Banks seen to cope with SVB contagion

THE ASIA-PACIFIC banking sector, including in the Philippines, has reasonable buffers to cope with possible contagion effects from the failure of Silicon Valley Bank (SVB), S&P Global Ratings said.

“Asia-Pacific banks are well-placed to absorb potential contagion effects emanating from the SVB collapse. Direct exposures are negligible, and secondary impacts are manageable,” S&P said in a note released on Thursday.

S&P said it believes the fallout from SVB would be manageable at current rating levels across Asia-Pacific banks. Of around 380 banks and nonbank financial institutions it rates in the region, S&P said it does not anticipate any rating actions directly related to the SVB default.

SVB became the biggest bank in the United States to fail since the global financial crisis in 2008. Its sudden closure rattled markets, raising concern over its possible impact on the global banking sector.

Of the 18 banking jurisdictions it covers in Asia-Pacific, S&P said economic risk trends are stable in 17 jurisdictions, including the Philippines. Only New Zealand’s economic risk trends are negative.

“While the failure of SVB has no immediate impact on the ratings on Asia-Pacific banks, the knock-on 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,” S&P said.

Unlike SVB, securities held typically by Philippine banks could have been as high as one-third of their books in 2020 and 2021 when interest rates were extremely low, S&P Director and Lead Analyst for South and Southeast Asia Ivan Tan said. This was higher compared with the average South and Southeast Asian banks.

“So, when 2022 came around, and just before the Bangko Sentral ng Pilipinas (BSP) started to hike rates, you can see the holdings of investment securities come down. So, on average if you look at the banking system now, it is around 15-20% of their books,” Mr. Tan said.

He noted that SVB had investment securities make up close to 55% of its total balance sheet.

In a webinar, S&P Senior Director and Sector Lead Gavin Gunning said banks in the Asia-Pacific region are well-placed to absorb any contagion effects from the SVB collapse due to certain macro and sector-wide funding and liquidity indicators.

“Deposits from domestic households constitute a significant portion of total deposits in the Asia-Pacific banking sector. And further to that, liquidity levels are at least adequate across every one of the top 60 banks in Asia-Pacific,” he said.

In the Philippines alone, the capital adequacy ratio of big banks stood at 16.5% while the common equity tier 1 ratio hit 15.4% as of end-June 2022, based on the central bank’s latest report on the Philippine financial system.

Both figures were well above the BSP minimum requirements of 10% and 6% respectively. Meanwhile, banks’ liquidity coverage ratio reached 192.5% as of end-June last year, almost double the 100% minimum regulatory requirement of the central bank. 

However, Mr. Gunning said they acknowledge buffers may be challenged if contagion effects worsen.

“If contagion risk stemming from SVB default would be more complex or would be more troublesome than we currently envisage, then Asia-Pacific banking systems, despite being well-buffered, could be challenged,” he said.

He also noted that nonbank financial institutions (NBFIs) could be negatively affected quickly if contagion risks were amplified. 

“We note that the NBFI sector is weaker than the banking sector and typically involves smaller, more concentrated and less systemically important entities,” he said. 

But governments in the Asia-Pacific may lend extraordinary support for most banking systems if a crisis occurs, he added. 

Earlier this week, BSP Governor Felipe M. Medalla has assured markets that Philippine banks have no direct exposure to the SVB collapse.

The Bankers Association of the Philippines also said that developments in the US financial system have no “substantial or material impact” on the Philippine banking industry. — Keisha B. Ta-asan