OREANDA-NEWS. Fitch Ratings has affirmed DBS Bank Ltd.'s (DBS; AA-/Stable/F1+) outstanding mortgage covered bonds equivalent to SGD 2.1bn at 'AAA'. The Outlook is Stable. The covered bonds are issued through DBS and covered bonds payments are guaranteed by Bayfront Covered Bonds Pte. Ltd. (CBG) upon a covered bond event of default.

KEY RATING DRIVERS

The rating affirmation is based on DBS's Long-Term Issuer Default Rating (IDR) of 'AA-', a stable Discontinuity Cap (D-Cap) of 3 notches, and the asset percentage (AP) used in the asset coverage test of 85.5% (equivalent to 17% of OC), which Fitch relies on in its analysis. The AP relied upon supports a tested rating of 'AA' on a probability of default (PD) basis, and a 'AAA' rating after giving credit for recoveries given default of the covered bonds. The Stable Outlook on the covered bonds reflects the Stable Outlook on DBS's IDR.

Fitch's 'AAA' breakeven AP increased to 87.0%, from 85.5% previously. This was mainly driven by Fitch's updated residential mortgage loss assumptions for rating DBS's covered bond programme. The low prepayment assumption was revised to a constant 5%, from the previous 3%. As a result, the expected asset disposal loss component from the breakeven AP was reduced to 16.2%, from 18.5% at the last review in June 2016, as higher prepayments reduce assets exposed to distressed asset sales. Other changes to the assumptions include simplified foreclosure frequency (FF) adjustments and increased base FFs. A detailed description of the rating drivers and the residential mortgage loss assumptions that apply to DBS's cover pool will follow in a full rating report soon.

The D-Cap of 3 notches remains unchanged.

DBS expects to increase its eligible cover assets to SGD8.9bn on 22 July 2016 from an existing SGD3.7bn. Fitch has taken into consideration the expected addition of the eligible loans in its asset analysis. However, the cover pool characteristics as of 9 July 2016 remain stable with a Fitch-calculated weighted average (WA) loan-to-value ratio of 56.8% for the enlarged cover pool size, slightly higher than the 56.3% at the last review. Fitch's calculated WA seasoning of the pool reduced to 49.4 months, from 57.8 months previously. Investment properties continue to make up about a third of the pool, at 34.4% after the increase in pool size compared with 36.4% at the last review.

A total return swap is provided by DBS, which protects bond investors against currency and interest mismatches between the cover pool and the bonds.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) DBS's Issuer Default Rating (IDR) was downgraded by three notches to 'A-'; (ii) Fitch Discontinuity Cap fell by three notches to 0 (full discontinuity); or (iii) the asset percentage (AP) that Fitch takes into account in its analysis increased above Fitch's 'AAA' breakeven AP of 87.0%.

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.