“We lowered our target prices for DBS to $30.15 and OCBC to $14.28,” says Jonathan Koh in a Tuesday report.
On June 13, the Federal Reserve hiked Fed funds rate by 25bps to 1.75% as anticipated. Based on a poll of FOMC participants, the median projected path for Fed funds rate has increased to 2.4% at end 2018 from 2.1% previously and 3.1% at end 2019 from 2.9%, However, the rate remains unchanged at 3.4% for end 2020.
The projected path implies four interest rate hikes in 2018 from previous three, three in 2019 but only one in 2020 from two. According to Chairman Jerome Powell, the US economy is in a great shape. Fed board members have revised GDP forecast higher by 0.1ppt to 2.8% for 2018. They also expect unemployment rate to trend lower to 3.6% from 3.8% and core PCE inflation to trend higher to 2.1% from 1.9%.
The US economy has picked up from a slow start in January and February. Many private sector economists have revised up their US GDP forecasts to a 3-4% growth for 2Q18 from +2.3% in 1Q18 due to the recovery in manufacturing, inventory replenishment and narrower trade deficit. Atlanta Fed’s GDPNow forecasting model, an unadjusted running estimate of US GDP growth based on available economic data, estimates that US GDP would expand by 4.7% in 2Q18.
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Koh says there is an upside risk for domestic interest rate due to the correction in the bond market and the resultant higher yields for government and corporate bonds would have a positive impact on pricing for corporate loans.
The recent strength in the US dollar, if sustained, should booste domestically for SOR and SIBOR too.” The US dollar has so far strengthened by 3.8% in 2Q18 against the Singapore dollar. “The basis for our expectation of higher domestic interest rates remains intact,” says Koh.
Meanwhile, the share prices or bank have experienced volatility as both the US and China have ramped up trade war rhetoric. However, it is difficult to imagine that both the US and China would accept a lose-lose outcome, adds Koh.
As at 2.38pm, shares in DBS are up 3 cents at $26.69 at 1.36 times FY19F book while shares in OCBC are down 3 cents at $11.57 or 1.11 times FY19F book.
