With Wall St providing no direction, the STI fell every day last week

Date: May 15, 2023

  • The STI fell for all five days, losing 58 points or 1.8% at 3,208.55
  • Banks led the falls on narrower NIM concerns – DBS lost 3.9%, OCBC fell 3.2% and UOB dropped 0.8%
  • OCBC reported 39% rise in 1Q profit to new high of S$1.88b
  • SingPost’s 2nd half profit down 28%, will evaluate its postal business
  • Wall St stocks were supported by benign CPI and PPI data
  • Probability of zero US Fed rate hike in June is now 83%
  • But US banking and Government debt ceiling worries remain


Banks led the STI down every day of the week

The Straits Times Index fell every day last week, losing 58 points or about 1.8% to 3,208.55. Banks were particularly hard hit despite all three reporting record first quarter profits as concerns surfaced about their future earnings because of narrowing net interest margins (NIMs).

Overall activity was subdued with average volume traded daily amounting to a low $S966m versus S$972m the previous week.

Over on Wall Street, the release of relatively benign Consumer Price Index (CPI) and Producer Price Index (PPI) data during the week did help provide some support as it led to hopes of a pause in interest rate hikes but concerns over the health of the US banking sector and the Government’s debt ceiling problems capped gains.

OCBC reported a 39% rise in 1Q profit to a new high of S$1.88b

Singapore’s second-largest lender OCBC last week reported a 39 per cent year on year rise in net profit for its first quarter ended 31 March 2023 to S$1.88 billion, beating the S$1.74 billion estimate by analysts.

In a press release, the bank said return on equity rose to 14.7% and earnings per share improved to S$1.68 on an annualised basis.

Net interest income rose 56 per cent to S$2.34 billion amid a 5 per cent growth in average asset balances. Net interest margin (NIM) – a key gauge of a lender’s profitability – shot up by 75 basis points to 2.3 per cent.

However, the bank will have to contend with a likely peak in its margins as the US Fed comes to the end of its rate-hiking cycle, as well as slowing loan growth amid the higher rates.

Chief executive Helen Wong said she expects NIM to come in around 2.2 per cent in 2023 amid low- to mid-single-digit loan growth, comparable with her previous forecast for mid-single-digit growth.

“The loan book does not have a lot of potential to be repriced upwards, but the funding costs will continue to catch up – a natural phenomenon in a rapidly rising interest rate environment,” she said, adding that rates have probably peaked, but that the Fed is unlikely to make any cuts in 2023.

Maybank said while OCBC’s earnings were better than expected, it is more cautious going forward in terms of asset quality and NIM expansion.

“EPS for 2023-25E is lowered by 1-3% to account for this. We lower our multi-stage dividend discount model target price to S$13.19 from S$13.48. The Group’s strong capital and liquidity levels together with potential improvement in activities in North Asia is defensive. However, we believe risk-reward is currently balanced given asset quality uncertainty. HOLD’’ said Maybank.

Over the course of the five trading days, OCBC’s shares fell S$0.40 or 3.2% to S$12.25.

DBS was the worst off, losing S$1.24 or 3.9% at S$30.66 while UOB was relatively unscathed, only dropping S$0.22 or 0.8% over the week to S$27.77.

The outlook for the three local banks

All three bank bosses pointed out that profit margins from high interest rates have peaked as the Fed will likely stop its rate-hiking cycle soon. Also, a worry is possible spillover effects from US bank worries.

Phillip Securities analyst Glenn Thum was quoted in the Straits Times saying another major headwind is muted loan growth but this could pick up in the second half as more people become comfortable with higher interest rates.

Maybank’s research head Thilan Wickramasinghe said “with interest rates expected to stay higher for longer and with slowing global growth, we think the risks to asset quality are increasing. In terms of geographies and sectors, we think falling asset quality will be broad-based’’.

Fitch Ratings’ director Willie Tanoto said “we think non-performing loans will rise by year-end amidst this more difficult credit climate, but the increase in impairment ratios is likely to be modest and within the three banks’ capacities to absorb from their ample loan-loss ratios’’.

SingPost’s 2nd half profit down 28%, will evaluate sustainability of domestic postal business

On Thursday, SingPost reported a 28% drop in earnings for its second half ended 31 March 2023 to S$34.6m and announced it is conducting a strategic review of its portfolio which will include evaluating the commercial sustainability of its domestic postal operations.

The company attributed the profit fall to losses from its postal and parcel business as delivery volumes fell, whilst operational costs within the segment rose due to inflation. For the half-year, the postal and parcel business recorded a S$3.8m operating loss compared to an operating profit of S$13.6m previously.

Revenue for the group fell 2.2% to S$913.4m and earnings per share fell from S$0.0186 to S$0.013. SIngPost’s shares ended Thursday unchanged at S$0.515 and slipped S$0.005 to S$0.51 on Friday on volume of 6m.

Over on Wall St, benign CPI and PPI data helped support stocks

The consumer price index rose less than 5% year-over-year in April and was lower than what economists had expected. Also, April’s producer price data showed that wholesale inflation advanced at the slowest pace in more than two years, another data point that supports a Federal Reserve pause.

The producer-price index rose 0.2% month over month in April, slower than the 0.3% expected by economists. On an annual basis, prices moved up 2.3%, the slowest gain since January 2021 and slightly lower than expected.

The expectation of lower rates—and inflation that gets under control—has brought the 10-year Treasury yield down to just under 3.44% from just over 3.5%.

The two-year Treasury’s yield was 3.98%, compared with 4.02% at its Tuesday close. Bond prices and yields move inversely.

According to the CME FedWatch Tool, the probability of there being no rate hike at the 14 June meeting is now 83%.

US bank worries are still present whilst…

The problem is that banking issues are raging on. PacWest Bancorp has continued to see depositor money being withdrawn as people flock to higher-yielding money market funds.

…US debt ceiling worries are now in focus

The debt ceiling remains unresolved, with President Biden and House Speaker Kevin McCarthy having postponed talks on government finances until next week.

The concern is that the U.S Treasury may not have adequate funds to meet its liabilities by the end of the month, which would further lower the price of short-term Treasury debt—potentially spelling trouble for money market funds, which own some of that debt.

JPMorgan Chase CEO Jamie Dimon says the unresolved debt ceiling situation could wreak havoc on the stock market.

Dimon said on Bloomberg television that if a debt ceiling agreement isn’t reached, it would be “potentially catastrophic,” adding that as a government default on credit draws closer, there will be panic.

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