Here's why covered bonds won't save local banks' shrinking margins

These make up less than 10% of total issued debt.

Singapore's largest banks have turned to covered banks in a bid to boost their net interest margins (NIMs), but a report by Maybank Kim Eng reckons that these new offerings are unlikely to meaningfully boost the banks' margins.

The report noted that while covered bonds will help lower banks' cost of funding, the total issuance is just too small to significantly impact NIMs.

"In terms of total debt issuance as of Sep 2016, covered bonds currently form only ~7% and ~4% for DBS and UOB respectively. Singapore banks have established their Global Covered Bond Programme, with both DBS’s and OCBC’s programme at USD10b each, and UOB’s at USD8b. At USD8-10b of issuance, we do not expect covered bonds to boost the banks’ NIMs significantly from low cost of funding," the report said.

Covered bonds, which are debt securities secured by a pool of assets such as residential mortgages, have recently attracted strong interest among global investors. For instance, DBS has announced that it has successfully priced the issue of EUR 750m in fixed-rate covered bonds due 2024.

"We maintain a negative view on Singapore banks, mainly due to asset quality deterioration amid the turning credit cycle. We prefer UOB for its lower exposure to the O&G sector and China, and a bigger general-provision buffer," Maybank Kim Eng said.