While CFOs are mitigating bank failure risks, businesses are worried about a spillover to Asia Pacific.
According to Fitch, APAC banks are resilient to the recent bank failure risks.
“Direct exposures to Silicon Valley Bank (SVB) and Signature Bank among Fitch Ratings’ portfolio of rated banks in APAC appear limited,” the credit rating agency said.
Weaknesses that contributed to the failure of the two banks are among the factors already considered in Fitch’s 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 firm pointed out.
Quality of deposits
The quality and persistence of deposits is an important credit consideration for bank credit ratings, according to Fitch.
This applies particularly when liquidity is tightening sharply and when unrealised valuation losses on asset holdings could be realised if a deposit run forced banks to sell assets, the credit rating agency said.
Few Fitch-rated banks in APAC have the sort of depositor concentration profiles that left SVB particularly vulnerable to a run, the firm observed.
“We believe the risk of deposit volatility could be significant for digital banks in APAC,” Fitch said. “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.”
Exposures tend to be greatest in India and Japan
Fitch noted that it views 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 US for most APAC markets — a pattern that Fitch said expects to be sustained in 2023.
“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 JGB yields,” Fitch predicted.
Regulators in APAC also emphasise strong interest-rate risk management, led by Australia, which levies minimum requirements for non-traded interest rate risk, according to Fitch, adding that many developed markets incorporate the minimum Basel liquidity rules, which smaller US banks are not subject to.
In line with this, Japanese banks have been reducing securities investments and duration, and some banks in Taiwan have raised capital to restore common equity Tier 1 (CET1) capital ratios after interest-rate-related valuation losses, Fitch observed.
“We believe risks from valuation losses are offset by the likelihood that the authorities will provide liquidity support to banks if needed,” Fitch said.
Support for smaller banks may be more variable, the firm noted.
According to Fitch, it assumes 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, the firm said.
“Our base case is that recent developments in the US will not cause major shifts in US monetary policy,” Fitch said. “If they do result in lower peak US rates or earlier US rate cuts than we expect, this could cause monetary policy in some APAC markets to be looser than under our baseline.”
Fitch added that this would be in general credit negative for APAC banks, as the effect on net interest earnings would outweigh that on securities valuations.
However, it would aid asset quality and no meaningful effect on bank ratings is expected, the firm noted.
“The direct exposures among Fitch-rated banks in APAC to SVB and Signature that we are aware of are not material to credit profiles,” Fitch said.
Shanghai Pudong Development Bank (SPDB), for example, has a joint venture with SVB, but its total assets were only around 0.25% of SPDB’s at end-1H22, Fitch pointed out.
Some Japanese banks and their clients also have limited indirect exposures, but these would not be significant for the banks’ credit profiles, the firm added.