An ambiguous FOMC statement leaves investors wondering what comes next

Date: May 8, 2023

  • The STI traded within a narrow range and lost 0.01% at 3,266.63
  • DBS reported a 43% jump in 1Q profit but its shares fell 2,.8% over the week
  • Most analysts lowered their DBS target prices
  • MAS imposed additional capital requirements on DBS
  • Keppel announced restructuring, analysts positive on the move
  • Ong family raised its Lian Beng offer from S$0.62 to S$0.68 per share
  • Wall St fell between Mon and Thurs but rebounded unexpectedly on Friday after a strong jobs report


A narrow trading range for the STI after an ambiguous FOMC

Last week’s main market-moving event was the US Federal Open Markets Committee (FOMC) meeting which ended on Wednesday. As expected, the Fed raised interest rates by 25 basis points, the 10th hike of this current cycle which started early last year and one which took the fed-funds rate to a target range of 5.00% to 5.25%, its highest since 2007.

The problem was that while the FOMC’s statement hinted at a pause, Chairman Jerome Powell said during his news conference that the central bank was prepared to lift rates higher if needed and that cuts were unlikely to happen this year.

Predictably, Wall Street’s reaction was one of disappointment, its major indices fell for four consecutive sessions between Monday and Thursday before rebounding unexpectedly on Friday after release of a strong April jobs report.

Also affecting sentiment in the US market was pressure on the banking sector after news of a possible sale of regional bank PacWest, as well as simmering fears of a coming recession.

The upshot was that as far as trading here was concerned, stocks moved within relatively tight trading ranges in a holiday-shortened week, the Straits Times Index eventually recording a net loss of 4 points or about 0.01% for the week at 3,266.63.

DBS reported a 43% rise in 1Q net profit, shares come under presssure

DBS on Tuesday reported a 43% jump in net profit for the quarter ended 31 March to a record S$2.6b, beating the S$2.3b that the market had expected.

Total income for the year grew 34% year on year to a record S$5b whilst return on equity was a new high of 18.6%. Net interest income climbed 69% to S$3.4b and net interest margin (NIM) rose to 2.12% for the quarter versus 1.46% in Q1 2022.

The bank expects full-year NIM to see a gradual decline and come in between 2.05 and 2.1%.

DBS declared an interim dividend of S$0.42 per share. DBS’s shares came under pressure over the week, losing S$0.92 or 2.8% at S$31.90. All this loss came after announcement of its results.

 Analysts lowered DBS target prices

Analysts on Wednesday lowered their target prices on DBS, with RHB downgrading the counter to “neutral” from “buy”.

The move came after DBS lowered its FY2023 guidance on loans and fee growth, net interest margins (NIMs) and treasury income amid a softer outlook.

In a report, RHB cut its target price on the lender to S$35.70 from S$39.80.

Meanwhile, CGS-CIMB maintained “hold” on the stock and trimmed its target price to S$35.30 from S$35.70.

The research team lowered its earnings-per-share forecast for FY2023 to FY2025 by between 1-7% as it expects lower NIM and loan growth estimates.

Among the other brokers, UOB Kay Hian (UOBKH) lowered its target price on DBS to S$41 from S$41.80, while maintaining its call to “buy”. The new target price is 1.88 times the brokerage’s FY2023 book value forecast for the lender.

MAS imposed additional capital requirements on DBS

On Friday, the Monetary Authority of Singapore imposed an additional capital requirement on DBS after the bank recently suffered its third digital banking breakdown in 18 months.

Along with the additional capital requirement of S$930m imposed on DBS in Feb last year that was related to a Nov 2021 disruption, this brings to total additional regulatory capital requirement on DBS to about S$1.6b.

The additional capital requirement on DBS is now 1.8 times its risk-weighted assets for operational risk, an increase from 1.5 times before.

Keppel announced restructuring, analysts positive on the move

Keppel Corp last week announced a major corporate restructuring, doing away with its conglomerate form and dividing itself into three distinct units, in a bid to simplify and further grow its operations.

The conglomerate, which has operations ranging from data centres to renewable energy assets, will restructure itself into three businesses – fund management, investment, and operating platforms.

Keppel is now targeting between S$10 billion to S$12 billion in cumulative asset monetisation by 2026-end. It has already achieved asset monetisation of S$4.9 billion as at end of first-quarter of fiscal 2023 since the program was launched in late 2020.

In response, CGS-CIMB maintained its “add’’ call on Keppel and an unchanged target price of S$8.70. The broker said the monetisation target is feasible as Keppel has been achieving S$1.2-S$1.6b per annum since 2020.

Meanwhile, Citi maintained its “buy’’ on Keppel with a target price of S$7.51. Citi’s analysts said the resumption of share buybacks, decent dividend per share of S$0.33 in the past two years and a sustained pace of asset monetisation are near-term price catalysts.

Privatisation offer for Lian Beng raised to S$0.68 per share

Construction firm Lian Beng Group’s controlling Ong family, through its investment holding company OSC Capital, last week raised its offer to take the company private from S$0.62 to S$0.68 per share.

This revision comes after SIAS had sent a letter to the offerors saying that S$0.62 versus a net asset value of S$1.54 did not appear to be “fair or reasonable” and called on the offeror to raise its price.

The revised price translates to a 19.3% premium over the Lian Beng’s last transacted price per share of S$0.57 on the last trading day prior to the offer announcement date on April 6.

The closing time and date of the offer have been set at 5.30pm on May 26.

Over on Wall St, a strong jobs report unexpectedly led to Friday rebound

The U.S. economy added 253,000 jobs in April, well above expectations for 185,000, while the unemployment rate fell to 3.4% when it was supposed to rise to 3.6%. Average hourly earnings rose 0.5%, well above expectations for a 0.3% increase.

Whilst such a strong set of numbers would normally have led to a selloff as it suggests the Fed will continue raising interest rates, some analysts explained Friday’s rally by pointing to a declining 3-month average because February and March were revised lower by 149,000.

Those revisions brought the three-month average down to 222,000 added per month, down from 295,000 at the end of March and nearly 320,000 at the end of February.

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