DBS could gain the most from Fed rate hike: analysts

Its net profit could rise by 1.7% for every 10bps increase in SIBOR.

More certainty on Fed Funds rate hike will be a boon for DBS, says RHB.

"Whilst we have kept our earnings forecasts, the probability of a Fed Funds rate hike has risen sharply, and some market players also see a higher likelihood of more Fed Funds rate increases going forward. We believe these could catalyse DBS’ share price to rise further, building on its total return of 10% MTD," it explained.

According to the research house, despite DBS’ 10% share price rise MTD, the positives from expected higher Singapore interest rates have not been fully priced in.

Since the US Presidential Elections, the Singapore 10-year government bond yield has jumped ~40bps to 2.297%. It expects Singapore Interbank Offered Rate (SIBOR), which rose at a more subdued pace, to increase more sharply going forward. It believes that DBS’ earnings would rise most (vs peers) from every bp rise in SIBOR.

Given the positive correlation between the US Fed Runds rate and SIBOR , it believes SIBOR would be on an uptrend. The 3-month SIBOR has already risen to 0.92%, from end-October’s 0.87%, and further increases can be expected through 2017. 

"Our sensitivity analysis shows that, in a steady state, a 10bps rise in SIBOR could raise DBS, OCBC’s net profits by 1.7%, 0.8% and 1.2% respectively," it said.

According to RHB, market expectations are for the Fed Funds rate to be raised in December, and more increases are expected in 2017.