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Market Volatility
Rahul Sadiwala
Fund holdings in Credit Suisse, Signature Bank and SVB Financial Group
As of 2/28/2023
As the fallout from the collapse of Silicon Valley Bank ripples across the world, markets continue to consider potential contagion effects on the global banking sector and beyond.
When it comes to Asian banks, they have been heavily regulated in recent years and risks are likely to be lower versus previous cycles. That said, there are three potential SVB linkages to consider, two direct and one in terms of the wider impact of US interest rate policy.
1. Limited capital holes from securities books
A first question to ask is whether any Asian banks have similar portfolio losses on security holdings that have not yet been realised. This is not an area of concern for banks across most of Asia given the relatively small size of their security books, accounting norms that require ongoing mark-to-market (MTM) through the other comprehensive income (OCI) line, duration hedges being standard practice, and meaningful unrealised equity gains (in the case of several Japanese banks).
2. Limited asset quality issues linked to US
A second question is whether we should expect asset quality issues linked to the fallout in the US. The first order impact looks limited as loans are either in the home country or pan-Asian in the case of the Singaporean/Hong Kong banks. The one exception are the Japanese banks since several of them have meaningful credit books in the US.
There is also a second order impact in that weaker US economy has negative implications for most Asian countries, and more so for export-led economies.
3. Is this the end of the US rate hiking cycle?
This is the single most important question as it relates to investing in Asian banks.
Until last week, the Fed Funds futures implied that we still had multiple hikes from the US Federal Reserve to come, with an exit Fed Funds rate in March 2024 higher than today. However, over the last few days, there has been a dramatic shift in what the market is expecting and the market now expects the Fed to start cutting rates beginning this summer.
This has profound implications for investing in Asian banks since US rates will ultimately drive rates in Asia. If we start to see the Fed pivot this summer, the winners among Asian banks for the next few years will be quite different versus those that outperformed during the past 18 months in a rising rate environment.
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