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SVB Default And Asia-Pacific Banks: Secondary Effects Are The X-Factor

Chart 1


Contagion risk hangs over Asia-Pacific. S&P Global Ratings believes the knock-on effects from the collapse of Silicon Valley Bank (SVB) should be manageable at current rating levels across Asia-Pacific banks. Of the about 380 banks and nonbank financial institutions that we rate in the region, we anticipate no rating actions directly related to the SVB default.

Asia-Pacific Markets Remain Volatile

SVB-triggered market volatility is mainly hitting U.S. markets, but Asia-Pacific and European markets are also experiencing volatility. Japan's Topix Banks Index fell 7.4% on Tuesday driven mainly by concerns from the U.S. although only to stabilize on Wednesday (see chart 2).

Chart 2


So while the swift market reaction to the SVB failure itself seems to have faded somewhat, markets generally remain very volatile. We note a further downgrade in the US regional bank sector overnight: see "First Republic Bank Downgraded To 'BB+' From 'A-' On Funding Profile Risk; Ratings On CreditWatch Negative," published March 15, 2023, on RatingsDirect. The scenario continues to evolve. Market sentiment and, therefore, confidence can turn very quickly.

Japanese Banks In The Spotlight

Unlike banks in the U.S. and Europe, Japanese banks have not enjoyed a large interest rate-driven boost to net interest margins. They have, however, sustained unrealized fair value losses on their foreign bond holdings. Also, in Japan's case, banks that focus on securities investment rather than lending have high sensitivity to interest rates; (such banks include Norinchukin Bank, Japan Post Bank Co. Ltd., and Shinkin Central Bank).

We already recognize high interest rate sensitivity in our ratings.  Specifically, our moderate assessment of the risk positions on Norinchukin Bank and Japan Post Bank constrains the issuer credit ratings on the entities. For Shinkin Central Bank, which has an adequate risk position, sensitivity to interest rate risk is a key downside factor that could hit our ratings on the institution.

We are likewise monitoring the effect of unrealized losses on earnings for the three global systemically important (G-SIB) banking groups in Japan (see chart 3).

Our team of economists currently assumes that Japan's policy rate will rise 0.2% to +0.1% in 2023 (see details for "Economic Research: Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth," (Nov. 28,2022).

Based on this assumption, we run a simulation how a +0.2% parallel shift in the yield of Japanese yen would affect the fair value of holding bonds and our view of banks' capital and earnings. The result is that we estimate that about 10% of banks' stand-alone credit profiles would be negatively revised by one notch because of weaker capitalization.

Assuming a parallel shift of +0.5%--being far in excess of our economists' forecasts--we estimate about 20% of banks' stand-alone credit profiles would fall by one notch because of weaker capital.

In both cases, most of the banks' issuer credit ratings would not be affected, assuming there is no change to the Japanese sovereign ratings. This is because of ratings uplift for banks because of government support.

These estimates only take into account the effect on capital because of increasing unrealized losses on holding securities due to higher interest rates become realized losses. It also assumes that other conditions remain unchanged. That is, we do not incorporate the other effects, which could be positive or negative. These include improving net interest margins, as has occurred already in the U.S. and Europe because of higher rate increases. It likewise could include higher credit costs due to effect of higher interest rates on bank borrowers.

Any wide fluctuations or rapid changes in bond prices could have an even more significant impact than we already factor into these ratings. We continue to view Japan's industry-wide funding and liquidity as very strong with a high share of household deposits. This key strength of Japan's banking industry would become a strong buffer from to any contagion risks, in our view.

Chart 3


Funding and Liquidity Profiles Are Sound

Funding has long been considered a relative strength in many banking jurisdictions in Asia-Pacific.  Currently, we assess systemwide funding in 10 of the 18 banking systems we cover in Asia-Pacific as either very low risk or low risk (see chart 4). For another five, we see an intermediate risk factor.

Chart 4


Through periods of significant stress over the past 20 or so years the funding and liquidity of Asia-Pacific banks have proved robust. The banks emerged relatively unscathed compared with other regions from the global financial crisis that began in 2008, and from the European sovereign debt crisis. Since then Asia-Pacific banks have progressively benefited from the global regulatory impetus to strengthen bank balance sheets. This has involved more robust capital, funding and liquidity standards.

We cannot identify a rated bank in Asia-Pacific that has a very similar deposit base to SVB. SVB serviced a corporate client base centered in the tech, health, and life sciences sectors; its customer base was highly concentrated in commercial deposits.

SVB's average depositor size was large compared with typical banks in Asia-Pacific with 88% of SVB's deposits above the Federal Deposit Insurance Corp.'s US$250,000 limit. The deposit bases of most Asia-Pacific banks tend to have a significantly larger retail flavor.

Certain macro and sector-wide funding and liquidity indicators underpin our view that banks in Asia-Pacific should stay resilient if contagion effects amplify.   Deposits from domestic households constitute a significant proportion of total domestic deposits in Asia-Pacific banks (see chart 5). Furthermore, we assess liquidity levels as at least adequate across every one of the Top 60 banks in Asia-Pacific (see chart 6).

