Fitch Ratings has affirmed United Overseas Bank Limited's (UOB) Long-Term Issuer Default Rating (IDR) at 'AA-', Short-Term IDR at 'F1+' and Viability Rating (VR) at 'aa-'.

The Outlook on the Long-Term IDR is Stable.

Key Rating Drivers

Ratings Underpinned by Standalone Strength: UOB's Long-Term IDR is driven by its VR. The VR is in line with the implied VR and is underpinned by the bank's strong domestic franchise, steady financial performance and consistent execution.

Stable Operating Environment: We expect UOB's operating environment to remain stable, with stronger GDP growth in 2024 across many of the markets in which it operates, including in south east Asia. We expect UOB's home market, Singapore, to expand by 2.5% in 2024 and 3.0% in 2025, after a 1.1% expansion in 2023.

Resilient Franchise and Business Model: UOB has an entrenched domestic market position; it has a 27% share of loans to residents and a 22% share of local-currency deposits. The bank's diversified business model and consistent strategy across segments have resulted in steady risk-adjusted earnings over time. This stability led us to score UOB's business profile at 'aa-', which is above the implied 'a' category score.

Stable Risk Profile: UOB's underwriting standards and risk controls have been steadfast, enabling it to maintain healthy loan performance, despite persistent economic headwinds over the past few years. Its risk profile score of 'a+' is one notch lower than its business profile score and aligned to its asset-quality score. This reflects the bank's large overseas operations, most of which are in markets that are lower rated than Singapore. This is a structural feature common to all three major Singapore banks.

Stable Asset Quality: The non-performing loan (NPL) ratio was steady at 1.5% in 1Q24 as new impaired-loan formation was largely offset by recoveries and write-offs. We expect credit impairments to rise moderately in 2H24 on higher debt-servicing costs, as interest rates remain high, but the bank maintains general allowances near 1% of performing loans and total reserves equal to 99% of non-performing assets. This buffers against impairment risks.

Improved Profitability: UOB's operating profit/risk-weighted assets reached 2.5% in 2023, from 2.2% in 2022, as it continued to benefit from higher interest rates. This continued in 1Q24, with the net interest margin remaining above 2%, and a recovery in fee and trading income which should drive revenue for the remainder of the year.

Earnings Accretion Drives Capital: We project UOB to maintain its common equity Tier 1 (CET1) ratio at around 14.0%. The 1Q24 improvement to 13.9%, from 13.4% in 2023, was driven by earnings, which we expect to remain supportive. Fitch anticipates the CET 1 ratio to remain relatively stable in 2024 due to internal capital generation and limited risk-weighted asset growth, alongside continued shareholder capital returns.

Stable Funding and Liquidity: UOB's loan/deposit ratio remained lower than in previous years, at 82% at end-1Q24 (2022: 87%, 2019: 87%), due to slower loan growth and a continued increase in deposits. The liquidity coverage ratio of 160% and net stable funding ratio of 121% at end-March 2024 had also improved yoy and remain comfortably above regulatory requirements.

Solid State Support: The Government Support Rating (GSR) reflects the state's strong propensity to support the bank, given UOB's high systemic importance as a domestic systemically important bank. The GSR is also supported by the regulator's exclusion of senior debt from bail-in provisions in the resolution framework as well as Singapore's 'AAA' sovereign rating and strong fiscal flexibility.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The VR and Long-Term IDR could come under pressure should financial metrics deteriorate significantly. For example, if:

the CET1 ratio declines and remains significantly below 14% without a credible plan to restore it to around this level, along with a weakening in the Basel leverage ratio to meaningfully below 7% for a sustained period;

the four-year average of the impaired-loan ratio worsens and rises above 2% on a sustained basis;

the four-year average of the operating profit/risk-weighted asset ratio falls below 2%, with poor prospects of a recovery.

A downward revision of the operating environment score to 'a+' on a significant economic slowdown in UOB's key markets or a significant increase in exposure to higher-risk markets is also likely to lead to a downgrade of the VR and Long-Term IDR.

Any downgrade to the Long-Term IDR would be limited to two notches unless the GSR of 'a' is also downgraded.

Downgrades of the Short-Term IDR and short-term senior debt ratings appear unlikely in the near term, as it would require the Long-Term IDR to be downgraded by at least two notches to 'A' or worse, and the funding and liquidity score to simultaneously be lowered by at least one notch to 'a+'.

Any decline in the propensity of the authorities to provide extraordinary support could result in the GSR being downgraded. This could arise from a reduction in UOB's systemic importance or from the introduction of senior debt bail-in requirements in Singapore. However, we consider these developments improbable in the near term.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Upward rating action to the VR and Long-Term IDR appears unlikely, as the ratings are already near the top of Fitch's global rated bank universe. Long-term upward rating momentum would involve a significant strengthening of UOB's capital position and franchise outside Singapore. This would be in addition to an enhanced risk profile, particularly in relation to emerging-market exposures, as well as a considerable improvement in asset quality, profitability and funding.

The Short-Term IDR is already at the highest end of the scale and cannot be upgraded.

The GSR may be upgraded if Singapore's authorities provide public and explicit statements of support towards UOB that give greater certainty of support, if needed, or if UOB attains significantly higher systemic importance.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The senior debt instruments represent UOB's unsecured and unsubordinated obligations and are equalised with the bank's Long-Term IDR.

UOB's Basel III Tier 2 subordinated notes are rated two notches below the VR to account for loss-severity risk. This reflects their subordinated status, the absence of going-concern loss-absorption features and the partial or full write-down feature at the point of non-viability, as determined by the Monetary Authority of Singapore.

The bank's Basel III additional Tier 1 securities are rated four notches below the VR, comprising two notches for non-performance risk and two notches for loss-severity risk. The four notches reflect the securities' deep subordination status and fully discretionary distributions.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The senior debt ratings are sensitive to UOB's Long-Term IDR and the subordinated and additional Tier 1 securities are sensitive to the VR.

VR ADJUSTMENTS

The business profile score of 'aa-' has been assigned above the 'a' category implied score for the following adjustment reason: business model (positive).

The capitalisation and leverage score of 'aa-' has been assigned above the implied category of 'a' for the following adjustment: leverage and risk-weight calculation (positive).

The funding and liquidity score of 'aa-' has been assigned above the implied category of 'a' for the following adjustment: deposit structure (positive).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

UOB's GSR is linked to Singapore's sovereign rating.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

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