DBS Bank Ltd. covered bonds

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1 DBS Bank Ltd. covered bonds This was originally published on 2 July The content was not updated. 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/AAs) 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. 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 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 ringfenced 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 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. Authors Franz Rudolf, CEFA (UniCredit Bank) franz.rudolf@unicreditgroup.de Dr. Tilo Höpker (UniCredit Bank) tilo.hoepker@unicredit.de Bloomberg UCCR Internet UniCredit Research page 1 See last pages for disclaimer.

2 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 Singapore , , ,182.5 East Asia & Pacific , , ,116.2 European Union , , ,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 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 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) Current USD 60,000 50,000 40,000 30,000 20,000 Growth Rate (RS) GDP Per Capita (LS) 25% 20% 15% 10% 5% Other Services 17.8% Ownership of Dwellings 4.6% Manufacturing, Construction & Utilities 24.9% 10, % -5% Finance, Insurance & Business Services 28.3% Trading & Transport 24.4% Source: Department of Statistics Singapore, UniCredit Research UniCredit Research page 2 See last pages for disclaimer.

3 Labor market Housing 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 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). 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 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 LABOR MARKET DEVELOPMENT REAL ESTATE PRICE DEVELOPMENT 4.0 Unemployment Rate Labor Force Participation Rate Core Central Region Rest of Central Region Outside Central Region Unemployment Rate (%) Participation Rate (%) IPrice ndex (1Q09 = 100) Q/2011 1Q/2012 2Q/2012 3Q/2012 4Q/2012 1Q/2013 2Q/2013 3Q/2013 4Q/2013 1Q/2014 2Q/2014 3Q/2014 4Q/2014 1Q/2015 Source: Statistical Office of Singapore, UniCredit Research UniCredit Research page 3 See last pages for disclaimer.

4 DBS Bank profile Key characteristics Ratings: Aa1s/AA-s/ AA-s Bloomberg: 1471Z SP Bond ticker: DBSSP 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 Market-leading franchise in Singapore in SGD deposits and well-established franchise in consumer and corporate banking Strong capital, funding and asset quality profile, with profitability benefiting from a substantial proportion of fee income Management team's proven record Weaknesses/Threats Exposure to rising economic and credit risk due to expansion in emerging Asian markets Operations in a saturated and competitive domestic market 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. UniCredit Research page 4 See last pages for disclaimer.

5 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) 12,000 8,000 12,000 6,000 10,000 7,000 10,000 5,000 6,000 8,000 5,000 8,000 4,000 S$ mn 6,000 4,000 4,000 3,000 S$ mn 6,000 4,000 3,000 2,000 2,000 2,000 1,000 2,000 1,000 0 Consumer Banking / Wealth Mgmt. Institutional Banking Treasury Others Total Total income 2,882 4,967 1, ,817 Profit before Tax 876 2, , Singapore Hong Kong Rest of Greater China South and South- East Asia Rest of the World Total Total income 6,149 1, ,817 Profit before Tax 3,399 1, ,906 0 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 3.0 DBS OCBC UOB Other (123) 33% DBS Bank 28% % UOB Bank 18% OCBC 21% Source: Moody s, Bankscope, UniCredit Research UniCredit Research page 5 See last pages for disclaimer.

6 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. UniCredit Research page 6 See last pages for disclaimer.

7 P&L HIGHLIGHTS DBS Group Holdings Ltd. DBS Bank Ltd. Quarterly ending (SGD mn) 1Q14 1Q15 yoy yoy Net interest revenue 1,488 1, % 5,652 6, % Net fees & commissions % 1,885 2, % Trading income % 1,288 1, % Other operating income % % Total revenues 2,464 2, % 9,133 9, % Operating expenses 1,041 1, % 3,911 4, % Loan-loss provisions % % Operating profit 1,272 1,514 19% 4,451 4, % Pretax profit 1,470 1,514 3% 4,496 4, % Attributable net profit 1,231 1, % 3,793 4,098 8% B/S HIGHLIGHTS Quarterly ending (SGD mn) DBS Group Holdings Ltd. DBS Bank Ltd. 1Q14 1Q15 yoy yoy Total assets 418, ,647 9% 402, , % Risk-weighted assets 246, , % n.a. n.a. n.m. Total equity 34,879 38, % 292, , % KEY RATIOS DBS Group Holdings Ltd. DBS Bank Ltd. Quarterly ending (%) 1Q15 1Q14 yoy yoy Net interest margin % % Cost/income ratio % % Return on average equity % % Loans/deposits % % NPL ratio % % NPL coverage % % Tier-1 ratio % n.a. n.a. n.m. Total capital ratio % n.a. n.a. n.m. Leverage Ratio n.a n.m % Source: BankScope, UniCredit Research UniCredit Research page 7 See last pages for disclaimer.

8 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 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 UniCredit Research page 8 See last pages for disclaimer.

9 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 DBS Bank Ltd. Seller Declaration of asset trust Sale of mortgages (via equitable assignment) Covered Bond Guarantee DBS Bank Ltd. Asset trustee Contribution to / beneficial interest in asset trust Bayfront Covered Bonds Pte. Ltd. Covered Bond Guarantor (CBG) Intercompany loans DBS Bank Ltd. Issuer Covered Bond proceeds Repayment of Intercompany loans Covered Bonds Covered Bond holders/ Bond Trustee DBS Bank Ltd. Interest rate swap provider DBS Bank Ltd. Covered Bond swap provider The Bank of New York Mellon, Singapore Branch Security Trustee Deeds of charge Swaps Source: DBS, Fitch, UniCredit Research Asset segregation via SPV or declaration of asset trust Central Provident Fund (CPF) 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. 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. UniCredit Research page 9 See last pages for disclaimer.

