Singapore Banks - UOB Kay Hian 2022-03-21: The First Strike At High & Persistent Inflation


Singapore Banks - The First Strike At High & Persistent Inflation

  • The Fed’s dot plot indicates six hikes totalling 175bp for the remainder of this year, including one hike of 50bp. The plan to downsize the Fed's balance sheet will be unveiled during the next FOMC meeting on 3-4 May 22.
  • Tighter monetary policy and higher interest rates are positive for banks. However, the outcome of the Russia-Ukraine war remains uncertain.
  • BUY DBS (Target: S$38.15) and OCBC (Target: S$15.00) for 2022 dividend yield of 4.1% and 4.7% respectively. Maintain OVERWEIGHT.

Interest rate hikes front loaded in 2022.

  • The Federal Open market Committee (FOMC) has hiked the Fed Funds Rate by 25bp, bringing the target range to 0.25-0.5%. Based on projections submitted by FOMC participants, the Fed Funds Rate is expected to reach 1.9% by end-22 and 2.8% by end-23. This translates to about six hikes totalling 175bp in 2022 (one of the hike could be 50bp).
  • The monetary tightening will tone down to just three hikes totalling 75bp in 2023. The Fed Funds Rate is projected to peak at 2.8%, which is much higher than previous expectations of 2.1%.

The next step is quantitative tightening.

  • The FOMC reaffirmed its intention to begin reducing its holdings of Treasury securities and agency mortgage-backed securities currently at US$9t. The Fed could allow Treasury securities and mortgage-backed securities to mature and run-off naturally. The move would drain liquidity from the financial system and could push long-term interest rates higher. The Fed could prioritise downsizing for its holding of mortgage-backed securities of US$2.6t at a faster pace, which could be achieved by selling them.
  • The plan to reduce the size of the Fed's balance sheet is being finalised and will be announced during the next FOMC meeting on 3-4 May 22.

Priority on restoring price stability.

  • The Fed has adopted a more hawkish stance:
    1. The Fed does not want current elevated inflation to become entrenched. Core personal consumption expenditures (PCE) inflation has hit a 38-year high of 5.2% in Jan 22. FOMC participants expect Core PCE inflation to average 4.3% in 2022 as inflation is expected to moderate in 2H22 due to slower demand and easing of capacity constraints in supply chains and labour markets.
    2. The FOMC is confident of the resiliency of the US economy. GDP growth of 5.5% in 2021 was accompanied by massive fiscal stimulus. FOMC participants projected GDP growth of 2.8% in 2022, which is still fairly robust.

Systemic risks under control.

  • FRA-OIS spread, a measure of dollar funding stress, inched higher by 15bp year-to-date to 22bp. The deterioration is modest compared with previous crises, such as Europe’s Sovereign Debt Crisis (peaked at 59bp in Dec 11) and the COVID-19 pandemic (peaked at 79bp in Mar 20).
  • Russia is not well integrated into the global financial system. Financial linkages with other countries have been reduced since the European Union first imposed sanctions after Russia annexed Crimea and Sevastopol in 2014. Financial markets are under stress but remain functional.

Europe not a core market.

  • Singapore banks’ core markets are within Asia. They have established branches in London to serve their networks customers in Europe. They do not have branches in continental Europe, such as Paris and Frankfurt. Europe is a small part of the banks’ operations.
  • Singapore’s three listed banks classify exposure to Europe under the “Rest of the World” category, which also includes their exposures to Australia, Canada, Japan and the US.

Minimal direct exposure to Russia.

  • The Singapore government has imposed sanctions on Russia. Financial institutions are banned from entering into transactions or establishing business relationships with four Russian banks, namely VTB Bank, Vnesheconombank, Promsvyazbank and Bank Rossiya. Singapore banks are restricted from issuing letters of credit to finance trade in crude oil and liquefied natural gas from Russia. They have minimal direct exposure to Russia.

Russia-Ukraine war creates heightened uncertainties.

