Singapore banks see benefits as yuan devaluation boosts rates

[SINGAPORE] Singapore's two largest banks said they stand to benefit from higher local interest rates and the weakening in the city's currency that followed the recent devaluation of the Chinese yuan.

Executives from DBS Group Holdings Ltd and Oversea-Chinese Banking Corp said the drop in the Singapore dollar should support local interest rates, which in turn is positive for the banks' earnings.

The Chinese yuan recorded its biggest two-day slump in 21 years this week amid concerns about a further economic slowdown in Asia's biggest economy, where the biggest Singaporean banks have been growing their business. The lenders' share prices fell sharply on Wednesday, after news of the devaluation, before rebounding on Thursday.

"Negative sentiments" regarding the impact of a China slowdown on Singapore bank earnings are "overdone," Kevin Kwek, an analyst at Sanford C. Bernstein in Singapore, wrote in a report Thursday. "Further weakness on the Singapore dollar should have been expected and poses offsetting implications." DBS rose 2 per cent on Thursday to close at S$19.02 after plunging 5.5 per cent Wednesday, the most since October 2011. OCBC gained 1.9 per cent after slumping 5.8 per cent. United Overseas Bank Ltd, Singapore's third-largest bank, climbed 1.9 per cent after dropping 4.2 per cent Wednesday. The benchmark Straits Times Index rose 1 per cent on Thursday.

The Singapore dollar has dropped 1.3 per cent since the Chinese devaluation, while the three-month Singapore interbank offered rate, or Sibor, extended its gains on Thursday.

For DBS, the "positive translation effects" of appreciating US and Hong Kong dollars against Singapore's currency "will more than outweigh the negative impact of a depreciating renminbi," DBS Chief Financial Officer Chng Sok Hui said in an e-mail. "A weaker Singapore dollar could also be supportive of Sibor and swap-offer rates, which will be beneficial to earnings," she said.

Higher local interest rates "would be supportive" to OCBC's earnings, said the bank's Chief Financial Officer Darren Tan, in an e-mail.

Singapore's three largest banks have been expanding in China. DBS took over Royal Bank of Scotland Group Plc's retail and commercial banking customers in China in a deal agreed in December 2010. The Singaporean lender now has more than 100 branches in Hong Kong, China and Taiwan.

OCBC spent US$5 billion buying Wing Hang Bank in Hong Kong last year as part of its strategy to expand in Greater China. The region contributed about a fifth of the lender's pretax profit in the first half of this year.

UOB's Chinese unit has more than 10 branches and sub- branches, according to the bank's 2014 annual report. Greater China accounted for about 11 per cent of its first-half pretax profit.

Ms Chng at DBS said the yuan's depreciation "will have some small translation impact" on the bank's earnings in China. At the same time, the weaker yuan "may lead to a pickup in China exports, and this could be helpful to loan growth," she added.

"The recent events in China reflect ongoing uncertainties in the global economy," said Jimmy Koh, UOB's head of investor relations in an e-mail. "Notwithstanding near-term uncertainties, we believe the growth drivers for Asia remain intact," he added.

UOB didn't respond to a request for comment on the impact of the China devaluation on its earnings.

BLOOMBERG