What’s next for banks after their steep share price plunge?

Fundamentals are intact but vulnerabilities remain.

Singapore’s largest banks suffered a steep sell-down after China's unexpected move to devalue the RMB. As the dust settles after China’s decision, analysts weigh in on what’s next for listed banks.

DBS analysts believe that last week’s sell-off was an exaggerated knee-jerk reaction to the RMB devaluation.

“Singapore banks took the brunt of profit taking last week, as investors capitalised on their outperformance in the last six months to raise cash levels...we believe Singapore banks have been oversold vs their fundamentals and remain attractive vs regional peers,” DBS said.

However, banks remain vulnerable as they are considered as proxies to the slower economic growth in Singapore, while their exposure to Hong Kong, China, Indonesia and Malaysia raises their risk profile. Overseas earnings accounted for 33% of Singapore banks’ pre-tax profits.

CIMB analysts note that despite the sell-down, the RMB devaluation is actually positive for banks. The RMB devaluation will add fuel to the dollar strength theme and push up the S$ SIBOR, which will aid margin expansion. .

“The recent concern of Rmb devaluation has caused Singapore banks to be sold down significantly. In our view, these moves are more due to global investment flows, as worries of Asian currencies devaluation (in line with Rmb) are causing a flight to safety back to US assets. The actual fundamental effects on bank earnings are positive,” CIMB said.