dbs bank ltd. covered bonds

2 June 2016 Credit Research

Credit View

UniCredit Research page 1 See last pages for disclaimer.

DBS Bank Ltd. covered bonds

■ DBS Bank Ltd. (DBS) is the main and 100%-owned subsidiary of DBS Group Holdings Ltd. DBS Group Holdings is a leading financial services group in Asia, offering a variety of services in consumer, SME and corporate banking, and wealth management across Asia to more than six million consumer and wealth management customers and over 200,000 institutional customers. While being based in its home market Singapore, the group has around 21,000 employees and more than 280 branches (including sub-branches and centers) in 17 markets, with key franchises in Singapore, Hong Kong, China, Taiwan, India and Indonesia, and a focus on Greater China, Southeast Asia and South Asia. In Singapore, it operates as a universal bank under the DBS and POSB “People’s Bank” (whose roots date back to 1877) brands, while it has three business lines elsewhere: 1. Corporate/Investment Banking (covering large corporations and institutional investors); 2. SME Banking; and 3. Wealth Management. In terms of market share, the group stated, in its FY14 report, that it has a 52% market share in retail savings balances in Singapore. DBS Group Holdings Ltd. is a holding vehicle; thus, the group’s total net attributable income is essentially contributed by DBS Bank Ltd.

■ DBS Group Holdings Ltd. (DBS, Aa2s/--/AA-s; DBS Bank: Aa1s/AA-s/AA-s) reported net attributable profit for 1Q15 of SGD 1.27bn (+3.1% yoy). Singapore is the most important market for DBS Bank Ltd. in terms of total income and profit before tax. Institutional Banking is the main contributor, followed by Consumer Banking/Wealth Management and Treasury.

■ In late June 2015, the Monetary Authority of Singapore (MAS) proposed to enhance its resolution regime for financial institutions in Singapore and plans to apply the statutory bail-in regime to unsecured subordinated debt and unsecured subordinated loans and hence exclude liabilities such as secured liabilities, senior debt and all deposits.

■ DBS’s covered bond program has a size of USD 10bn. The dynamic cover pool consists of first-ranking residential mortgage loans with properties located in Singapore, as well as of other eligible liquid assets up to 15%. As of May 2015, the cover pool had a volume of SGD 4.7bn (equivalent to around EUR 3.1bn). The minimum overcollateralization (OC) required for the AAA rating by Fitch is 17% (AP of 85.5%). Its covered bonds benefit from dual recourse, i.e. the senior unsecured claim on the issuer and the preferential senior secured claim on a ring-fenced pool of cover assets. The residential mortgages in the cover pool are originated and serviced by DBS.

■ On 31 December 2013, the MAS published its regulations regarding the issuance of covered bonds by banks incorporated in Singapore (MAS Notice 648). The regulations became effective on 31 December 2013 and were updated on 4 June 2015. The requirements set out in the notice are mandatory for Singapore's banks as MAS Notice 648 is part of the Banking Act in Singapore. The regulation outlines the MAS’s rules relating to the issuance of covered bonds by banks incorporated in Singapore.

This was originally published on 2 July 2015. The content was not updated.

Contents Singapore’s economy _________________________ 2 DBS Bank profile ____________________________ 4 Financial analysis ____________________________ 5 DBS covered bonds __________________________ 8 Covered bond legal framework ________________ 12 Singapore’s banking sector ___________________ 13

Earnings update: Singaporean banks __________ 14 Singapore’s banking regulation ________________ 15 Number crunching __________________________ 17

DBS Bank Ltd. ___________________________ 17 Rating agencies' views _______________________ 18 Rating DBS Bank Ltd. Aa1 stable / AA- stable / AA- stable DBS Bank Ltd. Covered Bonds Aaa / --- / AAA Bloomberg 1471Z SP Bond ticker DBSSP Company website www.dbs.com

Authors Franz Rudolf, CEFA (UniCredit Bank) +49 89 378-12449 [email protected] Dr. Tilo Höpker (UniCredit Bank) +49 89 378-12960 [email protected] Bloomberg UCCR Internet www.research.unicredit.eu

http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Commercial%20Banks/Regulations%20Guidance%20and%20Licensing/Notices/MAS%20Notice%20648%20on%20Covered%20Bonds_31%20Dec%2013



Credit View

Singapore’s economy Historic development Since it became independent in 1965, Singapore has experienced a long-lasting period of

economic expansion. GDP per capita, measured in current USD, has increased from USD 427 in 1960 to USD 55,183 in 2013, which is equivalent to an average growth rate of 9.6%. In 2013, GDP per capita was six times that of its East Asian and Pacific peers and more than 1.5 times the GDP per capita of the European Union member states. The 2014 total population of Singapore is 5.5 million. This compares to 5.1mn people in 2010, when the last census was performed. In Singapore, the crude birth rate (defined as the number of live births per 1,000 population) over the last ten years has fluctuated around 10 – with an average of 9.9 – ranging between the ten-year average of France (12.8) and Germany (8.3; World Bank data). Another driver of population growth is net migration, i.e. the difference between immigration and emigration. In the period between 2008 and 2012, net migration stood at 400,000, which is equivalent to 80,000 immigrants, or 1.5% of the total population of Singapore, per year. The main ethnic groups of Singaporean residents, as of June 2013 (Department of Statistics Singapore), are Chinese (74.2%), Malays (13.3%) and Indians (9.1%).

SINGAPORE: LONG-TERM GDP PER CAPITA DEVELOPMENT

Figures in Current USD 1960 1980 2000 2013 Singapore 427.9 5,003.9 23,793.0 55,182.5 East Asia & Pacific 147.2 1,157.7 3,967.7 9,116.2

European Union 877.9 8,328.2 18,051.2 35,416.9

Source: World Bank, UniCredit Research

Recent years The average real GDP growth rate over the past ten years was 5.9% and thus larger than that of most developed countries over the same period of time. Despite a slight decline in real GDP in 2009, economic activity surpassed its pre-crisis levels again in 2010 when the Singaporean economy grew over 15%. During the last three years, real GDP growth slowed down to levels slightly below 3.0% in 2014. However, this growth rate is still significantly higher than that of the euro area, showing that convergence of the Singaporean economy continues. Important drivers of the relatively diverse economy are finance, insurance and business services with a share of 28.3%, as well as trading and transport with 24.4%. Singapore has the second-largest port in the world by 2014 throughput. CPI inflation decreased to 1.0% in 2014 from 2.4% in 2013 and 4.6% in 2012. The main drivers for inflation were education (3.4% in 2014) and food (2.9% in 2014). Inflation remains at low levels, signaling no risk to Singaporean economic development.

GDP PER CAPITA AND GROWTH RATE STRUCTURE OF GDP (2014)

Source: Department of Statistics Singapore, UniCredit Research

-5%

0%

5%

10%

15%

20%

25%

0

10,000

20,000

30,000

40,000

50,000

60,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cur

rent

US

D

Growth Rate (RS) GDP Per Capita (LS)

Manufacturing, Construction &

Utilities24.9%

Trading & Transport

24.4%

Finance, Insurance &

Business Services28.3%

Other Services17.8%

Ownership of Dwellings

4.6%



Credit View

Labor market Singapore has a very stable labor market with an extremely low rate of unemployment and an increasing participation rate, mostly due to the constantly increasing participation rate among women. The highest rate of unemployment in Singapore since 1991 was 5.2% in 2003 (World Bank data). The unemployment rate temporarily increased in 2009 following the financial crisis, but returned to its previous path already in 2010. The unemployment rate on an annual average basis was 2.0% for 2014, slightly up from 1.9% in 2013 but exactly at its five-year average. Seasonally adjusted, the unemployment rate for March 2015 is at 1.8%, down 0.2 percentage points from last year and below the five-year average for March of 2.0%. This compares to March 2015 unemployment rates of 11.3% for the European Union (ECB data) and 5.5% for the US (St. Louis Fed data).

Housing market The housing sector is dominated by one major player, the Housing and Development Board (HDB), which had initially been established to increase living standards in slums but now provides properties for sale and rent to all income levels. Currently, more than 80% of the residents of Singapore live in HDB apartments. The relative share of owned property is extremely high at 96.3%. The HDB apartments for rent comprise roughly equal shares of one and two-room apartments, whereas these types of apartments account for only 1.1% of owned property. Furthermore, 97% of all one-room apartments are for rent. Hence, there is a tendency to rent small and purchase larger apartments.

Housing prices in all regions of the country have increased since the first quarter of 2009. Depending on the particular area, housing prices have increased between 31.4% and 63.8%. However, the price increase has slowed down since 2011 and is currently experiencing a slight decrease since its peak in 2013.

LABOR MARKET DEVELOPMENT REAL ESTATE PRICE DEVELOPMENT

Source: Statistical Office of Singapore, UniCredit Research

60.0

61.0

62.0

63.0

64.0

65.0

66.0

67.0

68.0

69.0

70.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Par

ticip

atio

n R

ate

(%)

Une

mpl

oym

ent R

ate

(%)

Unemployment Rate Labor Force Participation Rate

100

110

120

130

140

150

160

170

180

190

200

4Q/2

011

1Q/2

012

2Q/2

012

3Q/2

012

4Q/2

012

1Q/2

013

2Q/2

013

3Q/2

013

4Q/2

013

1Q/2

014

2Q/2

014

3Q/2

014

4Q/2

014

1Q/2

015

IPric

e nd

ex (1

Q09

= 1

00)

Core Central Region Rest of Central Region Outside Central Region



Credit View

DBS Bank profile Key characteristics Ratings: Aa1s/AA-s/ AA-s Bloomberg: 1471Z SP Bond ticker: DBSSP www.dbs.com

DBS Bank Ltd. (DBS) is the main and 100%-owned subsidiary of DBS Group Holdings Ltd. Other subsidiaries include practically wholly-owned commercial banks outside Singapore, mostly under the DSB Bank brand, 50% of merchant bank The Islamic Bank of Asia Limited and 100% of stockbroker DBS Vickers Securities Holdings Pte. Ltd. DBS Group Holdings is a leading financial services group in Asia, offering a variety of services in consumer, SME and corporate banking, and wealth management across Asia to more than six million consumer and wealth management customers and over 200,000 institutional customers. While based in its home market Singapore, the group has around 21,000 employees and more than 280 branches (including sub-branches and centers) in 17 markets, with key franchises in Singapore, Hong Kong, China, Taiwan, India and Indonesia and a focus on Greater China, Southeast Asia and South Asia. The group’s stated mission is to be an “Asian specialist”, outcompeting local lenders and having deeper Asian insights than global competitors by intermediating trade and investment flows between Greater China, South Asia, and Southeast Asia. In Singapore, it operates as a universal bank under the DBS and POSB “People’s Bank” (whose roots dates back to 1877) brands, while it has three business lines elsewhere: 1. Corporate/Investment Banking (covering large corporations and institutional investors); 2. SME Banking; and 3. Wealth Management. In terms of market share, the group stated, in its FY14 report, that it has a 52% market share in retail savings balances in Singapore. DBS Group Holdings Ltd. is a holding vehicle, thus the group’s total net attributable income is essentially contributed by DBS Bank Ltd.

