Singapore Banks

Kim Eng on 9 Dec 2014

• 10% MYR depreciation vs SGD could hurt EPS by as much as 2.3%. OCBC’s the most. DBS’s the least.
• USD appreciation to cushion MYR weakness.
• Maintain OVERWEIGHT with catalysts from further earnings deliveries. DBS still our top pick, followed by UOB. Remain cautious on OCBC.

MYR weakness against SGD
Since end-September, regional currencies have weakened against USD. SGD is no exception. Still, SGD has held up better than others. Amid a weakening MYR vs SGD and with Malaysia being the largest overseas market for OCBC at 26% of FY13 PBT and UOB at 15%, this is negative. DBS has negligible exposure to Malaysia.

What if MYR depreciates by 10%?
MYR could remain under pressure in 2015 as Malaysia’s economy is weighed down by low commodity prices and GST starting 1 Apr 2015. However, we estimate a 10% depreciation against SGD would only lop off less than 3% of banks’ earnings, ceteris paribus. OCBC will be slightly more affected by lower translated profits in SGD terms. However, this could be compensated by a USD which has gained 3.6% against SGD since end-September. All three banks are net beneficiaries of a rallying USD given their USD lending, paced by DBS at 35% of its loans. OCBC is next with 27% and UOB, 16%. In sum, we think recent currency volatility would be too mild to deflect 4Q14 results.

Maintain OVERWEIGHT. We expect the sector’s re-rating to continue in 2015 on further earnings deliveries. On top of that, waning interest in the oil & gas sector may benefit banks, through sector rotations. DBS is our first choice, followed by UOB. We remain cautious on OCBC over its ability to extract synergies from Wing Hang Bank.