SINGAPORE (Jan 18): DBS Group recently announced that it had successfully priced the issue of 750 million euros in fixed rate covered bonds due in 2024 under its US$10 billion ($14.2 billion) Global Covered Bond Programme. The bonds will have a fixed coupon of 0.375% per annum that is payable annually in arrears.
This is the bank’s third issuance of covered bonds, following the US$1 billion issue in 2015 and its A$750 million ($802 million) issue in 2016.
Covered bonds are debt securities that are secured by a pool of mortgage loans which in turn hold the properties as collateral. In Singapore, the bonds have been popular among investors as they are backed by triple-A credit ratings given by the local banks.
Are covered bonds better for banks and are they a game changer for the banking industry? Maybank Kim Eng’s analyst Ng Li Hiang does not appear to think so.
Ng points out that covered bonds offer a new and diversified source of funding for local lenders which lower their funding costs. However, as of end Sept 2016, they only account for 7% and 4% of DBS’ and UOB’s total debt issuance.
“DBS’ covered bonds issuance will diversify funding source and reduce cost of funding but we think it is unlikely to meaningfully boost the bank’s net interest margins,” said Ng in a note on Tuesday, adding that the banks’ Global Covered Bond Programmes ranged between US$8 billion and US$10 billion.
Maybank Kim Eng has maintained its “negative” rating for Singapore banks over the continued asset quality deterioration, and continues to favour UOB for its lower exposure to the oil and gas segment and its larger general provision buffer.
Shares in DBS, UOB and OCBC are trading at $18.17, $20.66 and $9.26.