SWOT ANALYSIS – DBS BANK LTD. Strengths/Opportunities Weaknesses/Threats Market-leading franchise in Singapore in SGD deposits and well-established franchise in consumer and corporate banking

Exposure to rising economic and credit risk due to expansion in emerging Asian markets

Strong capital, funding and asset quality profile, with profitability benefiting from a substantial proportion of fee income

Operations in a saturated and competitive domestic market

Management team's proven record

Source: rating agencies, UniCredit Research

Strategy According to its FY14 report, these are the group’s key statements regarding its strategic priorities:

■ Geographies: 1. entrench leadership in Singapore, 2. continue to expand Hong Kong franchise, 3. rebalance geographic business mix.

■ Regional businesses: 1. build a leading SME banking business, 2. strengthen wealth proposition, 3. build out transaction banking and treasury customer business

■ “Enablers” & others: 1. focus on management processes, people and culture, 2. strengthen technology, infrastructure platform and digitize the bank, and 3. confirm expansion plans for growth markets.



Credit View

Financial analysis Segments and geographies Below, we provide the latest available figures for DBS Bank Ltd. (FY14) on its segments and

geographies. Singapore is the most important market for DBS Bank Ltd. in terms of both total income and profit before tax. Institutional Banking is the main contributor, followed by Consumer Banking/Wealth Management and Treasury.

DBS BANK LTD. AND SUBSIDIARIES BY BUSINESSES (FY14) DBS BANK LTD. AND SUBSIDIARIES BY GEOGRAPHY (FY14)

Source: company data, UniCredit Research

DBS Group Holdings Ltd. is a holding vehicle, thus the group’s total net attributable income is essentially contributed by DBS Bank Ltd.

PEER MARKET SHARE OF DBS BANK BY FY14 ASSETS HISTORIC PEER DEVELOPMENT OF NPL RATIO

Source: Moody’s, Bankscope, UniCredit Research

ConsumerBanking /WealthMgmt.

InstitutionalBanking Treasury Others Total

Total income 2,882 4,967 1,102 866 9,817Profit before Tax 876 2,891 593 546 4,906

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

2,000

4,000

6,000

8,000

10,000

12,000

S$

mn

Singa-pore

HongKong

Rest ofGreaterChina

Southand

South-East Asia

Rest ofthe World Total

Total income 6,149 1,900 950 552 266 9,817Profit before Tax 3,399 1,062 268 20 157 4,906

0

1,000

2,000

3,000

4,000

5,000

6,000

0

2,000

4,000

6,000

8,000

10,000

12,000

S$

mn

DBS Bank28%

OCBC21%UOB Bank

18%

Other (123)33%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013 2014

%

DBS OCBC UOB



Credit View

Latest results DBS Group Holdings Ltd. (DBS, Aa2s/--/AA-s; DBS Bank: Aa1s/AA-s/AA-s) reported net attributable profit for 1Q15 of SGD 1.27bn (+3.1% yoy). Excluding one-time items of SGD 136mn, net profit rose 10% to SGD 1.13bn. Total income rose 12% to SGD 2.74bn, driven by strong net interest income and non-interest income across all business units. Net profit before one-time items rose 35% from the previous quarter due to higher non-interest income, and RoE was 12.2%. Net interest income rose 14% to SGD 1.69bn, as loans were up 11% to SGD 281bn (constant-currency terms) and loan growth was 6%. More regional corporate borrowing and secured consumer loans were somewhat dragged down by lower trade loans. Net interest margin rose 3bp to 1.69%. Non-interest income rose 9% to SGD 1.05bn. Fee income was up 10% to SGD 560mn and Wealth Management rose 43% due to higher unit trust and insurance sales while fees from credit and debit cards were up 23% thanks to solid Wealth Management and Consumer Banking franchises. Other fee income was roughly flat and other non-interest income rose 7% to SGD 486mn, driven by monetary easing in 1Q15. Trading income of SGD 356mn was flat yoy but generally profited from favorable positions in foreign exchange and interest rates over the last few quarters. Income from investment securities rose threefold to SGD 103mn due to profits on government securities. Income from treasury customer flows of SGD 335mn was stable yoy. DBS further stated that all business units reported record income. Consumer Banking/Wealth Management income rose 29% to SGD 861mn (Wealth Management +41% to SGD 365mn). Institutional Banking income rose 5% to SGD 1.35bn while Treasury income rose 38% to SGD 386mn. Total expenses followed income growth and rose 13% to SGD 1.18bn. The cost-income ratio was 43%. Profit before allowances rose 10% to SGD 1.56bn and total allowances rose 20% to SGD 181mn, with specific allowances up yoy for loans at SGD 151mn or 22bp and general allowances down yoy to SGD 21mn. Also, DBS reported an one-time gain of SGD 136mn from the property sale in Hong Kong. The NPL ratio was flat vs. the previous quarter at 0.9% and the reported allowance coverage of non-performing assets was 161% and 294% when considering collateral. Deposits were up 2% in 1Q15 and 8% yoy to SGD 324bn, leading to a loan-deposit ratio of 87%. The SGD and all-currency liquidity coverage ratios were 424% and 131%, respectively and compared to regulatory requirements of 100% and 60%, respectively. The CET1 ratio was 13.4%, the total capital ratio 15.3% and the leverage ratio 7.1%. DBS CEO Piyush Gupta commented as follows on the results: “DBS started the year on a solid footing, with strong all-round performance yet again. Despite a slowdown in trade volumes, the bank’s first-quarter earnings reached a record high”…”We will continue to grow our business, while keeping a watchful eye on the economy”. For further details, please refer to the tables below.



Credit View

P&L HIGHLIGHTS

DBS Group Holdings Ltd. DBS Bank Ltd. Quarterly ending (SGD mn) 1Q14 1Q15 yoy 2013 2014 yoy Net interest revenue 1,488 1,690 13.6% 5,652 6,398 13.2%

Net fees & commissions 510 560 9.8% 1,885 2,027 7.5%

Trading income 400 595 48.8% 1,288 1,099 -14.7%

Other operating income 53 27 -49.1% 229 250 9.2%

Total revenues 2,464 2,876 16.7% 9,133 9,853 7.9%

Operating expenses 1,041 1,181 13.4% 3,911 4,323 10.5%

Loan-loss provisions 149 172 15.4% 726 620 -14.6%

Operating profit 1,272 1,514 19% 4,451 4,863 9.3%

Pretax profit 1,470 1,514 3% 4,496 4,906 9.1%

Attributable net profit 1,231 1,269 3.1% 3,793 4,098 8%

B/S HIGHLIGHTS

Quarterly ending (SGD mn) DBS Group Holdings Ltd. DBS Bank Ltd. 1Q14 1Q15 yoy 2013 2014 yoy Total assets 418,979 456,647 9% 402,023 440,667 9.6%

Risk-weighted assets 246,749 269,275 9.1% n.a. n.a. n.m.

Total equity 34,879 38,453 10.2% 292,365 317,173 8.5%

KEY RATIOS

DBS Group Holdings Ltd. DBS Bank Ltd. Quarterly ending (%) 1Q15 1Q14 yoy 2013 2014 yoy Net interest margin 1.61 1.69 5.4% 1.64 1.66 1%

Cost/income ratio 42.25 416 -2.8% 42.82 43.88 2.5%

Return on average equity 13.55 12.83 -5.3% 10.86 11.31 4.2%

Loans/deposits 85.16 87.68 3% 86.26 881 2%

NPL ratio 12 0.88 -13.7% 1.14 0.87 -23.7%

NPL coverage 1346 147.42 10% 122.38 147.42 20.5%

Tier-1 ratio 13.10 13.40 2.3% n.a. n.a. n.m.

Total capital ratio 15.30 15.30 0% n.a. n.a. n.m.

Leverage Ratio n.a. 7.10 n.m. 93 8.57 -5.1%

Source: BankScope, UniCredit Research



Credit View

DBS covered bonds USD 10bn covered bond program

DBS’s covered bond program has a size of USD 10bn. The dynamic cover pool consists of first-ranking residential mortgage loans with properties located in Singapore and of other eligible liquid assets up to 15%. As of May 2015, the cover pool had a volume of SGD 4.7bn (equivalent to around EUR 3.1bn). The minimum overcollateralization (OC) required for the AAA rating by Fitch is 17% (AP of 85.5%). DBS covered bonds benefit from dual recourse, i.e. the senior unsecured claim on the issuer and the preferential senior secured claim on a ring-fenced pool of cover assets. The residential mortgages in the cover pool are originated and serviced by DBS.

COVER POOL OVERVIEW

General Current principal balance (SGD bn) as of 9 May 2015 4.7

Avg. current loan per borrower (SGD mn) 0.8

Number of loans 5,988 WA seasoning (months) 47 WA interest rate 1.4% Asset type Residential

Covered bonds Up to SGD 1.3bn Nominal OC 251.6% Loan-to-value (LTV)

WA original LTV 66.2%

Fitch calculated WA indexed current LTV 56.3% WA current LTV 58.4% Property type

Apartment 6.2%

Condominium 79.5% House/Other landed properties 6.9% Terrace 7.3% Interest rate type

Fixed rate 10.0% Floating rate 90.0% Property use

Owner occupied 62.2%

Investment 37.8% Loan type

Fully amortizing 100.0% Interest-only 0.0% Current arrears

>1M-2M 0.0% >2M-3M 0.0% >3M 0.0% Documentation

Full documentation 100.0% Rating details

Expected covered bond rating AAA

IDR/Outlook AA- stable D-Cap 3 (Moderate High risk)

Asset segregation Moderate Liquidity gap and systemic risk Moderate High

Systemic alternative management Moderate High Cover pool-specific alternative management Moderate High Privileged derivatives Moderate

Source: DBS, Fitch, UniCredit Research



Credit View

MAS Notice 648 as legal framework for covered bonds

DBS’s covered bond program complies with the MAS, the regulator in Singapore, under MAS Notice 648 (the legal framework for covered bonds), with additional oversight from the asset monitor. The covered bond program structure uses the SPV model, which is commonly found in the UK, the Netherlands, Canada, Australia and New Zealand. DBS Bank is the issuer of the covered bonds and the cover pool assets are held in a special purpose entity (SPV). The cover pool collateral is sold by way of an equitable assignment or by declaring a trust over the collateral to the SPV. The SPV (Bayfront Covered Bonds Pte. Ltd; the guarantor), in turn, provides a guarantee in respect to the principal and interest payments under the covered bonds outstanding. This structure ensures the effective segregation of the cover assets from the insolvency estate of the issuer in case of an issuer default. The contractual agreements for the issuance of covered bonds are structured within the general legislation in Singapore.

DBS COVERED BOND PROGRAM STRUCTURE


Asset segregation via SPV or declaration of asset trust

Asset segregation is structured in two ways. 1. Mortgage assets that have no Central Provident Fund (CPF) amounts linked to the purchase of the residential property or used for the servicing of the loan are segregated through a special-purpose vehicle (SPV). 2. Loans linked to CPF amounts are segregated by way of a declaration of assets trust (DoT) from DBS’s other assets. DBS is the asset trustee under the DoT, and the covered bond guarantor (CBG) is a beneficiary under the assets trust. All cover assets, regardless of method of segregation, are recorded in an asset register, which is reviewed by the asset monitor.

Central Provident Fund (CPF) The Central Provident Fund (CPF) is a comprehensive social security savings plan in Singapore. Under the CPF schemes, there is a special private properties scheme, which enables CPF members to use their CPF ordinary account savings to buy or build private residential properties in Singapore for their own occupation or investment. The declaration of asset trust mechanism preserves first priority to proceeds from the sale of a property with respect to CPF loans within the covered bond program structure.

DBS Bank Ltd.Issuer

Covered Bond holders/Bond Trustee

Bayfront Covered Bonds Pte. Ltd.Covered Bond Guarantor (CBG)

Cov

ered

Bon

d G

uara

ntee

Inte

rcom

pany

loan

s

Rep

aym

ent o

fIn

terc

ompa

nylo

ans

DBS Bank Ltd.Interest rate

swap provider

DBS Bank Ltd.Covered Bondswap provider

DBS Bank Ltd.Asset trustee

Contribution to / beneficialinterest in asset trust

DBS Bank Ltd.Seller

Declaration of asset trust

The Bank of New York Mellon,Singapore BranchSecurity Trustee

Cov

ered

Bon

d pr

ocee

ds

Cov

ered

Bon

ds

Dee

dsof

char

ge

Sale of mortgages(via equitableassignment) Swaps



Credit View

Well-seasoned cover pool As of May 2015, the cover pool consisted of 5,988 mortgage loans with an average current loan balance of SGD 0.8mn per borrower (equivalent to around EUR 0.5mn). The total size of the cover pool assets was SGD 4.7bn. The cover pool is well seasoned with a weighted average of 47 months. Regarding interest type, 90% of loans had a floating rate and 10% a fixed interest rate. All loans are fully amortizing. There are no loans in arrears in the cover pool.

Condominiums as the dominant property type

The dominant property type of collateral assets involves condominiums with a share of 79.5%, with the remainder being relatively evenly spread among apartments (6.2%), houses and other landed properties (6.9%) and terrace houses (7.3%; also known as row houses).

Current LTV of 58.4% The loan-to-value ratio is 66.2% on a weighted-average original LTV basis, while the current LTV is 58.4%, according to Fitch data. As the pool comprises loans secured by non-government built (private) residential properties only, there is a relatively large share of investment loans and loans held by non-Singaporeans. The pool has a large exposure of high-net values of properties. The loan values exceeding SGD 1.0mn account for 49% of the cover pool. The median value of Singapore properties in the cover pool is around SGD 1.3mn. There are no interest-only loans in Singapore, as those have been prohibited under the MAS’s banking regulation since September 2009.

COVER POOL DETAILS (AS OF MAY 2015)

By property type By interest rate type

By use By loan type


6%

80%

7% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Apartment Condominium House/Otherlanded properties

Terrace

Fixed rate10%

Floating rate90%

Owner occupied62%

Investment38%

Fully amortizing,

100%



Credit View

COVER POOL DETAILS (AS OF APRIL 2015)

By LTV-distribution By loan amount

By year of origination By seasoning


AAA rating by Fitch … Fitch assigned DBS’s covered bonds a AAA stable rating. The AAA rating is based on DBS Bank Ltd.’s (DBS) AA− Long-Term Issuer Default Rating (IDR), a Discontinuity Cap (D-Cap) of 3 (moderate high risk) and an asset percentage (AP) of 85.5%. The stable outlook reflects that of DBS’s IDR, and Fitch’s view that the rating could be sustained even if DBS’s IDR were downgraded to A.

… with high rating stability According to Fitch, there is limited downward pressure on the AAA rating for DBS’s mortgage covered bonds. DBS’s Long-Term IDR of AA− has a stable outlook, and the IDR is in line with its viability rating of aa. The D-Cap of 3 means that DBS’s covered bond rating is likely to change if the IDR fell by three or more notches to A− or below. If DBS’s IDR remains at AA−, the covered bond rating is likely to remain unchanged (due to the D-Cap impact) unless the D-Cap fell by three notches to 0. This would correspond to full discontinuity risk, which is an unlikely assessment in light of liquidity protection in the form of a one-year maturity extension for a standard residential mortgage cover pool in a country with a sovereign rating in the AAA category.

0%

5%

10%

15%

20%

25%

30%

35%

40%

0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% >80%LTV

0%

10%

20%

30%

40%

50%

Up

to 5

00k

500k

-1m

n

1mn-

1.5m

n

1.5m

n-2m

n

2mn-

2.5m

n

2.5m

n-3m

n

3mn-

3.5m

n

3.5m

n-4m

n

>4m

n

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

<1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y >7Y



Credit View

Covered bond legal framework MAS Notice 648 On 31 December 2013, the Monetary Authority of Singapore (MAS) published its regulations

regarding the issuance of covered bonds by banks incorporated in Singapore (MAS Notice 648). The regulations became effective 31 December 2013 and were updated on 4 June 2015. The requirements set out in the notice are mandatory for Singapore's banks as MAS Notice 648 is part of The Banking Act in Singapore. The regulation outlines the MAS’s rules relating to the issuance of covered bonds by banks incorporated in Singapore.

The key characteristics of the legal framework are as follows:

■ Regulator: Monetary Authority of Singapore (MAS)

■ Issuers: Banks incorporated in Singapore

■ Bankruptcy remoteness: The SPV model is used to achieve asset segregation from the issuer’s insolvency estate through the “true sale” of the mortgage assets to the SPV by way of equitable assignment or declaration of asset trust to the covered bond guarantor

■ Eligible assets: Loans secured by residential property in Singapore or elsewhere (ordinary collateral); substitute collateral (cash, Singapore Government Securities, MAS Bills) up to 15%. The 15%-limit can be temporarily exceeded in order to allow the issuer to build up the necessary liquidity to meet payments in the upcoming 12 months or to account for operational timing differences

■ LTV limit: 80% loan-to-current-market value

■ Derivatives: Hedging agreements, e.g. cross-currency swaps, are part of the cover pool

■ Encumbrance limit: The amount of collateral in the cover pool is limited at 4% of total assets of an issuer

■ Legal mandatory OC: 3% on a nominal basis

■ Cover pool monitor: According to MAS Notice 648 §8(b), a cover pool monitor shall be appointed. The cover pool monitor, who has to be an external third party qualified to be an auditor under the Companies Act (Cap 50), has to verify the compliance of the covered bond issuer with legal requirements.

UCITS/CRR compliance Singapore covered bonds are not UCITS 52(4) or CRR Article 129-compliant, given that Singapore is not a member state of the European Union.

Covered bonds to be exempt from bail-in in Singapore

Covered bonds to be exempt from bail-in. On 23 June 2015, the Monetary Authority of Singapore (MAS) published a request for comment on Proposed Enhancements to the Resolution Regime for Financial Institutions in Singapore. Under §6.8., it is stated that “the proposed scope of bail-in would hence exclude liabilities such as secured liabilities, … senior debt and all deposits”. Moody’s commented on the proposal, saying that “… this makes the MAS's proposed bail-in regime one of the most investor-friendly in the world for non-subordinated debtholders. If implemented, Singapore's regime will be credit positive for senior unsecured bondholders, because they will not be subject to bail-in outside of bank liquidation.”

http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Commercial%20Banks/Regulations%20Guidance%20and%20Licensing/Notices/MAS%20Notice%20648%20on%20Covered%20Bonds_31%20Dec%2013

http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/23%20Jun%202015%20Consultation%20on%20Enhancements%20to%20Resolution%20Regime%20for%20FIs%20in%20Singapore.pdf

http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/23%20Jun%202015%20Consultation%20on%20Enhancements%20to%20Resolution%20Regime%20for%20FIs%20in%20Singapore.pdf



Credit View

Singapore’s banking sector Overview The banking sector in Singapore has three major players with FY14 total assets

(Bankscope data) individually larger than SGD 300bn: DBS Bank Holding, Oversea-Chinese Banking Corporation and the United Overseas Bank. These three groups accounted for 89% of FY14 total assets held by the 20 largest banks (Bankscope data as of FY14) in Singapore and 67% of all bank assets in Singapore, according to Moody’s. According to the rating agency, the banking sector in Singapore consists of a total of 126 commercial banks, which includes five local banks that are owned by three domestic banking groups. The whole sector reported total assets of SGD 2.63tn (USD 1.99tn, or 676% of national GDP). According to Moody’s, the assets as a percentage of GDP consist of 272% of domestic assets and 404% of foreign assets. The largest share of the banks’ diversified loan books are consumer loans (26% of total loans), while foreign banks are largely dependent on interbank borrowing.