  • The Russia-Ukraine war poses a threat to economic recovery and exacerbates higher inflation. The average P/B in the month that P/B troughed during the past eight crises is tabulated in the report attached below.
  • Using the past three crises (Europe's Sovereign Debt Crisis, crash in oil & gas and COVID-19 pandemic) as a gauge, the potential downside is 35-46% for DBS, 5-17% for OCBC and 3-29% for UOB. The direction for share prices of banks depends on the progress of peace talks to end the Russia-Ukraine war. We see opportunities for bargain hunting in current weakness.
  • Technically, we see strong support for DBS at S$30.00 and for OCBC at S$11.00.

Russians persist with hostilities.

  • Russia’s invasion of Ukraine has bogged down due to poor planning, inaccurate intelligence, faulty equipment and overstretched supply lines. The Ukrainians have posed stiff resistance and are continuously resupplied with ammunition from Western countries. The Russian also has to contend with crippling sanctions imposed by Western countries. Half of Russia’s reserves of US$630b held at central banks around the world have been frozen. The Russian economy will suffer painful increases in unemployment and runaway inflation. Nevertheless, the Russians have regrouped for an assault on Kyiv.
  • The situation is still unfolding and it is uncertain if the ongoing peace talk would come to fruition.


  • Tighter monetary policy and higher interest rates are positive for banks. We have factored in a series of seven hikes with the Fed Funds Rate reaching 2.0% by end-22 (previous: 1.0%). We did not factor in any hikes in 2023 (unchanged).
  • BUY DBS (Target Price: S$38.15) and OCBC (Target Price: S$15.00) for 2022 dividend yield of 4.2% and 4.7% respectively.


  • We expect NIM to expand by 4bp to 1.49% in 2022 (previous: 1.44%) and 25bp to 1.73% in 2023 (previous: 1.55%). We raised our earnings forecast for DBS by 2% to S$6,996m for 2022 and S$7,670m for 2023.
  • We expect dividend of S$1.44 in 2022 and S$1.48 in 2023, which represents dividend payout ratio of 53.7% and 50.3% respectively. DBS provides dividend yield of 4.1% for 2022 and 4.3% for 2023.
  • Exposure to Mainland China. DBS China currently has a network of 12 branches and 23 sub-branches in Mainland China. It has also invested RMB5.3b (S$1.1b) to acquire a 13% stake and became the largest shareholder in Shenzhen Rural Commercial Bank (SZRCB) in Apr 21. Greater China (including Taiwan but excluding Hong Kong) accounted for 8.6% of DBS's total income in 2021 and 14.3% of total loans as of Dec 21. Loans denominated in Chinese Yuan accounted for 4.6% of total loans as of Dec 21.
  • Our target price of S$38.15 for DBS is based on 1.58x 2023F P/B, derived from the Gordon Growth Model (ROE: 12.6%, COE: 8.5% (previous: 8.25%), growth: 1.5%).
  • See


  • We expect OCBC's NIM to be unchanged at 1.55% in 2022 (previous: 1.54%) and expand 15bp to 1.70% in 2023 (previous: 1.63%). We raised our earnings forecast by 1% to S$5,011m for 2022 and by 3% to S$5,598m for 2023.
  • We expect dividend of S$0.56 in 2022 and S$0.60 in 2023, which represents dividend payout ratio of 50.3% and 48.2% respectively. OCBC provides dividend yield of 4.7% for 2022 and 5.0% for 2023.
  • Exposure to Mainland China. OCBC Wing Hang China currently has a network of 18 branches and sub-branches across 13 cities across Mainland China. It has a 20% stake in Bank of Ningbo worth S$9.7b in market value. Mainland China accounted for 11% of OCBC's total loans (onshore: 2.4%, offshore: 8.6%) as of Dec 21. Loans denominated in Chinese Yuan accounted for 2.3% of total loans as of Dec 21.
  • Our target price of S$15.00 for OCBC is based on 1.19x 2023F P/B, derived from the Gordon Growth Model (ROE: 10.0%, COE: 8.5% (previous: 8.25%), growth: 0.5%).
  • See

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-21
SGX Stock Analyst Report BUY MAINTAIN BUY 15.0 DOWN 15.100
BUY MAINTAIN BUY 38.15 UP 35.800