer's IDR. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to the outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, it cannot be assumed that the 'AAA' breakeven AP, which maintains the covered bond rating, will remain stable over time.

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

The covered bond ratings are driven by the credit risk of the issuing financial institution, as measured by its Long-Term IDR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire