Market Views: Is global banking in crisis after SVB, Credit Suisse?
Recent weeks have thrown the global financial sector into turmoil in a way that triggers uncomfortable memories of the global financial crisis of 2007-08.
In a historic and Swiss government-brokered deal, UBS on March 19 agreed to buy struggling rival Credit Suisse for SFr3 billion ($3.23 billion) and accept up to $5.4 billion in losses.
Banking stocks and bonds around the world dropped the next day investors fretted about the health of global banks, especially as the Credit Suisse-UBS deal came swiftly on the heels of the shock collapse of Silicon Valley Bank and Signature Bank in the US.
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Soon after the Swiss banks' deal, the US Federal Reserve, European Central Bank and other major central banks, issued statements to reassure financial markets in a bid to ward off any potential contagion risks.
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AsianInvestor asked asset managers how institutional investors should assess financial sector assets in 2023, and what the next danger zones could be.
The following contributions have been edited for clarity and brevity.
Anthi Tsouvali, multi asset strategist
State Street Global Markets
We have been negative on banks for a while. Aggressive interest rate hikes have been a tailwind, but banks are vulnerable at the end of the business cycle.
We don’t believe that the SVB fallout is systemic but banking stocks are at risk - large positions, high valuations and low profitability don’t bode well for the group.
Our systemic risk index has only been higher three times in its long history – the global financial crisis, the European fiscal crisis and Covid-19.
The SVB collapse has not triggered a sharp increase, signaling that the risk has not been systemic. However, bank stocks are in trouble.
As loan generation has been growing faster than assets, banks become more vulnerable to the deteriorating macro backdrop and banking stocks could be in for a sharp rerating.
Over the last year, banks have been the beneficiary of an increasing interest rate environment. Throughout that time, institutional investors bought the sector and prices rose.
Financials were the largest overweight position in the US at the beginning of the year. At the same time, profitability has not been boosted as expected given the increase in rates; net interest margins are now just at pre-pandemic levels.
In fact, since the beginning of the year, multiples rose while profitability fell. We remain negative on banks as we believe any good news is already priced in and risk to the downside is very high.
Jiahao He, CIO and co-founder
3 Capital Partners
The collapse of several US regional banks and the quick downfall of Credit Suisse left investors with an important lesson to learn: it is no longer possible to simply rely on capital ratios and credit ratings to evaluate constituents in the financial sector.
Investors must also pay attention to the profitability and sustainability of the business, diversification of business lines, depositors, the stability and size of liquidity reserves and, more importantly, the strength of the company’s risk management policies and framework.
While idiosyncratic opportunities may arise from the recent sell-off, we remain cautious about the sector in the medium term.
Such overhang may induce a credit tightening cycle as regional banks face higher scrutiny and pull back from lending.
Tighter regulations are on the horizon. These factors will inevitably put pressure on banks’ profitability.
As a result, we expect higher risk in the unsecured corporate high-yield space and prefer to stay away from cyclical or economically sensitive industries. We believe owning high-quality assets with a longer-term investment horizon is the best way to navigate the current cycle.
David Chao, global market strategist, Asia Pacific ex-Japan
Invesco
Markets are looking for a scapegoat for the recent banking turmoil, and blame can largely fall on the Fed’s abrupt and rapid reversal of its monetary policy path.
I expect interest rates that banks pay depositors are likely to go up while US Treasury rates and other government bond rates will fall as depositors become more aware of their available rates and risk options. This should place downward pressure on banks’ net interest margins that could drive more consolidation in the industry and less credit expansion in the economy.
We continue to be in a contractionary part of the economic and market cycle and the recent banking crisis reinforces this view. We know that monetary policy has around a 12-18 month lag and so I expect certain segments of the economy – such as small cap companies without easy access to liquidity - to start feeling the impact soon.
I favor defensive assets such as cash, short-term government bonds, investment-grade, and gold. From a regional perspective, we continue to prefer EM assets. This is partly because they are relatively cheap, which boosts long-term potential, as well as a hedge if the tightening cycle ends earlier than consensus estimates.
We also think the US dollar is expensive and that the Japanese yen is cheap. Given our belief that Fed tightening is coming to an end, we expect the dollar to weaken. If the BOJ starts to normalize, we think the yen could appreciate notably.
Sue Trinh, co-head of global macro strategy, multi-asset solutions
Manulife Investment Management
Direct contagion from the recent banking scare to Asia is largely limited, to the extent that financial and macro stability positions of economies in the region are generally more robust than previous crises.
Far more important to the Asian regional outlook is the event’s impact on global growth, US dollar funding conditions and US dollar strength.
While several companies within Asia’s venture capital and tech start-up sectors have exposure to those failing banks, they appear to be small in scale and few have admitted major losses.
If the global economy manages to avoid a hard landing, and US dollar funding costs remain low, Asia should be able to weather the storm.
Potential contagion to Asian banks emanating from this episode seems limited: Banks in the region are well capitalised and direct exposures are small in scale.
Liquidity coverage ratios are high and deposit bases also tend to be stickier. Corporate deposits are well diversified across industries.
Banks that can maintain a strong liquidity profile and benefit from the higher rate environment have the potential to generate a strong return on equity.
If problems in the US and European banking systems become more acute and investor risk aversion spikes, Asian economies with large current account deficits reliant on foreign capital flows will be most affected.
Current account deficits in Asia are mostly benign. Although there are signs of strain, most measures remain far below crisis levels. Many Asian currencies have appreciated against the US dollar since the banking issues came to light.
Xin-Yao Ng, investment manager of Asian equities
abrdn
We do not expect major spillover of risks from the US or Europe into the banking system in Asia.
Fundamentally, fiscal strength of countries in Asia and the balance sheet resilience of banks here are now made of different stuff than years ago, learnt lessons from the Global Financial Crisis and Asian Financial Crisis.
If things get worse, we see flight to quality actually benefitting those strongest banks with leading deposit franchise, evidenced by higher CASA (current account savings account) ratios that’s cheaper and more sticky.
We watch for risks in lower-quality banks that especially rely more on wholesale funding that has gotten costly and tight.
A particular segment is going to be the digital or new age banks that emerged over the last few years, who have not built up a sticky deposit base and have no track record through cycles.
We view the backdrop as incrementally negative for banks in Asia, despite limited direct impact, especially for those in regional developed markets due to their higher correlation to US monetary policy.
This is since we see indirect impact from the macro standpoint, where a dovish turn by the Fed could be accelerated while the Western economies could be weaker than expected, offsetting more of any positive pull from China in terms of global economic momentum.
These raise the pressure on interest margin and asset quality.