Singapore banks at risk as ringgit plunges to record low

OCBC is the most exposed.

The weak ringgit may be a boon to some Singaporeans, but the currency’s protracted weakness poses a threat to local bank earnings.

According to Maybank Kim Eng, OCBC and UOB have substantial exposure to Malaysia and could see earnings cuts if the ringgit depreciates by 10%. Since end-September, the ringgit has weakened 2.5% against SGD, dragged mainly by the plunge in oil prices.

On Monday, the ringgit fell to an intra-day low 3.5073 to the US Dollar, a level last seen during the global financial crisis.

“This will have an impact on UOB and OCBC given their sizeable exposure to Malaysia. Malaysia contributed 26% to OCBC’s FY13 PBT and 15% to UOB’s, the former through its banking and Great Eastern insurance arms. DBS’s exposure is inconsequential. A further depreciation will hurt Singapore banks’ profitability. Assuming a 10% depreciation of the MYR against SGD, the full-year EPS impact on Singapore banks could range from -1.5% to -2.3%, ceteris paribus,” noted Maybank Kim Eng.

However, the ringgit’s weakness can be offset by the US dollar’s strength, especially as Singapore banks have stepped up their USD lending in recent years.

“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,” stated the report.