Chart 5


Asian Banks Have Reasonable Buffers To Cope With SVB Contagion

Should contagion risks stemming from the SVB default be more complex or troublesome than we now envisage, the Asia-Pacific banks systems are in good shape. Of the 18 banking jurisdictions we cover across Asia-Pacific, economic risk trends are stable in 17 jurisdictions. New Zealand is the outlier since its economic risk trends are negative.

Industry risk trends are also stable in 17 jurisdictions. In Australia, the outlier, industry risk trends are positive (see chart 3). About 84% of our Asia-Pacific bank ratings are on stable outlook and the median rating level is 'BBB+'.

Contagion risks could take hold in the nonbank financial institution (NBFI) sector, more so than the bank sector. Even here we don't believe Asia-Pacific NBFIs are particularly vulnerable to the spillover effects from SBV, by itself. An amplification of contagion effects, however, could manifest more negatively in the NBFI sector compared with the bank sector.

The NBFI sector itself is weaker than the bank sector. It typically involves smaller, more concentrated, and less-systemically important entities. We believe the direct exposures of Asia-Pacific banks and NBFIs to SBV and more generally to U.S. regional banks is not significant.

Most Asia-Pacific NBFIs are vanilla in nature. They mainly comprise stereotypical finance companies, leasing companies, asset managers, and brokers. Some more concentrated NBFI entities have strong and committed parent groups. The tech fallout globally since the plunge in prices by digital assets from market highs has had a negligible effect in Asia-Pacific, across both banks and NBFIs.

Chart 6


Secondary Effects--We May Not Have Hit The Bottom

While the failure of SVB has no immediate impact on the ratings on Asia-Pacific banks, the knock-effects could yet have an effect. Stresses that banks can comfortably take in their stride could morph into bigger problems that are difficult to predict. They could also connect or combine with other stresses causing a confluence of negative developments that could yet test buffers across the Asia-Pacific banking sector.

This is the nature of contagion. Foreseeable secondary effects could include increasing risk aversion by investors. This ultimately could result in higher funding costs or other negative consequences.

Asia-Pacific Governments Are A Backstop For Banks

We see extraordinary government support as likely in a crisis for most Asia-Pacific banking systems.  In the unlikely event of a financial crisis, bailouts of key banks would be the likely course of action for most Asia-Pacific jurisdictions, including all the G-20 governments in the region.

In 14 of the 18 banking jurisdictions (about 78%) in Asia-Pacific where we have bank ratings (see chart 7) we believe that government support would be the most likely resolution mechanism if contagion effects are severe. This is an important backstop; all 21 sovereign ratings across Asia-Pacific are on stable outlook.

Our view concerning government support in Asia-Pacific is a clear point of contrast with some other regions. In North America and Western Europe, we anticipate that additional loss-absorbing capacity (ALAC) would be the more likely crisis-fighting tool in 22 of 24 countries. In these countries we believe that public authorities would be more likely to use resolution frameworks and bail-in buffers to deal with failed banks that posed a risk to financial stability.

While systemically important financial institutions in Asia-Pacific are the most likely beneficiaries of extraordinary government support, support in a stress situation is not necessarily limited to these names.

Government support in various forms are also available in the U.S. and Western Europe. This was indicated by the support for depositors by U.S. regulators in the SVB case. It was also shown in the intervention of the U.K. government in the gilts market in late 2022, which mitigated the effects of plunging prices on pension funds.

Chart 7


Asia-Pacific banks have become somewhat accustomed to absorbing global contagion effects. Most institutions in the region withstood the global financial crisis and the European sovereign debt crisis. We anticipate a similar outcome from the SVB failure, a much smaller contagion event.

Editor: Jasper Moiseiwitsch

Digital design: Evy Cheung

Related Research

This report does not constitute a rating action.

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Primary Credit Analyst:Gavin J Gunning, Melbourne + 61 3 9631 2092;
Secondary Contacts:Vera Chaplin, Melbourne + 61 3 9631 2058;
Ryoji Yoshizawa, Tokyo + 81 3 4550 8453;
Sharad Jain, Melbourne + 61 3 9631 2077;
Geeta Chugh, Mumbai + 912233421910;
Ivan Tan, Singapore + 65 6239 6335;
Nico N DeLange, Sydney + 61 2 9255 9887;
Daehyun Kim, CFA, Hong Kong + 852 2533 3508;
HongTaik Chung, CFA, Hong Kong + 852 2533 3597;
Eunice Fan, Taipei +886-2-2175-6818;
Chizuru Tateno, Tokyo + 81 3 4550 8578;
Ryan Tsang, CFA, Hong Kong + 852 2533 3532;
Ming Tan, CFA, Singapore + 65 6216 1095;
Lisa Barrett, Melbourne + 61 3 9631 2081;
Research Assistant:Priyal Shah, CFA, Mumbai

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