Basel III compliant securities growing among Singapore banks: Moody's

Tagged as 'credit positive' for depositors, bondholders.

Moody's Investors Service says that Singapore banks' issuance of Basel III compliant securities is growing, and that such issuance will be credit positive for Singaporean bank depositors and senior bondholders.

"In order to qualify as capital under Basel III, new securities other than common equity must have explicit terms that impose losses on investors either at the point of non-viability as determined by the regulator, or when specific triggers are breached," says Gene Fang, a Moody's Vice President and Senior Analyst.

Fang was speaking on the release of a new credit focus entitled "Basel III Capital Securities in Singapore: Answers to Frequently Asked Questions." In addition to providing an overview of Basel III compliant securities, the report also discusses implementation of the Basel III regime in Singapore and how Basel III securities would be rated.

On 11 March 2014, United Overseas Bank (UOB, deposits Aa1 stable, BFSR B / BCA aa3 stable) became the first bank in Southeast Asia to issue US dollar-denominated Basel III securities when it sold a $800 million subordinated bond that qualifies as Tier 2 capital.

UOB's latest issuance follows its sale of SGD1.35 billion and DBS Group Holdings' (Aa2 stable, parent of DBS Bank (DBS, deposits Aa1 stable, BFSR B / BCA aa3 stable)) sale of SGD805 million of perpetual capital securities in the second half of 2013, both of which qualified as Additional Tier 1 capital under Basel III.

Oversea-Chinese Banking Corporation (OCBC, deposits Aa1 stable, BFSR B / BCA aa3 stable) has not yet issued Basel III compliant securities.

As part of Singapore's implementation of the Basel III rules, bank securities issued since 1 January 2013, in order to qualify as Tier 2 or Additional Tier 1 regulatory capital, must include "bail-in" language making the instruments loss-absorbing. In addition, outstanding instruments that they issued under previous rules will be gradually phased out from counting toward capital.

"We expect banks in Singapore, as elsewhere, to replace "old-style" securities that do not have such loss-absorption features with new Basel III compliant securities," says Fang.

In Singapore, banks had SGD22.2 billion of outstanding "old-style" Basel II securities at the end of 2013, of which SGD5.9 billion will be callable or maturing in 2014. The rest will be callable or mature by 2019.

The three Singapore banks are well capitalized, with Core Equity Tier 1 ratios from 13.2% to 14.5% at the end of 2013. But the minimum requirements for the three measures of bank capital under Basel III -- CET1, Tier 1, and total capital adequacy ratio -- will increase in coming years more quickly in Singapore than the Basel recommendations, and to higher minimum levels.

"The issuance of Basel III securities will be credit positive for Singaporean bank depositors and senior bondholders, because the new securities absorb losses when the bank would otherwise become non-viable," says Fang.

For investors in the instruments, Basel III securities carry more risk than similar Basel II securities for the same reason. Moody's ratings of the securities reflect this differential.