Singaporean banks’ limited wholesale funding needs could mean that their approach to covered bond issuance is opportunistic, said Fitch yesterday (Thursday), suggesting that they may not “any time soon” hit a 2% limit on cover pool assets relative to total assets proposed by the Monetary Authority of Singapore in a consultation paper released last Friday.

The rating agency said it expects Singapore’s banks to take advantage of the funding instrument if a formal issuance framework is adopted in the wake of the consultation launched last Friday (9 March), but argued that a focus on deposits in the country means supply could be limited.

DBS Bank has been cited as a potential issuer

“We think they would take an opportunistic approach to funding through the covered bond market, since they have predominantly deposit funded balance sheets and this mitigates their wholesale funding needs,” said Fitch. “This could limit initial issuance compared with other jurisdictions that have introduced covered bond legislation, such as Australia, which saw heavy supply in early 2012 after introducing legislation the previous November.”

The rating agency said that the 2% cap is “strikingly low”, noting that Canada’s equivalent limit is 4%, Australia’s 8% and New Zealand’s 10%. Fitch said that the cap is consistent with MAS’s focus on risks to depositors, which play an important role in Singaporean banks’ funding, with loan-to-deposit ratios averaging 87% at end-2011.

“We think there is scope for MAS to review the cap if it were comfortable that a higher number was consistent with depositor protection,” added Fitch.

It noted that set-up costs and any premium required by investors for new Singaporean covered bonds could be disincentives for potential issuers.

Fitch said it will review and submit comments on the consultation paper in the coming weeks. (See here for our coverage of the MAS paper.)

The rating agency has a stable outlook for Singapore’s banks.

“Their strong, liquid balance sheets, reasonably diversified loan books, satisfactory risk management, and domestic deposit franchises all help support the banks’ high investment grade ratings,” said Fitch.