Moody's: Singapore Banks Will Benefit From Higher Capital Requirements

On June 28, the Monetary Authority of Singapore (MAS) said that Singaporean banks will be required to meet new capital adequacy requirements that are higher than Basel III’s global capital standards and will be introduced sooner than the Basel Committee on Banking Supervision’s timeline. MAS’s measures are credit positive for Singaporean banks as they ensure that banks continue to maintain their existing conservative capital positions, says Moody's, adding that the announcement also removes any doubt about whether MAS would converge towards the international norm.

 

Under the new requirements, Singaporean banks will need to meet their Basel III minimum capital adequacy requirements starting on 1 January 2013, two years ahead of the Basel Committee’s 2015 deadline. Those requirements involve maintaining a minimum common equity Tier 1 (CET1) capital adequacy ratio (CAR) of 4.5% and a Tier 1 CAR of 6%. MAS’s current requirement of a total CAR remains unchanged at 10%, versus Basel III’s 8% minimum. By 1 January 2015, MAS will increase those minimums to 6.5% for CET1 CAR, to 8% for Tier 1 CAR and to 10% for total CAR. These standards are higher than the Basel III’s minimums of 4.5%, 6% and 8%, respectively.

 

In line with Basel III, Singaporean banks will also need an additional 2.5% capital conservation buffer if they wish to make dividend payments, which must be met entirely with CET1 capital. The capital conservation buffer will be phased in from 2016-19. After including this buffer, Singaporean banks will need to maintain a CET1 CAR of 9%, above the Basel III requirement of 7%.

 

All four rated Singaporean banks will be subject to the new capital requirements, which will apply to every Singapore-incorporated bank with a Full Bank license and its locally incorporated bank subsidiaries. These four banks are DBS Bank (DBS, Aa1 stable; B/Aa3 stable),16 Oversea-Chinese Banking Corp. (OCBC, Aa1 stable; B/Aa3 stable), United Overseas Bank (UOB, Aa1 stable; B/Aa3 In line with Basel III, Singaporean banks will also need an additional 2.5% capital conservation buffer if they wish to make dividend payments, which must be met entirely with CET1 capital. The capital conservation buffer will be phased in from 2016-19. After including this buffer, Singaporean banks will need to maintain a CET1 CAR of 9%, above the Basel III requirement of 7%.

 

According to Moody's Weekly Credit Outlook, all four rated Singaporean banks will be subject to the new capital requirements, which will apply to every Singapore-incorporated bank with a Full Bank license and its locally incorporated bank subsidiaries. These four banks are DBS Bank (DBS, Aa1 stable; B/Aa3 stable),16 Oversea-Chinese Banking Corp. (OCBC, Aa1 stable; B/Aa3 stable), United Overseas Bank (UOB, Aa1 stable; B/Aa3 stable), and Bank of Singapore (BOS, Aa1 stable; C-/Baa1 stable).

 

These banks are already well capitalized, so they will easily comply with the new higher capital requirements without significant adjustments in their risk exposures, dividend policies or capital structures. Still, the new requirements will further ensure that they maintain good capital positions, even though they are under shareholder pressure to deliver higher returns on equity.

 

All four banks recently reported a core Tier 1 CAR (excluding hybrid securities) of at least 11.5%. Their CET1 ratios will be lower than their Core Tier 1 ratios because of a higher level of required reduction and increased risk-weighted assets, but Moody's expects the decline to be minimal for BOS, and less than 200 basis points for the other three banks. However, if MAS requires additional counter-cyclical buffers of up to 2.5% to be met fully with CET1 capital, only BOS would be immediately compliant. The other three banks could be slightly short, depending on the level of additional capital required.

 

 

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