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DBS Bank (China) Limited -- Moody's affirms A1/P-1 deposit rating of DBS Bank (China) Limited; outlook stable

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Rating Action: Moody's affirms A1/P-1 deposit rating of DBS Bank (China) Limited; outlook stable

Global Credit Research - 17 Dec 2020

Hong Kong, December 17, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the long-term A1 deposit rating of DBS Bank (China) Limited (DBS China). Moody's has also affirmed the bank's Baseline Credit Assessment (BCA) of baa3 and adjusted BCA of a1. The rating outlook remains stable.

A list of all affected ratings and assessments is provided at the end of this press release.

RATINGS RATIONALE

The affirmation of DBS China's ratings with a stable outlook reflects the stability of the bank's financial profile. The bank's capitalization and liquidity have been steady in recent periods and Moody's expects these metrics to be broadly maintained going forward.

On the other hand, new formation of nonperforming loans (NPLs) caused by the slow economic growth following the coronavirus pandemic and structural adjustment of the Chinese economy remains a risk to DBS China's asset quality, which in turn could hurt its profitability.

DBS China has consistently maintained strong capitalization. The bank's Common Equity Tier 1 ratio was 12.6% as of 30 June 2020. Moody's expects the bank's capital ratio will decline slightly but remain sound, amid stronger risk-weighted asset growth compared to its capability for internal capital generation. Strong commitment from DBS Bank Ltd. (DBS Bank, Aa1 stable, BCA a1), which fully owns DBS China, will help it maintain its capital levels.

The bank has adequate liquid resources, which are enough to cover its market funds. It also has good access to group funding and strong relationships with large Singapore corporates, serving their banking needs across the globe, which partially mitigate concerns over its limited franchise.

Moody's expects that the bank's NPL ratio will likely increase from a low base. Its loans to large and medium-sized enterprises increase its credit concentration, which could expose it to large and lumpy losses if those borrowers' financial conditions deteriorate materially. The bank's asset risk and profitability will be challenged from the recent default of Huachen Automotive Group Holdings (Huachen), the parent of German automaker BMW's Chinese joint venture partner. The bank's lending to Huachen was RMB779 million. This is partly mitigated by the strong buffers the bank has built up. Loan loss reserves covered 360% of nonperforming loans as of end-2019.

In addition, DBS China's profitability will stay modest compared with the system's average because of the bank's heavy reliance on net interest income, higher funding costs than its Chinese peers and high operating costs. Its return on average assets was at 0.57% in 2019.

DBS China's rating is based on China's Moderate+ Banking System Macro Profile. DBS China's BCA is baa3. The bank's adjusted BCA is a1, which incorporates five notches of affiliate support uplift, taking into account a very high level of affiliate support from DBS Bank. DBS China is strategically important to DBS Bank, and is well integrated with the group, serving the banking needs of the group's customers in China. Its customers include multi-national clients, Chinese state-owned enterprises and relatively large private firms.

China does not have an operational bank resolution regime. Therefore, Moody's applies a basic Loss Given Failure approach in rating Chinese banks. The Preliminary Rating Assessment on DBS China's deposits is at the same level as the bank's adjusted BCA. Because of its small market share in China, Moody's does not factor in any government support from the Government of China (A1 stable) in DBS China's A1 deposit ratings. As a result, its counterparty risk rating and counterparty risk assessment are uplifted by one notch to Aa3 and Aa3(cr) respectively.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade on DBS China's deposit rating is unlikely, given that DBS Bank's a1 BCA is among the highest assigned to any financial institution globally. DBS China's BCA could experience upward pressure if its funding structure improves, with solid growth in core deposits; profitability improves, with its return on average assets consistently above 0.6%; or asset quality improves, with its NPL ratio consistently below 1.0%.

Moody's could downgrade DBS China's deposit rating if DBS Bank or DBS China's BCAs are downgraded or if DBS Bank's willingness to support DBS China declines. DBS China's BCA could experience downward pressure if its funding structure, measured as market funds/ tangible banking assets (TBA), deteriorates, consistently above 40.0%; asset quality weaken significantly, with NPL ratio consistently above 3.0%; or and profitability weakens significantly, with its return on average assets consistently below 0.3%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

DBS Bank (China) Limited is headquartered in Shanghai. It reported assets totaling RMB122.9 billion at the end of 2019.

LIST OF AFFECTED RATINGS

- baa3 affirmed for Baseline Credit Assessment

- a1 affirmed for adjusted Baseline Credit Assessment

- A1 affirmed for long-term local and foreign currency deposit ratings, outlook remains stable

- P-1 affirmed for short-term local and foreign currency deposit ratings

- Aa3(cr)/P-1(cr) affirmed for long-term/short-term Counterparty Risk Assessments

- Aa3/P-1 affirmed for long-term/short-term local and foreign currency Counterparty Risk Ratings

- Outlook remains stable

The local market analyst for these ratings is Yan Li, +86 (106) 319-6561 .

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sonny Hsu, CFA VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Yat Man Sally Yim, CFA MD - Financial Institutions Financial Institutions Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

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