10 Well-seasoned cover pool Condominiums as the dominant property type Current LTV of 58.4% 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. 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). 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 COVER POOL DETAILS (AS OF MAY 2015) By property type By interest rate type 90% 80% 70% 60% 50% 40% 30% 80% Fixed rate 10% 20% 10% 0% 6% Apartment Condominium House/Other landed properties 7% 7% Terrace Floating rate 90% By use By loan type Investment 38% Owner occupied 62% Fully amortizing, 100% Source: DBS, Fitch, UniCredit Research UniCredit Research page 10 See last pages for disclaimer.

11 COVER POOL DETAILS (AS OF APRIL 2015) By LTV-distribution 40% 35% 30% 25% 20% By loan amount 50% 40% 30% 20% 15% 10% 10% 5% 0% 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% >80% LTV 0% Up to 500k 500k-1mn 1mn-1.5mn 1.5mn-2mn 2mn-2.5mn 2.5mn-3mn 3mn-3.5mn 3.5mn-4mn >4mn By year of origination 30% By seasoning 40% 25% 20% 30% 15% 20% 10% 5% 10% 0% % <1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y >7Y Source: DBS, Fitch, UniCredit Research AAA rating by Fitch with high rating stability 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. 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. UniCredit Research page 11 See last pages for disclaimer.

12 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 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 Covered bonds to be exempt from bail-in in Singapore 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. 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 nonsubordinated 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. UniCredit Research page 12 See last pages for disclaimer.

13 Singapore s banking sector Overview Business segments Operating conditions Support Stress tests 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. 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%. 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. 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. Financial institutions are put through stress tests annually by the MAS 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. UniCredit Research page 13 See last pages for disclaimer.

14 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, , % 1, , % 1, , % Net fees & commissions % % % Trading income % % % Other operating income % % % Total revenues 2, , % 1, , % 1, , % Operating expenses 1, , % % % Loan-loss provisions % % % Operating profit 1, , % % 1, , % Pretax profit 1, , % % 1, , % Attributable net profit 1, , % % % 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, , % 295, , % 343, , % Risk-weighted assets 246, , % 161, , % 157, , % Total equity 34, , % 25, , % 25, , % 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 % % % Cost/income ratio % % % Return on average equity % % % Loans/deposits % % % NPL ratio % % % NPL coverage % % % Tier-1 ratio % % % Total capital ratio % % % Leverage Ratio n.a n.m. n.a n.m. n.a n.m. Source: Bankscope, UniCredit Research UniCredit Research page 14 See last pages for disclaimer.

15 Singapore s banking regulation The Monetary Authority of Singapore (MAS) Capital requirements Liquidity requirements (MAS Notice 649) MAS s mortgage policies 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. The MAS has required Singapore-incorporated banks to fulfill the full Basel III capital standards since January 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. 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 Furthermore, banks must reach an all-currency LCR of100% by In order to achieve this, the bank has to increase its all-currency LCR by 10 percentage points each year, from 60% in 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 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 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. UniCredit Research page 15 See last pages for disclaimer.

16 TDSR Framework Bail-in legislation 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 65 th birthday. For certain real estate directly purchased from property developers, the MAS introduced a mortgage servicing ratio of 30%. In late June 2015, MAS proposed to enhance its resolution regime for financial institutions in Singapore. More specifically, MAS proposed, in its consultation paper P 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. UniCredit Research page 16 See last pages for disclaimer.

17 Number crunching DBS Bank Ltd. P&L HIGHLIGHTS Year ending (EUR million) 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 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, 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 Source: Bankscope, UniCredit Research B/S HIGHLIGHTS Year ending (EUR million) 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, , , , , ,588 Other Assets 6,032 6,400 9,751 8,673 8,742 11,019 Total Assets 258, , , , , ,667 Risk-weighted assets n.a. n.a. n.a. n.a. n.a. n.a. Total Customer Deposits 183, , , , , ,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, , , , , ,667 Source: Bankscope, UniCredit Research KEY RATIOS Key ratios - Figures in % Net Interest Margin Cost to Income Ratio Return on Average Assets (ROAA) Return on Average Equity (ROAE) Interbank Ratio Loans / Customer Deposits Net Loans / Total Assets Liquid Assets / Dep & ST Funding Loan Loss Reserve / Gross Loans Impaired Loans (NPLs) / Gross Loans Reserves for Impaired Loans / Impaired Loans 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. Source: Bankscope, UniCredit Research UniCredit Research page 17 See last pages for disclaimer.

18 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 Fitch AAA AA- F1+ Stable -- 1/A- Source: rating agencies, UniCredit Research RATING AGENCIES' COMMENTS DBS BANK LTD. Agency Moody's 29 June 2015 Comment 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 , and more recently in the global financial crisis in 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 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 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 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 In addition, while the banks increased their short-term USD borrowings in 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 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' - Wellestablished 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 Source: rating agencies, UniCredit Research UniCredit Research page 18 See last pages for disclaimer.