DBS BANK is well on its way to selling Singapore's first covered bond, as lenders in Asia seek to lift the quality of their assets amid tighter rules.
The bank announced on Tuesday that it has set up a US$10 billion (S$13.5 billion) global covered bond programme - making it the first among the local banks to do so.
It will issue covered bonds "from time to time", depending on market conditions. The first issue, to target institutional investors, will be made in the US dollar or the euro, said DBS.
Covered bonds are debt instruments issued by banks, secured primarily by their pool of residential mortgages.
They are rated higher than unsecured debt, often with the coveted AAA rating, as investors have recourse to both the issuer and a portfolio of assets.
The Monetary Authority of Singapore (MAS) in 2013 released guidelines for the sale of covered bonds by banks, capped at an amount equivalent to 4 per cent of their total assets.
DBS said that issuing covered bonds enables banks to "reach investors in high-grade securities".
"The programme enables us to engage a fresh group of investors and to access liquidity with greater cost efficiency," said DBS chief financial officer Chng Sok Hui.
"This will lower our overall funding cost."
The net proceeds from the issuance of covered bonds will be used for general business purposes, the bank added.
DBS Group has appointed Barclays Bank (Singapore branch) and DBS as joint arrangers of the programme.
It also appointed DBS, Barclays Bank (Singapore branch), Citigroup Global Markets, Citigroup Global Markets Singapore, Deutsche Bank (Singapore branch), JPMorgan Securities, Societe Generale and UniCredit Bank as initial dealers of the programme.
Fitch Ratings senior director Claire Heaton said DBS' announcement heralds "the beginning of the covered bond market in Singapore, which has been long awaited by investors". "Covered bond investors will be able to further diversify their covered bond investments outside of Europe."
She expects to see strong demand from investors for highly rated Singapore issuers' covered bonds, given that yields on covered bonds issued from outside Europe are typically higher than European-based covered bonds' yields.
Ms Heaton also said Singapore banks will likely use covered bonds for non-Singapore dollar contingent funding.
"Covered bonds are seen as an alternative funding tool for banks should markets experience dislocation, as what was seen in Europe during the banking crisis. This was the primary driver for MAS to allow covered bonds to be issued by Singapore-based banks."
The two other local banks are not letting up on efforts to enter the covered bond market as well.
A United Overseas Bank spokesman said it expects to launch its covered bond programme in the second half of the year "with the aim to diversify the bank's funding and investor base".
OCBC is "monitoring the developments of the covered bond market", said Ms Ang Suat Ching, head of funding and capital management at the bank.
"We... will continue to assess future issuances, taking into consideration market conditions and our funding requirements."