Business segments As of December 2014, according to the Monetary Authority of Singapore (MAS) and the IMF, reported loans and advances of the banking sector to non-bank customers amount to SGD 1.1tn, which resulted in a loan-to-GDP ratio of 295%. Based on MAS and IMF data, the loan-to-GDP ratio, which was 205% in 2008, declined slightly during 2009 (201%) and 2010 (199%) but has increased steadily since. From a regional perspective, Singapore is most exposed to borrowers in east Asia, including Greater China, Japan, South Korea, Taiwan and other ASEAN countries, which account for roughly half of all foreign loans. According to MAS, as of April 2015, the largest share of the banks’ diversified loan books were consumer loans, with 26% of total loans; financial institutions, with 17%; general commerce, with 14%; and building and construction, with 11%. The largest share of consumer loans were housing and bridge loans, which accounted for 62% of total consumer loans. Other larger types of consumer loans were credit card debt (3%) and car loans (3%). On the liability side of domestic bank units, non-bank customer deposits accounted for 54% of total system liabilities, and interbank loans amounted to 30%.

Operating conditions The banks’ operating environment is driven by Singapore’s high GDP-per-capita and solid growth, due the city-state’s being an internationally important trade center (Singapore is the world’s second largest port by 2014 throughput). This leaves Singapore’s banks with solid business prospects and generally sound borrowers. However, it also exposes them to potential international woes (e.g. China, EU, Malaysia, Indonesia and Hong Kong). The unweighted NPL ratio for Singapore’s largest three banks was, on average, 0.89% for FY14, which is a significant decrease from the already very low average rate of 1.0% in FY13. Furthermore, Singapore has negligible corruption and a strong legal system, according to the World Bank.

Support Currently rated at Aaas/AAAs/AAAs, Singapore has a track record of supporting the banking system. Its strong economic and fiscal positions and its low public debt should allow Singapore to intervene in a financial crisis. Consequently, there has been no known bank default there ever. During the economic and financial crises in 2008, Singapore established a blanket deposit guarantee, which was valid until 2010; it has been continued now under the Deposit Insurance Scheme.

Stress tests Financial institutions are put through stress tests annually by the MAS. 2013’s stress test concluded that banks and insurers are resilient to adverse macroeconomic scenarios. The test comprised two adverse scenarios, both assuming large falls in domestic and regional economic activity: 1. a V-shaped recession (GDP down harshly in the first year and a subsequent recovery) and 2. an extended recession (GDP down over three years). Moreover, in 2013, the IMF’s Financial Sector Assessment Programme declared that Singapore’s financial system is resilient to domestic and global risks.



Credit View

Earnings update: Singaporean banks Event ■ DBS Group Holdings Ltd. (DBS, Aa2s/--/AA-s; DBS Bank: Aa1s/AA-s/AA-s) reported

net attributable profit for 1Q15 of SGD 1.27bn (+3.1% yoy).

■ United Overseas Bank Limited (UOBSP, Aa1s/AA-s/AA-s) reported 1Q15 net attributable profit of SGD 801mn (+1.5% yoy).

■ Oversea-Chinese Banking Corp. Ltd. (OCBCSP, Aa1s/AA-s/AA-s) reported net attributable profit for 1Q15 of SGD 993mn (+10.5% yoy).

P&L HIGHLIGHTS

DBS Group Holdings Ltd. United Overseas Bank Ltd. Oversea-Chinese Banking Corp. Ltd. Quarterly ending (SGD mn) 1Q14 1Q15 yoy 1Q14 1Q15 yoy 1Q14 1Q15 yoy Net interest revenue 1,488.0 1,690.0 13.6% 1,114.0 1,202.0 7.9% 1,098.0 1,262.0 14.9%

Net fees & commissions 510.0 560.0 9.8% 414.0 453.0 9.4% 352.8 395.0 12.0%

Trading income 400.0 595.0 48.8% 149.0 225.0 51.0% 150.8 166.0 10.1%

Other operating income 53.0 27.0 -49.1% 75.0 76.0 1.3% 30.9 44.0 42.4%

Total revenues 2,464.0 2,876.0 16.7% 1,795.0 1,960.0 9.2% 1,872.2 2,193.0 17.1%

Operating expenses 1,041.0 1,181.0 13.4% 755.0 853.0 13.0% 719.5 897.0 24.7%

Loan-loss provisions 149.0 172.0 15.4% 146.2 61.0 -58.3% 40.4 65.0 60.9%

Operating profit 1,272.0 1,514.0 19.0% 883.0 938.0 6.2% 1,112.4 1,231.0 10.7%

Pretax profit 1,470.0 1,514.0 3.0% 883.0 938.0 6.2% 1,143.3 1,236.0 8.1%

Attributable net profit 1,231.0 1,269.0 3.1% 789.0 801.0 1.5% 898.5 993.0 10.5%

B/S HIGHLIGHTS

Quarterly ending (SGD mn) DBS Group Holdings Ltd. United Overseas Bank Ltd. Oversea-Chinese Banking Corp. Ltd. 1Q14 1Q15 yoy 1Q14 1Q15 yoy 1Q14 1Q15 yoy Total assets 418,979.0 456,647.0 9.0% 295,999.0 313,596.0 5.9% 343,638.2 404,156.0 17.6% Risk-weighted assets 246,749.0 269,275.0 9.1% 161,498.0 181,892.0 12.6% 157,078.0 196,769.0 25.3%

Total equity 34,879.0 38,453.0 10.2% 25,274.5 31,038.0 22.8% 25,580.5 35,150.0 37.4%

KEY RATIOS

DBS Group Holdings Ltd. United Overseas Bank Ltd. Oversea-Chinese Banking Corp. Ltd. Quarterly ending (%) 1Q15 1Q14 yoy 1Q14 1Q15 yoy 1Q14 1Q15 yoy Net interest margin 1.61 1.69 5.4% 1.85 1.89 2.0% 1.43 1.39 -2.7%

Cost/income ratio 42.25 41.06 -2.8% 42.06 43.52 3.5% 38.43 40.90 6.4%

Return on average equity 13.55 12.83 -5.3% 12.02 10.76 -10.5% 13.59 12.36 -9.1%

Loans/deposits 85.16 87.68 3.0% 87.06 84.93 -2.4% 87.88 83.96 -4.5%

NPL ratio 1.02 0.88 -13.7% 1.10 1.20 9.1% 0.68 0.64 -5.9%

NPL coverage 134.06 147.42 10.0% 160.18 146.97 -8.2% 148.36 169.32 14.1%

Tier-1 ratio 13.10 13.40 2.3% 14.00 14.30 2.1% 14.40 13.50 -6.3%

Total capital ratio 15.30 15.30 0.0% 17.70 17.10 -3.4% 15.60 15.50 -0.6%

Leverage Ratio n.a. 7.10 n.m. n.a. 7.60 n.m. n.a. 7.20 n.m.

Source: Bankscope, UniCredit Research



Credit View

Singapore’s banking regulation The Monetary Authority of Singapore (MAS)

The MAS is responsible for promoting sustained non-inflationary economic growth and establishing Singapore as a sound and progressive financial center. Its stated functions include 1. its role as the central bank of Singapore, 2. conducting integrated supervision of financial services and financial stability surveillance, 3. managing the official foreign reserves of the country and 4. developing Singapore as an international financial center. Furthermore, the MAS acts as a lender of last resort. According to the MAS, the financial supervision of banks and insurers is divided into three banking departments and one insurance department. Banking Department I supervises local banking groups on a consolidated level and some foreign banks. Banking Department II oversees retail and wholesale banks, finance companies, money chargers and remittance agents, whereas Banking Department III supervises banks involved in treasury and private banking.

Capital requirements

The MAS has required Singapore-incorporated banks to fulfill the full Basel III capital standards since January 2013. However, the MAS requires Singapore-incorporated banks to meet higher CET1 ratios than is necessary under Basel III. According to the MAS, and since January 2015, Singapore-incorporated banks’ CET1 ratios are required to be above 9% (including a 2.5% capital-conservation buffer) vs. 7% under Basel III. The CET1 ratio without the capital-conversation buffer is, since January 2015, 6.5% in Singapore vs. 4.5% under fully implemented Basel III standards. Additionally, since January 2014, the MAS has required that disclosure and submission requirements set by the Basel Committee on Banking Supervision be met. Moody’s argues that, in the event of an increase in the systemic risk due to fast credit expansion, the MAS may increase the Singapore-specific countercyclical buffer requirements or alter their implementation schedule when needed.

Liquidity requirements (MAS Notice 649)

All banks in Singapore that are either incorporated and headquartered in Singapore or considered a domestic systemically important bank by the MAS must comply with the liquidity coverage ratio (LCR) framework. Furthermore, all banks are required to submit a monthly liquidity report to the MAS. Institutions that are not required to comply with LCR are free to choose whether to comply with the minimum liquid assets (MLA) or the LCR framework. The MLA framework requires liquid assets of ≥16% of qualifying liabilities, and ≥50% of an institution’s liquid assets must be in Tier-1 liquid assets. The LCR framework requires a minimum SGD LCR of 100% and a minimum all-currency LCR of 60% on a group level as of January 2015. Furthermore, banks must reach an all-currency LCR of100% by 2019. In order to achieve this, the bank has to increase its all-currency LCR by 10 percentage points each year, from 60% in 2015. Banks considered domestic systemically important by the MAS or that choose the LCR framework must achieve an SGD LCR of 100% and an all-currency LCR of 50% by January 2016.

MAS’s mortgage policies A 2012 MAS analysis of the residential property loans business of major Singaporean banks stated that the policies and procedures of these banks were sufficient to assess credit worthiness and repayment capabilities. The analysis also stated that these banks were monitoring and stress-testing their portfolios, which showed low NPL ratios. To standardize and strengthen credit underwriting practices at these banks, the MAS issued the Notice on Computation of Total Debt Servicing Ratio for Property Loans in 2013. According to the MAS, the average loan-to-value ratio for housing and bridging loans in 4Q14 was 49.2%, up from 48% in 3Q14, and the NPL ratio for the same type of loans was at 0.4%, unchanged from 3Q14.



Credit View

TDSR Framework The MAS’s total debt servicing ratio (TDSR) framework from 2013 focuses on financial prudence among borrowers and stronger credit underwriting practices. The MAS generally demands a TDSR limit for every borrower of 60%. Among other measures it took in 2013, the MAS also lowered the maximum tenure of new loans for the purchase of HDB flats from 35 years to 30 years. Additional restrictions apply to loans with tenures that are larger than 25 years or to loans maturing after a borrower’s 65th birthday. For certain real estate directly purchased from property developers, the MAS introduced a mortgage servicing ratio of 30%.

