Singapore Banks - UOB Kay Hian 2023-07-13: Resiliency That Defies Gravity

• The Fed has signalled another two rate hikes of 25bp each to bring Fed Funds Rate to 5.50% by end-23. Core inflation is receding very gradually and we expect interest rates to stay elevated till mid-24.
• Our top BUY pick is OCBC (SGX:O39) (target price: S$17.50) for its new dividend policy with payout ratio at 50%, focus on ASEAN and defensively low P/B of 0.99x.
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• Maintain OVERWEIGHT.

Higher interest rates for a longer time frame.

• The Fed kept interest rates unchanged at the FOMC meeting on 14 Jun 23 but signalled more upcoming rate hikes. The dot plot indicates another two rate hikes of 25bp each to bring Fed Funds Rate to 5.50% by end-23. Fed chairman Jerome Powell said he does not anticipate core inflation to return to the Fed’s target of 2% until 2025, which suggests that interest rates could stay higher for a longer time frame.
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US economy stays resilient despite the series of rate hikes.

• The US economy has weathered higher interest rates, tightening of liquidity and fallout from the collapse of three regional banks. Labour market remains too tight with unemployment rate still low at 3.6% in Jun 23, near the historical low of 3.4% recorded in Apr 23.
• Lately, new single-family home sales and new construction activities have also surged in May 23.

Sensitivity analysis.

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Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-07-13 SGinvestors.io

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