SVB collapse unlikely to cause systemic risk, say analysts

Ammar Al Khudairy, chairman of Saudi National Bank, the single largest shareholder of Credit Suisse, triggered the big selloff in the European bank on March 15.

Asked if SNB would inject more capital into the beleaguered bank, his firm response of “absolutely not” sparked off a frenetic scramble by the Swiss bank to put in place a credit line of CHF50 billion ($73.09 billion) from its own government.

Yet, in a separate interview before European markets opened on March 16, Al Khudairy maintained he would not want to increase his stake in Credit Suisse for regulatory reasons, that the Swiss bank was generally “sound”, and that the panic he sparked off the day earlier was “completely unwarranted”.

The latest comments from Al Khudairy helped Credit Suisse shares surge by more than a third to CHF2.25 when trading started on March 16, perhaps, staving off a bigger banking crisis for an industry that was already unnerved by an earlier crisis across the Atlantic sparked by the run on Silicon Valley Bank (SVB).

From the comments of the market watchers thus far, they believe that the collapse of SVB and Signature Bank is unlikely to cause systemic risk for the time being, as it has been mitigated by the joint measures put in place by the US Treasury, the US Federal Reserve (US Fed) and the Federal Deposit Insurance Corp (FDIC).

UOB Kay Hian analyst Jonathan Koh sees the backstop as a “reprieve”, adding that the Fed’s facilities will “significantly reduce losses suffered by banks from their holdings of treasury securities”.

Noting that start-ups might face disruption in accessing their financing, Koh believes that the “decisive actions” by the US authorities should restore confidence. “We expect nerves to calm once investors realise that contagion from the three banks did not spread to the broader economy.”

To PhillipCapital, the collapse may spark runs on other regional US banks, tighter credit standards and the sale of other assets while they hunt for liquidity. However, the brokerage notes that “this too shall pass and can pass faster if Fed discounts SVB bonds at book value or [a] small discount”.

UOB’s head of research Suan Teck Kin says SVB’s failure is an “idiosyncratic development” because of its unusually narrow deposit base, as opposed to the “broader, systemic issues in the US banking system”.

Maybank Securities’ head of research Thilan Wickramasinghe also sees SVB’s collapse as “unlikely to create contagion” in the broader banking system due to its narrow deposit base and narrow asset base, which were falling in value amid the rise in interest rates. “Banks in Singapore, on the other hand, have diversified deposits, while assets are largely loans that reprice along with interest rates,” he writes.

ING analysts Padhraic Garvey and Suvi Platerink Kosonen describe SVB as an “outlier” in many ways and that the woes have not spread to the so-called “systemically important banks”, although there is a fear that contagion risks are “uncomfortably elevated”.

Though the system is “under scrutiny”, the ING analysts say the US Fed needs to be careful not to over-tighten. “The SVB saga as a standalone mutes the ability of the Federal Reserve to over-tighten from here. The down move in the yield curve points to a material reduction in the likelihood that the Fed overdoes it on rate hikes.”

For them, it is more important to monitor the financial system than to look at the equity markets at present. “If the inflation data refuses to dampen in a material fashion it places pressure on the Fed to make a tough choice. The simplest choice is to stick with 25 basis points (bps), and let the market calm down of its own accord in the weeks and months ahead,” they add.

CLSA analysts Neel Sinha and Daxin Lin go as far as to call the collapse of SVB a “non-event” for Singapore banks and that the drop in their share prices unjustified, although they qualify that beyond primary and secondary exposure, the third-degree impact would be harder to determine.

Analysts also largely agree SVB is unlikely to impact markets the way the Global Financial Crisis did in 2008 when US authorities were “very slow” to take action, allowing the likes of Lehman Brothers and Bear Sterns to collapse, thereby igniting the crisis.

“This is not the case today, where significant reforms … have been implemented since 2010 such that the flow of liquidity in the US financial system remains unencumbered even though more regional banks could fail,” note RHB Group Research analysts Dr Sailesh K Jha, Nur Qistina Ahmad Najamuddin and Wong Xian Yong, adding that the journey towards the “end-point” will also be “volatile”, presenting many trading opportunities.

DWS Group’s global chief investment officer Bjoern Jesch warns that while any spillovers from SVB’s collapse have so far been contained, vigilance is warranted. Calling SVB a “prominent victim” of the 2022 hiking cycle, Jesch notes that the effects of a failed bank can spill over into the wider sector and economy. This is done in four steps, with the direct (or first-order) effect being the bankruptcy of SVB and the FDIC receivership, he says.

The second-order effect is the behaviour of clients who hold uninsured deposits at other banks, with the main focus likely on US regional banks. The third-order effect would be to look at any spillover to “vulnerable companies” with weak balance sheets, start-ups or those related to crypto assets.

The fourth and final order effect would be “mass liquidations in markets and thus widespread contagion”. Signature Bank, which collapsed just two days later, is the first victim of the second-order effect, he notes.

Iain Cunningham, portfolio manager at Ninety One, is more pessimistic. He says SVB is a result of “something much bigger” and is also the start of a “broader cycle of delinquency, default and bankruptcy”. Over the past 12 months, the markets have been rapidly exiting from the “false equilibrium” of monetary policies that are “far too loose” following the Global Financial Crisis. “A false equilibrium is a theoretically unstable or unsustainable situation that has been so long-lived that it appears to be a true equilibrium. The false equilibrium here is the decade and a half of excessively easy money, through near-zero or negative interest rates and quantitative easing,” he says.

“We are now beginning to see early signs of businesses that built their operating models around the false equilibrium begin to struggle, such as SVB. Beyond this, we see [a] material imbalance in household leverage and housing markets in several countries around the world beginning to consolidate,” says Cunningham. —