Bail-in legislation In late June 2015, MAS proposed to enhance its resolution regime for financial institutions in Singapore. More specifically, MAS proposed, in its consultation paper P011 – 2015 from June 2015, that the statutory bail-in regime be applied to unsecured subordinated debt and unsecured subordinated loans (issued out of the bank holding companies or bank entities within the group of the Singapore-incorporated bank or bank holding company), issued or contracted after the effective date of the relevant legislative amendments implementing the statutory bail-in regime. The proposed scope of bail-in would hence exclude liabilities such as secured liabilities, short-term liabilities owed to financial institutions and payment systems, amounts owed to vendors for goods and services that are critical to the affected bank’s operations, senior debt and all deposits.



Credit View

Number crunching

DBS Bank Ltd. P&L HIGHLIGHTS

Year ending (EUR million) 2009 2010 2011 2012 2013 2014 Net interest revenue 4,455 4,318 4,825 5,334 5,652 6,398 Net Fees & commissions 1,394 1,397 1,542 1,579 1,885 2,027 Trading income 687 1,205 1,134 1,502 1,288 1,099

Other Operating Income 67 146 130 50 229 250 Operating Income (Memo) 6,669 7,168 7,758 8,589 9,133 9,853 Total Non-interest expenses 2,602 3,940 3,297 3,609 3,911 4,323 Loan-loss provisions 1,414 796 638 379 726 620

Operating profit 2,515 2,317 3,739 4,564 4,451 4,863 Other Non-operating Income and Expenses n.a. n.a. n.a. n.a. n.a. n.a. Pre-tax profit 2,515 2,317 3,739 4,613 4,496 4,906 Attributable net profit 2,109 1,720 3,184 3,932 3,793 4,098


B/S HIGHLIGHTS

Year ending (EUR million) 2009 2010 2011 2012 2013 2014 Assets

Cash & cash equivalents 22,515 31,200 25,300 17,767 18,719 19,505 Securities 70,419 67,837 79,668 82,112 79,635 85,447

Customer loans (NET LOANS) 129,973 151,698 194,275 209,395 248,654 275,588 Other Assets 6,032 6,400 9,751 8,673 8,742 11,019 Total Assets 258,665 283,728 340,864 353,090 402,023 440,667 Risk-weighted assets n.a. n.a. n.a. n.a. n.a. n.a.

Total Customer Deposits 183,432 193,692 225,346 242,907 292,365 317,173 Senior Debt Maturing after 1 Year n.a. n.a. 5,412 5,256 5,635 9,196 Subordinated Borrowing 7,702 6,398 5,304 5,505 5,544 4,665 Other Liabilities 6,988 7,171 11,819 7,795 9,659 9,932

Total Equity 25,452 27,163 29,059 31,199 36,307 36,984 Total Liabilities and Equity 258,665 283,728 340,864 353,090 402,023 440,667


KEY RATIOS

Key ratios - Figures in % 2009 2010 2011 2012 2013 2014 Net Interest Margin 1.98 1.86 1.79 1.72 1.64 1.66

Cost to Income Ratio 392 54.97 42.50 422 42.82 43.88

Return on Average Assets (ROAA) 0.87 0.69 16 1.16 13 0.99

Return on Average Equity (ROAE) 8.83 6.50 10.58 126 10.86 11.31

Interbank Ratio 243.78 107.95 92.65 111.20 2799 249.85

Loans / Customer Deposits 72.40 79.68 87.59 87.57 86.26 881

Net Loans / Total Assets 50.25 53.47 570 59.30 61.85 62.54

Liquid Assets / Dep & ST Funding 28.80 272 22.39 19.93 20.55 20.51

Loan Loss Reserve / Gross Loans 2.14 1.70 1.57 1.56 1.40 1.28

Impaired Loans (NPLs) / Gross Loans 2.85 1.83 1.32 1.20 1.14 0.87

Reserves for Impaired Loans / Impaired Loans 74.99 93.26 119.50 130.17 122.38 147.42

Core Tier 1 Regulatory Capital Ratio n.a. n.a. n.a. n.a. n.a. n.a.

Tier 1 Regulatory Capital Ratio n.a. n.a. n.a. n.a. n.a. n.a.




Credit View

Rating agencies' views RATING PROFILE – DBS BANK LTD.

Covered Bonds Long-term Short-term Watch/Outlook Financial Strength Support/Floor Moody’s AAA Aa1 P-1 Stable -- -- S&P -- AA- A-1+ Stable -- +2 Fitch AAA AA- F1+ Stable -- 1/A-


RATING AGENCIES' COMMENTS – DBS BANK LTD.

Agency Comment Moody's 29 June 2015

SUMMARY RATING RATIONALE: On 10 June 2015, we affirmed all of DBS Bank Ltd.'s (DBS) ratings, including the senior unsecured debt and deposit ratings of Aa1 and the baseline credit assessment (BCA) of aa3. We also assigned the bank a Counterparty Risk Assessment (CRA) of Aa1(cr)/P-1(cr). The rating actions follow the implementation of our new methodology for rating banks globally (see "Banks" published on 16 March 2015). The affirmation of DBS' debt and deposit ratings reflects the combination of: (1) the bank's BCA of aa3; and (2) two notches of uplift, due to the high likelihood of systemic support for the bank in the event of need, given its size and importance to Singapore's (Aaa stable) financial market. The ratings take into account the introduction of the new bank rating methodology, including our basic Loss Given Default analysis, where creditors are not presumed to absorb losses, since no operational resolution regime is in place. DBS' BCA of aa3 is one of the highest assigned to any financial institution globally. The BCA reflects the bank's strong financial profile compared to other similarly rated banks. DBS' well-established franchise in Singapore and Hong Kong supports its funding and profitability profile. Its track record of strong asset quality and capital adequacy reflects the overall prudence the bank has shown in growing its business in its home market of Singapore and also in overseas markets. The bank has also shown good management stewardship; as evidenced by its reported profits during the Asian financial crisis in 1997 - 1998, and more recently in the global financial crisis in 2008-2009. We believe there is a very high likelihood of systemic support for DBS if needed, given its leading market share of around 26% of SGD deposits and 19% of SGD loans in Singapore at end-March 2015. Consequently, the bank's global local currency deposit rating of Aa1 includes two notches of uplift from its standalone rating of aa3. At 31 March 2015, the Singapore market accounted for 65% of DBS's total assets and 71% of the bank's net profits. Its Greater China operations contributed 28% of its total assets in the same period; in particular, its business in Hong Kong contributed 18% of the total and the remainder of the Greater China region contributed 10%. As for its net profits, 21% at 31 March 2015 was from Hong Kong and 6% was from the rest of its markets in Greater China. Other regions accounted for 7% of its assets at 31 March 2015 and 2% of net profits in the same period. Unless noted otherwise, data in this report is sourced from company reports and our Banking Financial Metrics. All figures are based on our own chart of account, and are adjusted for analytical purposes. Please refer to the documents entitled "Moody's Approach to Global Standard Adjustments in the Analysis of the Financial Statements of Banks, Securities Firms and Finance Companies" and "Frequently Asked Questions: Moody's Approach to Global Standard Adjustments in the Analysis of the Financial Statements of Banks, Securities Firms and Finance Companies", both published on 19 July 2012. DBS' BCA OF aa3 IS SUPPORTED BY ITS MACRO PROFILE OF STRONG+: DBS' Macro Profile of Strong+ reflects its regional operations, which is essentially an asset-weighted average of the Macro Profiles of its key markets including Singapore (Macro Profile of Very Strong), Hong Kong (Strong+) and China (Moderate+). Over 46% of DBS' total loans are in Singapore. In addition, DBS has significant exposures to the macroeconomic factors affecting banks in Greater China and Hong Kong in particular, as well as the broader Asian region, excluding Japan and Australia. About 19% of DBS's total loans are in its subsidiary, DBS Bank (Hong Kong) Limited (DBS Bank (HK), deposits Aa3 stable, BCA a2), with an addition 17% in the Rest of Greater China. A further 9% of total assets are from the rest of Asia, and an additional 9% are from the rest of the world. As for DBS' home market of Singapore, the country's economic strength is characterized by high levels of per capita income and strong growth performance. However, GDP growth rates tend to be volatile, given Singapore's role as a global trade hub. Over the past 10 years, Singapore's real GDP growth rate averaged 6.4%; which was more than triple the 1.9% average for similarly Aaa-rated sovereigns, and by far the highest within its peer group. Singapore's very high economic strength is positive for domestic banks, providing them with healthy growth opportunities and supporting the debt repayment capacity of their borrowers. At the same time, the country's deep regional and global integration exposes the banks to downside risks, should any of Singapore's main trading partners -- including Malaysia, Indonesia, Hong Kong, China and the EU -- face economic problems. A long period of low interest rates in Singapore has fueled high credit growth rates in recent years; a situation which presents a risk to the banks. Singapore banks have grown rapidly both their domestic and cross-border loans, and we expect a moderate increase in problem loans, as interest rates rise and asset prices potentially fall. While domestic credit growth moderated in 2014, due to cooling-off measures implemented by the Monetary Authority of Singapore (MAS) in 2013, we are concerned that the high levels of corporate and household debt will lead to weaker debt repayment capacity when loan interest rates rise. Such repayment risks will be offset to a certain extent by low average loan-to-value ratios on property loans, and consumers' high levels of liquid assets and wealth relative to debt. Singapore's three largest banks by assets -- DBS, Oversea-Chinese Banking Corporation (OCBC, deposits Aa1 stable, BCA aa3 stable) and United Overseas Bank (UOB, deposits Aa1 stable, BCA aa3 stable) -- are mainly funded by deposits. Their all-currency loan-to-deposit ratios (LDR) averaged 85% at end-March 2015. While LDRs have edged up due to rapid credit growth and the banks' reluctance to raise their deposit rates significantly, we expect that bank funding profiles will nevertheless remain healthy, because credit growth is moderating. The three large banks' dependence on market funding -- namely interbank funds and bonds -- is moderate, at around 20% of their liabilities at end-March 2015. In addition, while the banks increased their short-term USD borrowings in 2013-2014 to finance short-maturity trade finance transactions, these borrowings are well matched by maturity. Overall, Singapore's banking system is concentrated; with the top three banking groups controlling around 63% of SGD deposits and 49% of SGD loans at end-March 2015. This structural feature is positive for the banks, because it protects their pricing power and margins; ultimately supporting their profitability profiles. Rating Drivers - Largest franchise in Singapore by assets, with an around 26% share of system SGD deposits - Strong capital position and asset quality, as is the case with domestic peers. DBS' capital position and asset quality are better than its global peers' - Well-established franchise in consumer and corporate banking - Strong profitability levels, supported by substantial proportion of fee income - Risk profile affected by appetite for regional expansion or acquisitions Rating Outlook DBS' ratings carry a stable outlook. What Could Change the Rating – Up: DBS' ratings are unlikely to be upgraded, given that they are already among the highest when compared to banks globally. Furthermore, the operating environment is becoming more challenging, with credit costs expected to increase. What Could Change the Rating – Down: The ratings may be downgraded if: - The bank pursues an overly aggressive loan growth and regional expansion strategy, such that it raises its risk profile, owing to larger exposures to high-risk markets - The bank's financial ratios deteriorate significantly - The operating environment becomes more challenging than we expect, leading to a sharp increase in credit costs




