Fitch Ratings has revised the Outlook on United Overseas Bank Limited's (UOB) Long-Term Issuer Default Rating (IDR) to Stable from Negative, and affirmed the IDR at 'AA-', Short-Term IDR at 'F1+' and the Viability Rating (VR) at 'aa-'.

A full list of rating actions is below.

Key Rating Drivers

Capitalisation Restored: The Outlook revision reflects easing pressure on UOB's capitalisation. Fitch had revised the Outlook to Negative from Stable in January 2022 when UOB announced its acquisition of Citigroup Inc.'s (A/Stable/a) south-east Asian consumer banking businesses. UOB's common equity Tier 1 (CET1) ratio fell to 12.8% by end-September 2022 before the acquisitions were consolidated. Subdued balance-sheet growth and an increase in global interest rates that was faster than we expected boosted the bank's profitability, contributing to a recovery in the CET1 ratio to 14.0% by March 2023.

We expect earnings and capital accrual to remain steady over the next year, which supports the stabilisation of the outlook on the capitalisation score. UOB's IDR is driven by its VR, which is in line with the implied VR and is underpinned by the bank's strong domestic franchise, steady financial performance and consistent execution. The outlooks on all key rating drivers are now stable, which drives the Outlook revision on the IDR to Stable.

Stable Operating Environment: We expect the operating environment for UOB to remain stable, despite our forecast of a slowdown in GDP growth in 2023 across many of the markets that it operates in. We expect the GDP of UOB's home market, Singapore, to grow 2.2% in 2023 after a 3.6% expansion in 2022. Most other south-east Asian markets are also likely to see slower growth. China's economy should continue to recover as its borders reopen, which may buoy transnational trade and investment flows that dovetail with UOB's business strategy.

Improved Profitability: UOB's operating profit/risk-weighted assets rose to an annualised 2.9% in 1Q23 from 2.2% in 2022 and 2.3% in 2019, as it continues to benefit from higher interest rates and a recovery in fee and trading income. The net interest margin may have peaked as funding costs begin to catch up, but we expect it to be maintained above 2% in 2023 to keep revenue growing above 2022's record level. We have affirmed the earnings and profitability score at 'a+' with a stable outlook.

Stable Asset Quality: The non-performing loan ratio was steady at 1.6% in 1Q23 (2022: 1.6%, 2019: 1.5%) as new impaired-loan formation was largely offset by recoveries and write-offs. We expect credit impairments to rise moderately in 2H23 due to higher debt-servicing costs and a less favourable economic environment, but the bank maintains general allowances equal to about 1% of performing loans and total reserves equal to 96% of non-performing assets to act as a buffer against impairment risks. We affirmed the asset quality score at 'a+' with a stable outlook.

Stable Risk Profile: UOB's underwriting standards and risk controls have been steadfast, enabling it to maintain healthy loan performance despite persistent economic headwinds over the past few years. Its risk profile score of 'a+' is one notch lower than its business profile score and aligned to its asset-quality score to reflect the bank's large overseas operations, most of which are in markets that are lower rated than Singapore. This is a structural feature common to all three major Singapore banks because of the relatively small and well-serviced domestic market.

Resilient Franchise and Business Model: UOB's domestic market position is well-entrenched with about 20% share of loans to residents and 21% of local-currency deposits. The bank's diversified business model and consistent strategy across segments have resulted in steady risk-adjusted earnings over time. This stability led us to score the bank's business profile at 'aa-', which is above the implied 'a' category score.

Funding and Liquidity Intact: UOB's loan/deposit ratio improved to around 83% by end-1Q23 (2022: 87%, 2019: 87%). The liquidity coverage ratio of 154% and net stable funding ratio of 121% at end-March 2023 were also a yoy improvement, remaining comfortably above regulatory requirements.

Solid State Support: The Government Support Rating (GSR) reflects a strong state propensity to support the bank, given UOB's high systemic importance, domestic systemically important bank status and the regulator's exclusion of senior debt from bail-in provisions in the resolution framework, as well as Singapore's 'AAA' sovereign rating and strong fiscal flexibility.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The ratings could come under pressure should financial metrics deteriorate significantly. For example, if:

the CET1 ratio declines and is sustained materially below 14% without a credible plan to restore it to around this level, along with a weakening in the Basel leverage ratio to meaningfully below 7% for a sustained period;

the four-year average of the impaired-loan ratio worsens and is sustained above 2%;

the four-year average of the operating profit/risk-weighted asset ratio falls below 2% with poor prospects of a recovery.

A downward revision of the operating environment score to 'a+' on a significant economic slowdown in UOB's key markets, or a significant increase in exposure to higher-risk markets, is likely to lead to a downgrade of the VR and Long-Term IDR.

Any downgrade to the Long-Term IDR would be limited to two notches unless the GSR of 'a' is also downgraded.

A downgrade to the Short-Term IDR and short-term senior debt ratings would require the Long-Term IDR to be downgraded to 'A+' and the funding and liquidity score to simultaneously be lowered by one notch to 'a+'.

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 UOB'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

Upward rating action to 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 material strengthening of the bank's capital position, its franchise outside of Singapore, and an enhanced risk profile, particularly in relation to emerging-market exposures, as well as considerable improvement in asset quality, profitability and funding.

The Short-Term IDR is already at the highest end of the scale and cannot be upgraded.

The GSR may be upgraded if Singapore's authorities provide public and explicit statements of support towards UOB that give greater certainty of support when needed, or if UOB attains significantly higher systemic importance than it already has.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The senior debt instruments represent UOB's unsecured and unsubordinated obligations and are equalised with the bank's Long-Term IDR.

UOB's Basel III Tier 2 subordinated notes are rated two notches below the VR to account for loss-severity risk, reflecting their subordinated status, the absence of any going-concern loss-absorption features and the partial or full write-down feature at the point of non-viability, as determined by the Monetary Authority of Singapore.

UOB's 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. The four notches reflect their deep subordination status and fully discretionary distributions.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The senior debt ratings are sensitive to UOB's Long-Term IDR and the subordinated and additional Tier 1 securities are sensitive to the VR.

VR ADJUSTMENTS

UOB's 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

UOB's GSR is linked to Singapore's sovereign rating.

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, visitwww.fitchratings.com/esg

(C) 2023 Electronic News Publishing, source ENP Newswire