Fitch Ratings has affirmed Shanghai-headquartered United Overseas Bank (China) Limited's (UOBC) Long-Term Issuer Default Rating (IDR) at 'A+' and Short-Term IDR at 'F1+'.

The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed the rating on the bank's Tier 2 subordinated debt instrument at 'A-'.

Key Rating Drivers

Parental Support Underpins Ratings: UOBC's IDRs and Shareholder Support Rating (SSR) reflect the extremely high likelihood of extraordinary support from its parent, United Overseas Bank Limited (UOB, AA-/Stable/aa-), if needed. We view UOBC as a core subsidiary of UOB, as China is a strategically important market for the parent. UOBC's Long-Term IDR is capped by China's Country Ceiling of 'A+'. The Stable Outlook reflects that the rating is likely to remain at the current level unless UOB's Long-Term IDR were to be downgraded by two or more notches.

Fitch revised the Outlook on UOB's Long-Term IDR from Negative to Stable and affirmed the ratings on the bank on 30 May 2023. The Outlook revision was driven by easing pressure on UOB's capitalisation, as subdued balance-sheet growth and a rise in global interest rates faster than we expected in 2022 boosted the bank's profitability. This helped the common equity Tier 1 (CET1) ratio recover to a sustainable level by March 2023. More details are available in 'Fitch Revises Outlook on United Overseas Bank to Stable; Affirms 'AA-' IDR'.

Strong Rating Linkage: The contribution of the Greater China operations to UOB's financial performance was stable in 2022, and accounted for 15% of group loans. The common brand name and close integration between UOBC and its parent underpin their strong rating linkage, and any reputational damage to the parent would be huge if UOB failed to extend support to UOBC when needed.

Record of Support: UOB has a history of providing ordinary support to UOBC, including customer referrals as well as other operational and system support. The group injected CNY2 billion of capital into UOBC in January 2022 to support business expansion, lifting the subsidiary's pro forma CET 1 ratio by 3.6pp to 16.8% at end-2022.

Highly Integrated with Parent: Fitch views UOBC and UOB as highly integrated in terms of management, strategy, risk profile and business generation. The parent oversees UOBC's operations and key operational metrics, including funding and liquidity management as well as capital planning. Fitch expects UOBC to continue playing an integral role in channelling customer referrals and supporting cross-border opportunities for the group. This includes working closely with the parent to provide financial services to mainland Chinese entities seeking to invest in south-east Asia and vice versa.

No VR Assigned: Fitch has not assigned a Viability Rating (VR) to UOBC. The bank's intrinsic strength is subject to operational and financial support from its parent and it lacks a meaningful standalone franchise.

Debt Rating Affirmed: Fitch has affirmed UOBC's Tier 2 subordinated debt instruments two notches below the Long-Term IDR to reflect the high loss severity relative to senior unsecured instruments. We take into consideration that the support-driven IDR reflects the risk of UOBC triggering a non-viability event. This is because parental support from UOB can and will be used to neutralise non-performance risk of UOBC's subordinated bonds, in Fitch's view.

Short-Term IDR: UOBC's Short-Term IDR of 'F1+' is the higher of two possible options given the support-driven Long-Term IDR. We believe the parent's propensity to provide support is more certain in the near term, and that there are no significant impediments to support.

Rating Sensitivities

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

IDR AND SSR

A downgrade of UOB's VR to below China's Country Ceiling of 'A+', at which UOBC's Long-Term IDR is capped, would lead to negative rating action on UOBC.

The bank's Long-Term IDR and SSR will also come under pressure if there is any weakening in Fitch's assessment of UOB's propensity to support UOBC. For example, this may arise from reduced management and operational integration, as well as a decline in shareholding that could lead to a significant reduction in the subsidiary's strategic importance to the parent. However, Fitch does not consider any changes in support propensity to be likely in the medium term.

SUBORDINATED DEBT

Any changes to the rating on UOBC's Tier 2 capital bonds will be directly linked to changes in UOBC's Long-Term IDR. A downgrade of UOBC's Long-Term IDR would lead to negative rating action on UOBC's Tier 2 capital bonds.

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

IDR AND SSR

There is no rating upside for UOBC's SSR and Long-Term IDR unless China's Country Ceiling is revised upwards.

SUBORDINATED DEBT

An upgrade of UOBC's Long-Term IDR would lead to positive rating action on its Tier 2 capital bonds.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

UOBC's IDRs are linked to the VR of the parent, UOB.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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