Singapore Banks - Higher capital ratios above Basel III required; rules kick in earlier (DBSVickers)

The Monetary Authority of Singapore (MAS) announced that the Singapore-incorporated banks will soon have to hold more capital, exceeding those required under Basel III. The requirements will apply to every bank incorporated in Singapore with a Full Bank licence, and its locally-incorporated bank subsidiaries. The requirements will apply at both bank-group and banksolo levels.

Currently, the Singapore banks are required to hold a minimum Tier-1 CAR of 6% and Total CAR of 10%, above the current Basel requirements of 4% and 8% respectively. There are no minimum requirements for core equity Tier-1 CAR.

The new MAS capital requirements, which are stricter than Basel III requires a minimum Core Equity Tier-1 CAR of 4.5% from 1 Jan 2013, two years ahead of Basel Committee’s 2015 timeline. MAS will raise the minimum core equity Tier-1 CAR to 6.5% by 2015 (Basel Committee only requires 4.5% from 2015 with a phase-in period starting from 3.5% from 1 Jan 2013).

MAS will also bring the minimum Tier-1 CAR to 8% from 1 Jan 2015 (from 6% currently; Basel Committee requires minimum Tier-1 CAR of 6% from 4% by 2015).

Total CAR required by MAS will remain at 10% (Basel Committee’s Total CAR remains at 8%).

MAS will also introduce a capital conservation buffer of 2.5% above Core Equity Tier-1 CAR, in line with Basel III requirements. This will be phased in from 2016 to 2019. Taking into account the capital conservation buffer, the banks will have to maintain a Core Equity Tier-1 CAR of at least 9%, above the Basel III requirement of 7%. In addition, a countercyclical capital buffer within a range of 0% to 2.5%, comprising of Core Equity Tier-1 CAR, may be implemented according to national circumstances to address a build-up of system-wide risk associated with excessive aggregate credit growth. Under Basel III, national authorities should have in place a countercyclical capital framework by 1 January 2016. National authorities will have discretion to make decisions on the triggers to and size of the countercyclical capital buffer. MAS will be developing a countercyclical capital framework, in accordance with the Basel Committee’s guidance on its design.

Implications: Looking at current capital levels as at 1Q11, the Singapore banks should not have any issue meeting these requirements. We do not expect the banks to raise additional capital, undertake any rights issue or cut dividends. Singapore banks’ capital ratios are currently the strongest compared to ASEAN peers.

Valuation and recommendation: Singapore banks remain top buys among our ASEAN bank picks and still offer the best risk-reward option with robust asset quality and strongest capital ratios. We prefer OCBC (Buy, TP S$11.30) over UOB (Buy, TP S$21.70) as we believe its strategy to focus on non-interest income levers will ensure strong earnings growth which are less capital intensive.