- Asia-Pacific banks are well-placed to absorb potential contagion effects emanating from the Silicon Valley Bank (SVB) collapse. Direct exposures are negligible, and secondary impacts are manageable. Only a significant escalation would be sufficient to change our view.
- Some Japanese banks, which have large holdings of U.S. government bonds are among the most exposed to weakened market sentiment because of SBV, but not to the extent where we anticipate any imminent rating changes.
- Of the 18 Asia-Pacific jurisdictions we cover, bank industry risk trends are stable in 17; Australia is the outlier, where the trend is currently positive.
- A key rating factor across the region is continuing depositor and stakeholder confidence. Prudent funding and liquidity management will remain integral to ratings stability.
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).
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.
Explainer Box: Silicon Valley Bank Rating Action
On March 10, 2023, S&P Global Ratings lowered its rating on Silicon Valley Bank to 'D' and lowered its rating on SVB Financial Group to 'CC'. The ratings were subsequently withdrawn.
We lowered our issuer credit rating on Silicon Valley Bank to 'D' following the announcement from the California Department of Financial Protection and Innovation that it took possession of the bank and appointed the Federal Deposit Insurance Corp. (FDIC) as receiver. At the time of closing, the FDIC immediately transferred all insured deposits of Silicon Valley Bank to the newly created Deposit Insurance National Bank of Santa Clara.
We expect SVB Financial Group to enter bankruptcy. The 'CC' rating is used when a default has not yet occurred but we expect default to be a virtual certainty, regardless of the anticipated time to default. In addition, the 'C' rating is used when an obligation is highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated higher.
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.
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.
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).
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.
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.
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
- First Republic Bank Downgraded To 'BB+' From 'A-' On Funding Profile Risk; Ratings On CreditWatch Negative, March 15, 2023
- Rated U.S. Banks Haven't Seen Widespread Deposit Outflows But Uncertainty Continues, March 15, 2023
- First Republic Bank 'A-' Rating Placed On CreditWatch Negative On Funding Profile Risk, March 15, 2023
- European Banks See Limited Contagion Risk From SVB, March 15, 2023
- The Fed's Plan For U.S. Banks Should Reduce Contagion Risk, March 13, 2023
- Silicon Valley Bank Rating Lowered To 'D' And SVB Financial Group Rating Lowered To 'CC'; Ratings Subsequently Withdrawn, March 11, 2023
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|
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.