Monetary Policy Under The Fog Of War
Systemic risk is elevated but below the levels seen during past crises as Russia is
not well integrated into the global financial system. Singapore banks’ exposures to
Europe and Russia are minimal. The Fed is expected to kick-start the interest rate
upcycle with a hike of 25bp next week. We see strong support for DBS at S$30.00
and for OCBC at S$11.00. BUY DBS (Target: S$35.80) and OCBC (Target: S$15.10) for
2022 dividend yield of 4.5% and 4.9% respectively. Maintain OVERWEIGHT.
WHAT’S NEW
• Russia shocked the world by invading Ukraine. Russian forces launched a full-scale
invasion of Ukraine by land, air and sea on 24 Feb 22. Facing stiff resistance from Ukrainian
forces, Russia has put its nuclear forces on special alert, risking an escalation to
unconventional nuclear weapons. Western countries have imposed sanctions by freezing the
assets of major Russian banks and its central bank and cutting selected Russian banks off
from the SWIFT messaging system.
• Liquidity crisis contained within Russia. Sanctions had a crippling impact on Russia’s
financial system with the Rouble losing 43% of its value ytd against the US Dollar. The Bank
of Russia was forced to hike its key interest rate from 9.5% to 20% to defend the Rouble.
The picture is vastly different outside of Russia. FRA-OIS spread, a measure of dollar
funding stress, inched higher by 27bp ytd to 34bp. The deterioration is modest compared to
previous crises, such as Europe’s Sovereign Debt Crisis (peaked at 59bp in Dec 11) and the
COVID-19 pandemic (peaked at 79bp in Mar 20). Financial markets are under stress but
remain functional.
• Systemic risks under control. Russia is not well integrated into the global financial system.
Financial linkages with other countries have been reduced since the European Union first
imposed sanctions after Russia annexed Crimea and Sevastopol in 2014. Foreign central
banks have not tapped on swap lines and repo facilities established by the Fed, indicating
most countries didn’t experience dislocation in their financial systems.
• US an oasis far away from ongoing crisis. The US economy created a substantial
678,000 jobs in Feb 22. The unemployment rate has improved 2.4ppt yoy to 3.8%, which is
near pre-pandemic levels (troughed at 3.5% in Jan 20). We observed that labour force
participation rate for those aged 55 and above has improved 0.9ppt yoy to 39.3%. Core PCE
inflation remains elevated and reached 6.1% in Jan 22, the highest in four decades, even
before accounting for the recent surge in energy prices caused by Russia’s invasion of
Ukraine. Implied inflation based on five-year Treasury Inflation-Protected Securities (TIPS)
has deteriorated 0.6ppt ytd to 3.5% in Mar 22.
• The US is self-sufficient and would not be affected by the embargo on imports of crude oil
and liquefied natural gas from Russia.
• Monetary policy under the fog of war. With conditions in the labour market having
improved and higher inflation remaining a threat, the Fed is expected to kick-start the interest
rate upcycle with a hike of 25bp during the upcoming FOMC meeting on 15-16 March. We
expect a series of four hikes with the Fed Funds Rate reaching 1.0% by end-2022
(unchanged). We expect no hikes in 2023 (previous: four hikes).
ACTION
• Europe not a core market. Singapore banks’ core markets are within Asia. They have
established branches in London to serve their networks customers in Europe. They do not
have branches in continental Europe, such as Paris and Frankfurt. Europe is a small part of
the banks’ operations. Singapore’s three listed banks classify exposure to Europe under the
“Rest of the World” category, which also includes their exposures to Australia, Canada,
Japan and the US.
• Minimal direct exposure to Russia. The authorities have banned financial institutions from
entering into transactions or establishing business relationships with four Russian banks,
namely VTB Bank, Vnesheconombank, Promsvyazbank and Bank Rossiya. Singapore
banks are restricted from issuing letters of credit to finance trade in crude oil and liquefied
natural gas from Russia. They have minimal direct exposure to Russia.
• Heightened uncertainties but peace talks offer potential for rebound. The average P/B
in the month that P/B troughed during the past eight crises is tabulated below. Using the past
three crises (Europe’s Sovereign Debt Crisis, Crash in Oil & Gas and COVID-19 pandemic)
as a gauge, the potential downside is 30-42% for DBS, 1-13% for OCBC and 15-22% for
UOB. Direction for share prices of banks depends on the progress of peace talks to end the
Russia-Ukraine war. We see opportunities for bargain hunting in current weakness.
Technically, we see strong support for DBS at S$30.00 and for OCBC at S$11.00.