Singapore covered bonds plan positive, supply may be low

The Monetary Authority of Singapore's proposal to introduce rules for covered bond issuance would be positive for Singaporean banks if enacted, as issuing covered bonds would allow them to potentially diversify their funding base and lengthen their debt maturity profile, Fitch Ratings says.

We expect Singaporean banks to take advantage of this opportunity if a formal issuance framework is adopted. However, we think they would take an opportunistic approach to funding through the covered bond market, since they have predominantly deposit-funded balance sheets and this mitigates their wholesale funding needs. This could limit initial issuance compared with other jurisdictions that have introduced covered bond legislation, such as Australia, which saw heavy supply in early 2012 after introducing legislation the previous November.

For this reason, Singaporean banks may not start hitting MAS's proposed cap on the value of the assets in the cover pool at 2% of the value of the total assets of the bank any time soon.

The proposed 2% cap is strikingly low - it compares with 4% in Canada, 8% in Australia and 10% in New Zealand, for example. But as a starting point in MAS's consultation, it is consistent with the regulator's focus on potential risks to depositors, which in turn reflects their important role in funding Singaporean banks, whose loan-to-deposit ratios averaged 87% at end-2011. We think there is scope for MAS to review the cap if it were comfortable that a higher number was consistent with depositor protection.

And while issuing covered bonds should be cheaper than funding via the senior unsecured bond market all other things being equal, the initial costs of setting up a covered bond programme, such as legal and documentation costs, plus the potential premium that investors would demand to buy covered bonds from a new jurisdiction, could be a disincentive for potential covered bond issuers.

MAS recently issued a consultation paper outlining its proposed rules for covered bond issuance by banks incorporated in Singapore. As well as the 2% cap, the paper suggests limiting mortgage loans that can be funded through covered bonds to an 80% loan-to-value threshold, and suggests a 3% minimum overcollateralisation between the cover pool and the covered bonds.

Under MAS's proposals, only residential mortgages and derivatives held for the purpose of hedging risks arising from covered bond issuance can be included in the cover pool.

Fitch will review and submit its views and comments on the covered bond consultation paper in the coming weeks.
Our rating outlook for Singaporean banks is stable. Their strong, liquid balance sheets, reasonably diversified loan books, satisfactory risk management, and domestic deposit franchises all help support the banks' high investment grade ratings.

Alfred Chan, Director - Financial Institutions, Fitch Ratings
Helen Wong, Director - Structured Finance, Fitch Ratings
Mark Brown, Senior Director, Fitch Wire

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