Credit View

RATING AGENCIES' COMMENTS – DBS BANK LTD. (CONTINUED)

Agency Comment S&P 31 July 2014

Major Rating Factors: Strengths: (1) Market-leading position in Singapore with a strong franchise, (2) strong funding profile and (3) management team's proven record. Weaknesses: (1) Exposure to increasing economic and credit risk because of expansion in emerging Asian markets, (2) Operations in a saturated domestic market with competitive pricing. Rationale: We base our ratings on DBS on the bank's "strong" business position, "adequate" capital and earnings, "adequate" risk position, "above average" funding, and "strong" liquidity, as our criteria define those terms. DBS' SACP is 'a'. We believe the bank has high systemic importance in Singapore and the government is highly likely to support it. Anchor: ‘bbb+' based on the countries in which the bank operates Our 'bbb+' anchor for DBS draws on our Banking Industry Country Risk Assessment methodology and our view of the economic and industry risks in the countries where the bank operates. The economic risk score of '4' is based on the weighted average of DBS' private-sector loans to nonbanks in each country in which it operates. About 50% of the bank's operations are in Singapore, 15% in Hong Kong, and the rest is spread across Asia. We view Singapore as a high income, diverse, and resilient economy. We believe the rapid property price increases in recent years in conjunction with a significant growth in credit to the private sector increases the risks of credit losses for banks. That said, property cooling measures have been effective in moderating property prices, in line with the government's stabilization objective. In our view, a well-developed institutional framework, prudent banking practices, and stable share of core customer deposits support Singapore's banking industry. However, Singapore banks have been expanding overseas, particularly into higher risk emerging markets, to offset limited growth prospects and margin pressures in the home market. Business position: Market leader in Singapore with regional ambitions DBS' market leadership in Singapore, with the largest branch network and customer deposit base, supports the bank's business position. DBS maintains a superior competitive position, with a market share of about 17% of system loans and 25% of deposits. We expect DBS to maintain its resilient revenue stream and high customer retention despite the increasingly challenging macroeconomic environment in Asia. We also believe that DBS will continue to diversify geographically to offset domestic margin pressures, with Singapore remaining its anchor market. The bank's goal is to create a 40:30:30 revenue spilt among Singapore, Greater China, and Southeast Asia by 2020. Capital and earnings: Profits are sufficient to keep pace with growth We expect DBS' risk-adjusted capital ratio to stay above 7% over the next two years. This is based on the assumption that loan growth will moderate to 8%-10%, from 18% in 2013. The slower growth reflects the impact of property cooling measures on mortgage lending and absence of chunky corporate loans compared with that in 2013. The bank's net interest margin will likely remain under pressure, although early signs of stabilization are emerging after several years of compression. Going forward, opportunities to re-price loans upward may emerge, in a rising interest rate environment. Overall, we believe the bank's profit generation and retention will broadly keep pace with growth. We also expect DBS to maintain a reasonable dividend payout and capital buffers above the regulatory minimum. Risk position: Prudent risk management tempers risks from regional expansion Our assessment of DBS' risk position reflects our view of the bank's simple commercial banking business model. In our view, the bank's credit risk exposure is likely to shift toward emerging markets, such as China and Indonesia, which are inherently more risky. However, we expect DBS' asset quality to remain sound because of its prudent credit risk management and stability in the bank's key markets of Singapore and Hong Kong. Funding and liquidity: Strong retail-customer-funded model DBS' large and stable retail deposit base and established franchise in Singapore underpin its funding profile. The bank benefited from deposit inflows during periods of financial turmoil, when smaller foreign banks were scaling back and losing deposit share. In addition, we assess DBS' liquidity as strong because of the bank's rich pool of liquid assets. The bank's ratio of liquid assets to short-term wholesale funding is 3.2x as of Dec. 31, 2013. DBS' retail-customer-funded model reduces the need for short-term wholesale funding, which accounts for less than 15% of the bank's funding base. Support: Two notches of government support: The issuer credit rating on DBS is two notches higher than the SACP, reflecting the bank's high systemic importance in Singapore and our view of a high likelihood of support from the government of Singapore.

Fitch 7 October 2014

Key Rating Drivers: Stable Funding: DBS Bank Ltd.’s (DBS) established domestic franchise supports its stable local-currency deposit base, and its Singapore dollar loan/deposit ratio (LDR) of 77% at end-June 2014 underpins the liquidity position. Foreign-currency deposits (mainly US and Hong Kong dollars) are more challenging, but the bank has made progress in this area. Deposit-gathering in its major functional currencies should remain a priority as DBS grows regionally. Concentration Risk Manageable: DBS’s exposure to China, and to the building and construction sector, has risen over the past three years. Total China exposure, at about 13%-15% of total assets, is the highest among its peers. Higher segment concentrations may raise the bank’s vulnerability to country or industry shocks. However, Fitch Ratings assesses that sector concentrations are still manageable, taking into account the bank’s reasonable internal risk controls and sound asset-quality track record through previous economic cycles. High Capitalisation: Strong capitalisation is crucial to compensate for DBS’s exposure to more volatile markets as it expands offshore. In that respect, DBS’s Fitch Core Capital (FCC) ratio and Basel III fully implemented core equity Tier 1 (CET1) capital adequacy ratio (CAR), both at 12.2%, indicate comfortable loss-absorption buffers relative to risk. Steady Profitability: ROA, as calculated by Fitch, has been consistent at around 1.05%-1.15% over 2011-1H14 despite a narrowing NIM – due to disciplined cost control, a focus on sustainable non-interest income, and benign asset quality. Profitability may ease over the next two years amid slower economic and loan growth, a competitive landscape and a potential rise in credit costs from current lows, but Fitch expects the earnings profile to remain broadly stable. Simple Holding Company Structure: DBS Group Holdings (DBSH) is the bank holding company for DBS Bank. The ratings of both entities are equalized, as they are closely integrated, with a simple balance sheet and low double leverage at the DBSH standalone level. Very Strong State Support: Fitch believes that the probability of extraordinary state support for DBS, if needed, is extremely high. This is in view of the bank’s high importance to the domestic economy and banking system, with a roughly 25% market share of Singapore dollar deposits, and the sovereign’s strong financial position – as reflected in its 'AAA' ratings. However, DBSH’s ratings do not incorporate sovereign support. Rating Sensitivities Limited Ratings Upside: An upgrade is unlikely, as DBS and DBSH are already among the highest-rated banks and bank holding companies globally. Rising Risk Appetite: Sustained rapid loan growth, higher exposure to more cyclical industry or country segments, large acquisitions or other signs of greater risk appetite, without a strengthening in the bank’s funding and capital positions, would be negative for the ratings. Prolonged Economic Downturn: Severe economic and asset-quality weakness, leading to capital impairment risk, would be negative for the credit profile, but Singapore’s history of timely counter-cyclical action, and the bank’s steady asset-quality track record, mitigates this risk. DBSH’s Ratings: Greater holding company balance-sheet complexity, significantly higher double leverage, or global developments reducing support for bank holding companies relative to their subsidiary banks, may lead to a divergence between the ratings of DBS and DBSH.




