Singapore Banks - Maybank Kim Eng 2016-11-23: Assessing FX Impact

Singapore Banks - Maybank Kim Eng 2016-11-23: Assessing FX Impact Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Singapore Banks - Assessing FX Impact

  • Regional currencies depreciated As the USD continues to strengthen, regional currencies have depreciated, with the biggest slide seen in the MYR of close to -5% over the past two weeks. The SGD is no exception, and Maybank’s FX team expects more volatility for ASEAN currencies ahead
  • Given Singapore banks’ exposure to the region, we conducted a sensitivity analysis to assess the FX impact on Singapore banks’ profits, where: 
    1. regional currencies (ex-HKD)/USD will depreciate/appreciate by 5% and 10% against SGD; and 
    2. a 20 and 30bps increase in credit costs on potential higher provisions from USD exposure. 
  • We assume there are no major systemic risks in the financial system. 
  • Our analysis shows that on aggregate, banks’ profits will decline by less than 2% as the impact of higher credit costs is partly offset by translational gains from USD strength.



Gains from stronger USD 

  • On a translational perspective, DBS should be a key beneficiary of USD strength as it has the largest USD loan exposure at 33% vs peers’ 19-23%.
  • To simplify this exercise, we assess the FX translation impact on banks’ profits on the basis of some broad assumptions based on banks’ pretax profits by regions. 
  • For translational FX gains alone, we estimate DBS’s FY16-17E pretax profits will increase the most by 2-4% vs OCBC’s 0.8- 1.7% and UOB’s 0.7-1.4%. OCBC’s and UOB’s gains are partly offset by their relatively bigger exposure in ASEAN.


Decline in profits from higher provisions 

  • There will be default risks if corporates/customers are not able to repay USD debt when their domestic currencies depreciate further. In the event of potential higher provisions from USD exposure, we assess the impact by factoring a 20-30bps increase in credit costs on the banks’ USD loan book.
  • On an aggregate basis combining both translational FX gains and increase in credit costs, we estimate that FY16-17E’s net profits may decline by less than 2% across the banks, ceteris paribus. 
  • OCBC may see a larger decline in profits of 1.4-1.7% vs peers’ 1.2-1.6%. This can be attributed to OCBC’s larger exposure in Malaysia and Indonesia, as PBT from these two countries formed 24% of total PBT as at 9M16. 
  • For DBS, translation effects of stronger USD partly offset the higher provisions from its larger USD loan exposure.


Maintain Negative 

  • Fundamentally, we remain NEGATIVE on the sector in view of further asset quality deterioration (latest note here). 
  • Key risks to our call are: 
    1. higher interest income; 
    2. higher non-II; and 
    3. benign credit costs. 
  • We prefer UOB (HOLD, TP SGD18.36) for its lower exposure to O&G and China.







Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-23
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 14.55 Same 14.55
SELL Maintain SELL 7.40 Same 7.40
HOLD Maintain HOLD 18.36 Same 18.36



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