The devaluation of the Chinese Renminbi resulted in a material sell-down of the Singapore banks of -4% to -6% yesterday, on 12 August 2015. Macquarie Equities Research (MER) released a research report on the same day, trying to quantify the potential earnings impact for the Singapore banks from RMB depreciation. Some excerpts are found below…..
 
 
 
Event
MER believes that in a base-case scenario, the lower Renminbi is only slightly negative for Singapore banks earnings as a result of lower business volumes and translation losses. The key tail risk is asset quality deterioration.
 
Impact
With China joining the band wagon of competitive devaluation, MER thinks that potential negatives for Singapore banks relate to possible asset quality deterioration and negative spillover effects on ASEAN rather than a negative earnings impact from lower (China) business volumes or currency translation.
 
Negative currency translation impact – Assuming a 10% depreciation of the RMB against the S$ would result only in a 1% earnings hit and a 1.5% hit on equity for the Singapore banks in MER’s sensitivity analysis.
 
Negative impact on business flows– Assuming a 20% decline China assets for the Singapore banks would hit earnings by 2% based on MER’s sensitivity analysis. Post negative spillover effects on rest of Asia, the earnings hit from lower business volumes would be higher (but impossible to model).
 
Potential negative impact from asset quality deterioration – While the impact from currency translation and lower volumes would be manageable, the key tail risk relates to asset quality deterioration in MER’s view. Assuming a 100bp increase in the non-performing loan (NPL) ratio for Singapore Banks in China (and 100% NPL coverage for new NPLs) would hit earnings by 5%. This is before any negative spillover effects on rest of Asia.
 
Outlook
MER is overweight Singapore banks on a regional sector basis.
 
The sharp share price decline of the Singapore banks had more to do with negative sentiment, capital flows, emerging market (EM) currency depreciation and asset quality fears rather than with business fundamentals and the operating outlook.
 
MER continues to believe that asset quality for Singapore banks will hold up for the rest of the year and that it is too early to call for a turn in the credit cycle. Based on this assumption MER thinks it is an interesting opportunity to accumulate Singapore banks on a 12 months view.
 
The main share price catalysts for the Singapore banks should relate to (i) stable asset quality trends for the rest of the year (although risks have increased), (ii) further growth in Wealth Management, (iii) potential positive surprises on dividend payments and (iv) stable or slightly increasing net interest margin (NIM).
 
MER believes that Singapore banks offer good fundamental value at these levels. MER’s top-pick is DBS (DBS SP, S$18.64, Outperform, TP: S$23.00) followed by UOB (UOB SP, S$19.98, Outperform, TP: S$24.00) which has been hit hardest by the sell-down over the last few weeks. MER has a Neutral rating at the moment on OCBC (OCBC SP, S$9.50, Neutral, TP: S$10.50).

Source: Macquarie Research - 13 Aug 2015