Credit View

RATING AGENCIES' COMMENTS – DBS BANK LTD. COVERED BONDS

Agency Comment Moody's 19 June 2015

Moody’s assigned a provisional (P)Aaa long-term rating to the mortgage covered bonds (CB) to be issued by DBS Bank Ltd. (the issuer, counterparty risk assessment Aa1(cr), foreign currency senior unsecured Aa1, stable) under the USD10bn Global Covered Bond Program. The covered bonds will be issued in accordance with Notice 648 of the Monetary Authority of Singapore (MAS) on the issuance of covered bonds by banks incorporated in Singapore. Rating rationale: A covered bond benefits from (1) the issuer's promise to pay interest and principal on the bonds; and (2) following a CB anchor event, the economic benefit of a collateral pool (the cover pool). The rating therefore reflects the following factors: (1) The credit strength of the issuer and a CB anchor of the counterparty risk assessment plus zero notches. (2) Following a CB anchor event, the value of the cover pool. The stressed level of losses on the cover pool assets -- following a CB anchor event (cover pool losses) -- for this transaction is 31.7%. Moody's considered the following factors in its analysis of the cover pool's value: a) The credit quality of the assets backing the covered bonds. The mortgage covered bonds are backed by Singaporean residential mortgage loans. The collateral score for the cover pool is 7.5%. b) The Singaporean legal framework for covered bonds. Notable aspects of Notice 648 include: (i) It allows a special purpose vehicle (SPV) to own the cover pool assets, and requires legal opinion to confirm the segregation of cover pool assets when the issuer becomes insolvent. (ii) The cover pool can consist of only loans secured by private residential properties, interest held by the bank as trustee for the SPV in relation to such loans, cash, Singapore government securities and MAS bills to be included in the cover pool. Assets which are typically of higher credit risk, such as commercial mortgage loans, are not allowed. (iii) An independent cover pool monitor is responsible for monitoring the cover pool on an ongoing basis and observing compliance with the key aspects of Notice 648. c) The transaction's structural features that aim to mitigate various risks. The features are: (i) A 12-month pre-maturity test or maturity extension, which aims to mitigate refinancing risk. (ii) A liquidity reserve to be funded by the issuer upon breaching the rating trigger. d) The exposure to market risk, which is 26.7% for this cover pool. The main components are the exchange rate risk and the refinancing risk. e) The over-collateralisation (OC) in the cover pool is 17% on a "committed" basis. The TPI assigned to this transaction is "Improbable", and Moody's TPI framework does not constrain the rating. We have assigned a timely payment indicator (TPI) of "Improbable" to this transaction. Based on both the strength of the legal framework and the structural mechanisms implemented, we believe that refinancing and operational risks are to some extent mitigated. Nevertheless, the refinancing risk of the program is still higher than that in other developed covered bond markets because of the lack of a liquid secondary mortgage loan market in Singapore and the legal requirements related to the declaration of trust structure being employed for a large portion of the mortgage loans. Thus, it is less likely that timely payments to covered bondholders would continue following a CB anchor event. As of the pool cut-off date on 9 May 2015, the total current aggregate loan balance of the cover pool was approximately SGD790million, comprising 5,988 private residential mortgage loans. The residential mortgage loans have a weighted-average (WA) seasoning of 47.2 months, a WA remaining term of 286.9 months and a WA loan-to-value (LTV) ratio of 59.46%, based on property values as of loan origination. The provisional rating that Moody's has assigned addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Key assumptions/factors: Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis. Expected loss: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines expected loss as (1) a function of the probability that the issuer will cease making payments under the covered bonds (a CB anchor event); and (2) the stressed losses on the cover pool assets following a CB anchor event. The cover pool losses for this program are 31.7%. This is an estimate of the losses Moody's currently models following a CB anchor event. Moody's splits cover pool losses between market risk of 26.7% and collateral risk of 5%. Market risk measures losses stemming from refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks, such as set-off and commingling risks). Collateral risk is derived from the collateral score, which measures losses resulting directly from the cover pool assets' credit quality. On the closing date, the issuer will commit to provide an OC of 17%. The minimum OC level consistent with the Aaa rating target is 5%. Subject to certain requirements, the issuer can change this OC commitment so long as the revised OC commitment is consistent with the current Moody's rating of the covered bonds. Such flexibility will be reduced once the covered bonds have been downgraded. All numbers in this section are based on Moody's most recent modelling (based on data, as of 9 May 2015. TPI framework: Moody's assigns a "timely payment indicator" (TPI), which measures the likelihood of timely payments to covered bondholders following a CB anchor event. The TPI framework limits the covered bond rating to a certain number of notches above the CB anchor. Factors that would lead to an upgrade or downgrade: A multiple-notch downgrade of the covered bonds might occur in certain circumstances, such as (1) a country ceiling or sovereign downgrade capping a covered bond rating or negatively affecting both the CB anchor and the TPI; (2) a multiple-notch downgrade of the CB anchor; or (3) a material reduction of the value of the cover pool. The CB anchor is the main determinant of a covered bond program's rating robustness. A change in the level of the CB anchor could lead to an upgrade or downgrade of the covered bonds. Based on the current TPI of "Improbable", the TPI Leeway for this program is 3 notches. The TPI Leeway measures the number of notches by which Moody's might lower the CB anchor before the rating agency downgrades the covered bonds because of TPI framework constraints. This implies that Moody's might downgrade the covered bonds because of a TPI cap if it lowers the issuer's CB anchor by more than 3 notches, all other variables being equal.

Fitch 19 June 2015

Fitch has assigned a 'AAA(EXP)' rating with Stable Outlook to DBS Bank Ltd.'s (DBS; AA-/Stable) inaugural series of mortgage covered bonds to be issued from its program, which complies with the requirements under the Monetary Authority of Singapore's Notice 648. Under this program, DBS can periodically issue up to USD10bn of bonds, which are secured by a dynamic pool of Singapore residential mortgage loans. Key drivers: The 'AAA(EXP)' rating is based on DBS's Long-Term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3; and the asset percentage (AP) to be disclosed in the issuer's investor report, which is expected to be equal to or lower than Fitch's breakeven AP for a 'AA+' rating of 85.5%. The Outlook on the covered bonds reflects the Stable Outlook on DBS's IDR. The D-Cap of '3' reflects Fitch's "moderate high" discontinuity risk assessment related to the liquidity gap and systemic risk, systemic alternative management, and the cover pool-specific alternative management components. In a scenario where the recourse of the covered bonds switches from the issuer to the cover pool, Fitch believes that a successful sale of the cover assets would be possible within the extendible maturity of 12 months expected for a soft bullet issuance or within the 12-month pre-maturity test for a hard bullet issuance, which is envisaged in the documentation to make timely payments on the covered bonds. The liquidity gap and systemic risk assessment also reflects that Singapore is a nascent covered bond market. The systemic alternative management assessment addresses the significant roles performed post issuer default by the covered bond guarantor, or third parties acting on its behalf. The cover-pool specific alternative management assessment addresses both the quality and quantity of the data provided by the issuer and its IT systems. The 'AAA' breakeven AP of 85.5%, corresponding to a breakeven overcollateralization (OC) of 17%, is driven by the asset disposal loss of 19.1%, reflecting the maturity mismatches in the program upon issuance and the refinancing assumptions applied to Singaporean residential mortgages. This is followed by, the cover pool's credit loss of 4.2% in a 'AAA' scenario and finally the cash flow valuation component, which reduces the OC by 4.9% due to the excess spread under the program based on a stressed weighted average (WA) life of the assets versus the liabilities expected to be issued from the program. The breakeven AP considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario. As at 9 May 2015, the cover pool consisted of 5,988 prime Singapore private residential mortgage loans equating to SGD4.7bn. The portfolio has a WA loan to value ratio (LVR) of 58.4% and is 47 months seasoned. By current balance, 37.8% of the loans in the pool are for investment purposes and 35.7% of the loans are held by non-Singaporeans (including borrowers with permanent residency and borrowers holding Singapore employment passes). The cover pool comprises loans secured by condominiums (79.5%), detached houses and other landed properties (6.9%), terrace houses (7.3%) and apartments (6.2%). In a deviation from its APAC Residential Mortgage Criteria, the agency used a delinquency multiple of 2x on the WA frequency of foreclosure at the tested rating on a probability of default basis. In its cash flow modelling of the asset cash flows, this multiple stresses the level of loans falling delinquent in the cover pool over a period of time, curing thereafter. Expected rating sensitivities: The 'AAA(EXP)' rating would be vulnerable to downgrade if any of the following occurred: (i) DBS's IDR was downgraded by three notches to 'A-'; (ii) the D-Cap fell by three categories to 0 (full discontinuity); or (iii) the AP that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 85.5%. Fitch's 'AAA' breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the 'AAA' breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.



Credit View

UniCredit Research page 21

Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. This report may contain links to websites of third parties, the content of which is not controlled by UniCredit Bank. No liability is assumed for the content of these third-party websites. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. This analysis is for information purposes only and (i) does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe for any financial, money market or investment instrument or any security nor (iii) as an advertisement thereof. The investment possibilities discussed in this report may not be suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their entirety. This information is given without any warranty on an "as is" basis and should not be regarded as a substitute for obtaining individual advice. Investors must make their own determination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal, fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Investors are urged to contact their bank's investment advisor for individual explanations and advice. Neither UniCredit Bank nor any of their respective directors, officers or employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on this publication, and may not be redistributed, reproduced or published in whole or in part for any purpose. Responsibility for the content of this publication lies with: UniCredit Group and its subsidiaries are subject to regulation by the European Central Bank a) UniCredit Bank AG (UniCredit Bank), Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to UniCredit Group. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. b) UniCredit Bank AG London Branch (UniCredit Bank London), Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom and Prudential Regulation Authority 20 Moorgate, London, EC2R 6DA, United Kingdom. Further details regarding our regulatory status are available on request. c) UniCredit Bank AG Hong Kong Branch (UniCredit Bank Hong Kong), 25/F Man Yee Building, 68 Des Voeux Road Central, Hong Kong. Regulatory authority: Hong Kong Monetary Authority, 55th Floor, Two International Financial Centre, 8 Finance Street, Central, Hong Kong d) UniCredit Bank AG Singapore Branch (UniCredit Bank Singapore), Prudential Tower, 30 Cecil Street, #25-01, Singapore 049712 Regulatory authority: Monetary Authority of Singapore, 10 Shenton Way MAS Building, Singapore 079117 e) UniCredit Bank AG Tokyo Branch (UniCredit Tokyo), Otemachi 1st Square East Tower 18/F, 1-5-1 Otemachi, Chiyoda-ku, 100-0004 Tokyo, Japan Regulatory authority: Financial Services Agency, The Japanese Government, 3-2-1 Kasumigaseki Chiyoda-ku Tokyo, 100-8967 Japan, The Central Common Government Offices No. 7.

POTENTIAL CONFLICTS OF INTERESTS – Key 1a: UniCredit Bank AG and/or any related legal person owns at least 2% of the capital stock of the analyzed company. Key 1b: The analyzed company owns at least 2% of the capital stock of UniCredit Bank AG and/or any related legal person. Key 2: UniCredit Bank AG and/or any related legal person has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of financial instruments of the analyzed company, or in any related derivatives. Key 3: UniCredit Bank AG and/or any related legal person administers the securities issued by the analyzed company on the stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives). Key 5: The analyzed company and UniCredit Bank AG and/or any related legal person have concluded an agreement on the preparation of analyses. Key 6a: Employees or members of the Board of Directors of UniCredit Bank AG and/or any other employee that works for UniCredit Research (i.e. the joint research department of the UniCredit Group) and/or members of the Group Board (pursuant to relevant domestic law) are members of the Board of Directors of the analyzed company. Members of the Board of Directors of the analyzed company hold office in the Board of Directors of UniCredit Bank AG (pursuant to relevant domestic law). The application of this Key 6a is limited to persons who, although not involved in the preparation of the analysis, had or could reasonably be expected to have access to the analysis prior to its dissemination to customers or the public. Key 6b: The analyst is on the Supervisory Board/Board of Directors of the company they cover.

RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY Company Date Rec. Company Date Rec. Company Date Rec. – – – – – – – – – Overview of our ratings You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our website www.disclaimer.unicreditmib.eu/credit-research-rd/Recommendations_CR_e.pdf. Note on the evaluation basis for interest-bearing securities: Recommendations relative to an index: For high grade names the recommendations are relative to the "iBoxx EUR Benchmark" index family, for sub investment grade names the recommendations are relative to the "iBoxx EUR High Yield" index family. Marketweight: We recommend having the same portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is equal to the total return of the index. Overweight: We recommend having a higher portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is greater than the total return of the index. Underweight: We recommend having a lower portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is less than the total return of the index. Outright recommendations: Hold: We recommend holding the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is equal to the yield. Buy: We recommend buying the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is greater than the yield. Sell: We recommend selling the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is less than the yield. We employ three further categorizations for interest-bearing securities in our coverage: Restricted: A recommendation and/or financial forecast is not disclosed owing to compliance or other regulatory considerations such as a blackout period or a conflict of interest.


