APAC banks resilient to risks highlighted by U.S. bank failures
Jonathan Cornish

Editor's note: This article was co-written by Jonathan Cornish, the managing director of APAC Banks, Fitch Ratings; David Wong, senior director of financial institutions, Fitch Ratings; Tim Roche, senior director of financial institutions, Fitch Ratings; Tania Gold, senior director of financial institutions, Fitch Ratings; and Duncan Innes-Ker, senior director of Fitch Wire. The article has been edited for clarity. It reflects the authors' opinions and not necessarily the views of CGTN.

Direct exposures to Silicon Valley Bank (SVB) and Signature Bank among Fitch Ratings' portfolio of rated banks in Asia Pacific (APAC) appear limited, says Fitch. Weaknesses that contributed to the failure of the two banks are among the factors already considered in our rating assessments for APAC banks, but these are often offset by structural factors, such as regulation and our expectations that authorities would provide liquidity support if needed.

The quality and persistence of deposits is an important credit consideration for bank credit ratings. This applies particularly when liquidity is tightening sharply and when unrealized valuation losses on asset holdings could be realized if a deposit run forced banks to sell assets.

Few Fitch-rated banks in APAC have the sort of depositor concentration profiles that left SVB particularly vulnerable to a run. Mongolia's banking sector concentration is above average, due to the economic dominance of the local resources sector, but this is captured in the country's banking sector operating environment score of 'b'.

We believe the risk of deposit volatility could be significant for digital banks in APAC. However, the ratings of the two digital banks in Fitch's APAC portfolio are driven by expectations that parent entities would provide extraordinary support if needed, mitigating this risk.

We generally view securities portfolio valuation risks as manageable for APAC banks, although exposures tend to be greatest in India and Japan. In addition to market-specific structural factors, this partly reflects the fact that interest rate increases over 2022 were smaller than those in the U.S. for most APAC markets - a pattern that we expect to be sustained in 2023. Notably, while we expect the Bank of Japan's yield cap to be raised by 50bp later this year, we do not see a sharp rise in Japan Government Bond yields.

Regulators in the region also emphasize strong interest-rate risk management, led by Australia, which levies minimum requirements for non-traded interest rate risk. Many developed markets incorporate the minimum Basel liquidity rules, which smaller U.S. banks are not subject to. In line with this, Japanese banks have been reducing securities investments and duration. Some banks in Taiwan have raised capital to restore common equity Tier 1 (CET1) capital ratios after interest-rate-related valuation losses.

We believe risks from valuation losses are offset by the likelihood that the authorities will provide liquidity support to banks if needed. Support for smaller banks may be more variable – we assume New Zealand's small non-bank deposit takers would not have access to the central bank's lender-of-last-resort facilities, for example. Ultimately, the creditworthiness of many Fitch-rated banks in APAC is heavily influenced by prospects for extraordinary sovereign support.

Our base case is that recent developments in the U.S. will not cause major shifts in U.S. monetary policy. If they do result in lower peak U.S. rates or earlier U.S. rate cuts than we expect, this could cause monetary policy in some APAC markets to be looser than under our baseline. Generally, we believe this would be credit negative for APAC banks, as the effect on net interest earnings would outweigh that on securities valuations, but it would aid asset quality and we would not expect meaningful effects on bank ratings.

The direct exposures among Fitch-rated banks in APAC to SVB and Signature that we are aware of are not material to credit profiles. Shanghai Pudong Development Bank (SPDB), for example, has a joint venture with SVB, but its total assets were only around 0.25 percent of SPDB's at the end of 1H 2022. Some Japanese banks and their clients also have limited indirect exposures, but these would not be significant for the banks' credit profiles.

(Cover image via CFP)

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