Global Equities
Capital IdeasTM
Investment insights from Capital Group
Categories
Market Volatility
Asian banks: end of Fed hiking could be key
Rahul Sadiwala
March 17, 2023
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.
Learn more about
Our latest insights
RELATED INSIGHTS
-
-
-
Interest Rates
Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.