The capital impact of fully-loaded Basel IV rules looks to be “manageable” for all three Singapore banks, DBS, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), says Bloomberg Intelligence credit analyst Rena Kwok.

Basel IV, which includes new standards for credit and operational risks, was implemented on Jan 1 and will be fully loaded in 2029.

Even then, the impact of the new rules will be “modest” for Singapore banks thanks to their diversified portfolios. The diverse portfolios mean that shortfalls for some risk-weighted assets (RWA) will be able to be offset by those above the output floor.

“The output floor and risk-insensitive standardized approaches have most impact on low-risk assets like mortgages and corporates,” writes Kwok in her July 7 report.

“Banks with big trading books will be hit by Basel's fundamental review of them. As they've guided, the initial move to Basel IV in 2024 may lift common equity tier one (CET-1) ratios [by] 2% for DBS and UOB due to provisions such as the removal of the 1.06 multiplier for internal ratings-based RWA and a lower loss given default for loans to unsecured corporates under a foundation internal ratings-based approach,” she adds.

Accordingly, the modest impact is also unlikely to change the banks’ current dividend policies or for them to require capital raises given the ample capital in their books, continues Kwok.

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Under Basel IV, all three banks don’t have to worry about the impact to their capital under the fundamental review of the trading book (FRTB) since they have modest trading books. The FRTB is a set of rules that were developed by the Basel Committee and are applied to banks’ wholesale trading activities.

“Under FRTB rules, the new standardised approach has three separate components: a sensitivity-based variance-covariance approach for calculating market-price risks, a default-risk component for debt and equity positions, and a surcharge for residual risks,” Kwok writes.

“The FRTB rules will increase capital that banks must hold against trading many products, especially for illiquid products or risk profiles that are difficult to benchmark like derivatives,” she adds.

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In addition, risks that are not supported by enough data are deemed to be "non-modellable" and will lead to higher costs, continues Kwok.

Only banks with inadequate or inaccurate fund data should be concerned with the treatment of fund and index exposures under FRTB, she points out.

To mitigate the impact of Basel IV, banks must look at how they distribute their exposures to various types. They will also have to look at the setup of their data and systems in a bid to mitigate any impact that the implementation of Basel IV will have on their capital.

“Increasing income-to-RWA ratios and reducing RWA-to-capital ratios could help to create a competitive advantage for banks,” says Kwok. “Technical levers for capital management -- usually cost-efficient -- include improving accuracy in RWA calculations.”

She adds: “Banks can adjust their business levers by optimizing collateral eligible under both internal ratings-based and standardized approaches to reflect mitigation of credit risk, or by increasing the pricing of riskier loans. They could also cross-sell more fee-based products that don't result in any additional charge, or exit unprofitable customer segments.”

Capital in Singapore banks to remain ‘robust’ in second half of the year

Singapore banks, which have a solid capital basis with over $13 billion in excess CET-1 capital and way over the minimum regulatory 9% in the 1QFY2023 ended March 31, could remain “robust” in the 2HFY2023.

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Furthermore, Kwok does not see any “material” mergers and acquisitions (M&As) happening this year as it could erode their capital cushions amid the uncertain macroeconomic environment.

The banks will also remain well-capitalized even if they choose not to refinance their outstanding additional tier one bonds (AT1s) amid elevated interest, she adds.

“OCBC's peer-leading group CET-1 ratio of 15.9% in 1QFY2023 puts it in a better position to cushion potential loan slippages amid rising growth fears,” she says.

The banks are slated to announce their results for the 1HFY2023 with UOB taking the lead on July 27. DBS will follow on Aug 3 while OCBC will round up the trio on Aug 4.

Shares in DBS, OCBC and UOB closed at $31.87, $27.80 and $12.35 respectively on July 13.

Impact of Basel IV on Singapore banks ‘manageable’: Bloomberg

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