Singapore Banks - UOB Kay Hian 2022-01-05: Heightened Alert For Higher Interest Rates


Singapore Banks - Heightened Alert For Higher Interest Rates

  • Interest rates would be on an upcycle after QE Taper is completed by Mar 22. Our analysis indicates that every 100bp rise in 3M SIBOR results in NIM expansion of 25bp for DBS, 13bp for OCBC and 16bp for UOB.
  • We raise our earnings forecasts for DBS and OCBC by 6% and 3% respectively for 2023 and expect earnings growth of 16% and 10% in 2024. BUY DBS (SGX:D05) and OCBC (SGX:O39) for 2023 dividend yield of 4.5% and 4.8% respectively. Maintain OVERWEIGHT.

Political dimension of monetary policy.

  • The Biden Administration is vigilant and is focused on taming the trend of rising inflation as a top priority. President Joe Biden launched the supply chain task force in Jun 21. He has also repeatedly stressed the independence of the Fed to manage inflation effectively. Many voters see inflation as the biggest problem confronting the US economy.
  • Democrats are also concerned that high inflation could become a toxic topic during the midterm elections in Nov 22.

Elevated inflation could be prolonged by the Omicron variant.

  • US core Personal Consumption Expenditures (PCE) inflation jumped 2.7ppt y-o-y to 4.1% in Oct 21, the fastest pace in 30 years, overshooting the Fed’s target of 2.0%. Implied inflation based on five-year Treasury Inflation-Protected Securities (TIPS) rose 1.6ppt y-o-y to a peak at 3.2% in Nov 21 before receding to 2.7%.
  • The COVID-19 pandemic disrupts supply chains by causing shortage of components, shortage of workers and port congestion. Thus, the emergence of the Omicron variant could continue to disrupt supply chains and prolong the current elevated inflation.

A faster pace of QE Taper.

  • According to the Fed’s chairman Jerome Powell during testimony to the Senate on 30 Nov 21, inflation has become more broad-based and the risk of inflation becoming persistent and entrenched has increased. The Fed has to act to avert a wage-price spiral. In the latest Federal Open Market Committee (FOMC) meeting on 14-15 Dec 21, the Fed has reduced the pace of bond purchases from US$15b to US$30b per month. The accelerated pace of unwinding means that QE Taper would be over by Mar 22.

Interest rates on a gentle upcycle.

  • Based on projections by FOMC participants, the median projected path for Fed funds rate is 0.9% at end-22, 1.6% at end-23 and 2.1% at end-24, which implies three interest rate hikes in 2022, three in 2023 and two in 2024. UOB Global Economics & Markets Research expects 3M Singapore Interbank Offered Rate (SIBOR) and 3M Swap Offer Rate (SOR) to reach 1.15% (+71bp) and 1.10% (+74bp) respectively by end-22.

Maintain OVERWEIGHT on banking sector.

  • Singaporeans overcame vaccine hesitancy and are well adapted to living with COVID-19 as an endemic. As of 2 Jan 22, 88% of the total population has completed their full regimen and received at least two doses of COVID-19 vaccines, of which 42% have received their booster shots.
  • Omicron variant less lethal than previously thought. Several studies have concluded that the Omicron variant is less likely to cause severe diseases. A study in England published by UK’s Health Security Agency shows that people infected with the Omicron variant is 50-70% less likely to be hospitalised compared with those who caught the Delta variant. A study in Scotland published by University of Edinburgh shows that people infected with the Omicron variant is two-thirds less likely to be hospitalised. The majority of people who suffered breakthrough infections or reinfections due to the Omicron variant experienced mild symptoms.
  • A temporary pause to reopening. Singapore is likely to keep the economy open and refrain from imposing another Circuit Breaker. Vaccinated groups of up to five are allowed to dine in at restaurants since 22 Nov 21. Working from home is no longer the default. 50% of employees who are fully vaccinated or recovered from COVID-19 were allowed to return to work at the office starting 1 Jan 22. While the Vaccinated Travel Lane (VTL) scheme has been scaled down temporarily, we expect the reopening of borders with expansion of capacity for existing VTLs and introduction of new VTLs to resume in 2H22. Singapore has to weather a new wave of Omicron variant infections in 1Q22 but economic recovery is expected to likewise resume in 2H22.
  • Banks to benefit from NIM expansion starting 4Q22. Interest rates in Singapore are highly correlated with those in the US. Our regression analysis indicates that every 100bp rise in US FED Funds Rate results in 3M SIBOR increasing by 66bp.
  • Our regression analysis also indicates that every 100bp rise in 3M SIBOR results in NIM expansion of
  • Similarly, ROE is enhanced by an estimated
    • 2.3ppt for DBS,
    • 0.8ppt for OCBC and
    • 1.3ppt for UOB.


  • DBS's management guided mid-to-high single-digit loan growth (6-7%) and double-digit fee income growth in 2022. Total income is expected to grow at mid-single digits.
  • We expect DBS's NIM to expand by 13bp and 18bp respectively to 1.58% by end-23 and 1.76% by end-24. We raised our earnings forecast by 6% to S$7,565m in 2023 and expect earnings to grow 16% to S$8,777m in 2024.
  • We expect DBS's dividend of S$1.40 in 2022 and S$1.52 in 2023, which represents dividend payout ratio of 53.7% and 52.4% respectively.
  • Our target price of S$40.28 for DBS is based on 1.67x 2023F P/B, derived from the Gordon Growth Model (ROE: 12.3%, COE: 8.0%, Growth: 1.5%).
  • See



  • NIM expansion in 2023 and 2024 driven by upcycle in interest rates.
  • Banks review their dividend payout ratio and pay more dividends as risks emanating from the COVID-19 pandemic recede.
  • Resumption of reopening and economic recovery after weathering the Omicron variant wave in 2H22.


  • Escalation of geopolitical tension and trade conflict between the US, China and Russia.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-01-05
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