Which Singapore bank will be hit the hardest by USD strength?

Its profits could decline by up to 1.7%.

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, Maybank Kim Eng 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."

Here's more from Maybank Kim Eng:

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.