Credit View


Coverage in transition: Due to changes in the research team, the disclosure of a recommendation and/or financial information are temporarily suspended. The interest-bearing security remains in the research universe and disclosures of relevant information will be resumed in due course. Not rated: Suspension of coverage. Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short period or to a 6 to 9-month horizon. Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions. If not otherwise stated daily price data refers to pre-day closing levels and iBoxx bond index characteristics refer to the previous month-end index characteristics. Coverage Policy A list of the companies covered by UniCredit Bank is available upon request. Frequency of reports and updates It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation.

SIGNIFICANT FINANCIAL INTEREST UniCredit Bank AG and/or other related legal persons with them regularly trade shares of the analyzed company. UniCredit Bank AG and/or other related legal persons may hold significant open derivative positions on the stocks of the company which are not delta-neutral. UniCredit Bank AG and/or other related legal persons have a significant financial interest relating to the analyzed company or may have such at any future point of time. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled, subject to applicable law, to perform such actions at any future point in time which may lead to the existence of a significant financial interest, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact perform such actions which may lead to the existence of a significant financial interest relating to the analyzed company. Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed companies have actively supplied information for this analysis.

INVESTMENT BANKING TRANSACTIONS The analyzed company and UniCredit Bank AG and/or any related legal person concluded an agreement on services in connection with investment banking transactions in the previous 12 months, in return for which the Bank and/or such related legal person received a consideration or promise of consideration or intends to do so. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled to conclude, subject to applicable law, an agreement on services in connection with investment banking transactions with the analyzed company at any future point in time and may receive a consideration or promise of consideration, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact conclude such agreements and will in fact receive such consideration or promise of consideration.

ANALYST DECLARATION The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.

ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, UniCredit Bank has established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of securities to clients.

ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED You will find a list of further additional required disclosures under the laws and regulations of the jurisdictions indicated on our website www.cib-unicredit.com/research-disclaimer. Notice to Austrian investors: This analysis is only for distribution to professional clients (Professionelle Kunden) as defined in article 58 of the Securities Supervision Act. Notice to investors in Bosnia and Herzegovina: This report is intended only for clients of UniCredit in Bosnia and Herzegovina who are institutional investors (Institucionalni investitori) in accordance with Article 2 of the Law on Securities Market of the Federation of Bosnia and Herzegovina and Article 2 of the Law on Securities Markets of the Republic of Srpska, respectively, and may not be used by or distributed to any other person. This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Brazilian investors: The individual analyst(s) responsible for issuing this report represent(s) that: (a) the recommendations herein reflect exclusively the personal views of the analysts and have been prepared in an independent manner, including in relation to UniCredit Group; and (b) except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest” above, the analysts are not in a position that may impact on the impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the analysts do not have a relationship of any nature with any person who works for any of the companies that are the object of this report; (ii) the analysts and their respective spouses or partners do not hold, either directly or indirectly, on their behalf or for the account of third parties, securities issued by any of the companies that are the object of this report; (iii) the analysts and their respective spouses or partners are not involved, directly or indirectly, in the acquisition, sale and/or trading in the market of the securities issued by any of the companies that are the object of this report; (iv) the analysts and their respective spouses or partners do not have any financial interest in the companies that are the object of this report; and (v) the compensation of the analysts is not, directly or indirectly, affected by UniCredit’s revenues arising out of its businesses and financial transactions. UniCredit represents that: except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest” above, UniCredit, its controlled companies, controlling companies or companies under common control (the “UniCredit Group”) are not in a condition that may impact on the impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the UniCredit Group does not hold material equity interests in the companies that are the object of this report; (ii) the companies that are the object of this report do not hold material equity interests in the UniCredit Group; (iii) the UniCredit Group does not have material financial or commercial interests in the companies or the securities that are the object of this report; (iv) the UniCredit Group is not involved in the acquisition, sale and/or trading of the securities that are the object of this report; and (v) the UniCredit Group does not receive compensation for services rendered to the companies that are the object of this report or to any related parties of such companies. Notice to Canadian investors: This communication has been prepared by UniCredit Bank AG, which does not have a registered business presence in Canada. This communication is a general discussion of the merits and risks of a security or securities only, and is not in any way meant to be tailored to the needs and circumstances of any recipient. The contents of this communication are for information purposes only, therefore should not be construed as advice and do not constitute an offer to sell, nor a solicitation to buy any securities. Notice to Cyprus investors: This document is directed only at clients of UniCredit Bank who are persons falling within the Second Appendix (Section 2, Professional Clients) of the law for the Provision of Investment Services, the Exercise of Investment Activities, the Operation of Regulated Markets and other Related Matters, Law 144(I)/2007 and persons to whom it may otherwise lawfully be communicated who possess the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that they incur (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons or relevant persons who have requested to be treated as retail clients. Any investment or investment activity to which this communication related is available only to relevant persons and will be engaged in only with relevant persons. This document does not constitute an offer or solicitation to any person to whom it is unlawful to make such an offer or solicitation. Notice to Hong Kong investors: This report is for distribution only to “professional investors” within the meaning of Schedule 1 to the Securities and Futures Ordinance (Chapter 571, Laws of Hong Kong) and any rules made thereunder, and may not be reproduced, or used by or further distributed to any other person, in whole or in part, for any purpose. This report does not constitute or form part of an offer or solicitation of any offer to buy or sell any securities, nor should it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. By accepting this report, the recipient represents and warrants that it is entitled to receive such report in accordance with, and on the basis of, the restrictions set out in this “Disclaimer” section, and agrees to be bound by those restrictions. Notice to investors in Ivory Coast: The information contained in the present report have been obtained by Unicredit Bank AG from sources believed to be reliable, however, no express or implied representation or warranty is made by Unicredit Bank AG or any other person as to the completeness or accuracy of such information. All opinions and estimates contained in the present report constitute a judgement of Unicredit Bank AG as of the date of the present report and are subject to change without notice. They are provided in good faith but without assuming legal responsibility. This report is not an offer to sell or solicitation of an offer to buy or invest in securities. Past performance is not an


Credit View


indicator of future performance and future returns cannot be guaranteed, and there is a risk of loss of the initial capital invested. No matter contained in this document may be reproduced or copied by any means without the prior consent of Unicredit Bank AG. Notice to New Zealand investors: This report is intended for distribution only to persons who are “wholesale clients” within the meaning of the Financial Advisers Act 2008 (“FAA”) and by receiving this report you represent and agree that (i) you are a “wholesale client” under the FAA (ii) you will not distribute this report to any other person, including (in particular) any person who is not a “wholesale client” under the FAA. This report does not constitute or form part of, in relation to any of the securities or products covered by this report, either (i) an offer of securities for subscription or sale under the Securities Act 1978 or (ii) an offer of financial products for issue or sale under the Financial Markets Conduct Act 2013. Notice to Omani investors: This communication has been prepared by UniCredit Bank AG. UniCredit Bank AG does not have a registered business presence in Oman and does not undertake banking business or provide financial services in Oman and no advice in relation to, or subscription for, any securities, products or financial services may or will be consummated within Oman. The contents of this communication are for the information purposes of sophisticated clients, who are aware of the risks associated with investments in foreign securities and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy non-Omani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). This communication has not been approved by and UniCredit Bank AG is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. Notice to Pakistani investors: Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities as defined in sub-section I, Section 2 of the Securities and Exchange Ordinance, 1969 of Pakistan. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. The distribution of this report is intended only for informational purposes for the use of professional investors and the information and opinions contained herein, or any part of it shall not form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Polish Investors: This document is intended solely for professional clients as defined in Art. 3.39b of the Trading in Financial Instruments Act of 29 July 2005 (as amended). The publisher and distributor of the document certifies that it has acted with due care and diligence in preparing it, however, assumes no liability for its completeness and accuracy. This document is not an advertisement. It should not be used in substitution for the exercise of independent judgment. Notice to Serbian investors: This analysis is only for distribution to professional clients (profesionalni klijenti) as defined in article 172 of the Law on Capital Markets. Notice to UK investors: This communication is directed only at clients of UniCredit Bank who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. CR e 9


Credit View


UniCredit Research* Erik F. Nielsen Group Chief Economist Global Head of CIB Research +44 207 826-1765 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Credit Research

Luis Maglanoc, CFA, Head +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit Research

Dr. Philip Gisdakis, Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Christian Weber, CFA, Deputy Head Credit Strategy +49 89 378-12250 [email protected]

Dr. Tim Brunne Quantitative Credit Strategy +49 89 378-13521 [email protected]

Holger Kapitza Credit Strategy & Structured Credit +49 89 378-28745 [email protected]

Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Manuel Trojovsky Credit Strategy & Structured Credit +49 89 378-14145 [email protected]

Financials Credit Research

Franz Rudolf, CEFA, Head Covered Bonds +49 89 378-12449 [email protected]

Dr. Tilo Höpker Banks +49 89 378-12960 [email protected]

Luis Maglanoc, CFA Regulatory & Accounting Service +49 89 378-12708 [email protected]

Natalie Tehrani Monfared Regulatory & Accounting Service +49 89 378-12242 [email protected]

Dr. Michael Teig Banks +49 89 378-12429 [email protected]

Emanuel Teuber Covered Bonds +49 89 378-12961 [email protected]

Robert Vielhaber Sub-Sovereigns & Agencies, Green Bonds +49 89 378-12004 [email protected]

Dr. Martina von Terzi Banks, Financial Services, Insurance +49 89 378-14245 [email protected]

Corporate Credit Research

Stephan Haber, CFA, Co-Head Telecoms, Technology +49 89 378-15192 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head Automotive & Mobility +49 89 378-13246 [email protected]

Christian Aust, CFA Industrials +49 89 378-12806 [email protected]

Mehmet Dere Oil & Gas, EEMEA Energy, Consumer +49 89 378-11294 [email protected]

Michael Gerstner Utilities, Hybrids +49 89 378-15449 [email protected]

Jonathan Schroer, CFA Media/Cable, Logistics, Business Services +49 89 378-13212 [email protected]

Dr. Silke Stegemann, CEFA Health Care & Pharma, Food & Beverage, Personal & Household Goods +49 89 378-18202 [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich [email protected]

Bloomberg UCCR Internet www.research.unicredit.eu

*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), UniCredit Bank New York (UniCredit Bank NY), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania. CR 24

dbs bank ltd. covered bonds

Documents