Exposures to recent US bank failures appear limited for Apac banks, Fitch says

DIRECT exposures to recent failures from Silicon Valley Bank (SVB) and Signature Bank appear limited for Asia-Pacific (Apac) banks under Fitch Rating’s coverage, the credit ratings agency said on Friday (Mar 17).

Few Fitch-rated banks in the region have the type of depositor concentration profiles which left SVB vulnerable to a bank run. Furthermore, weaknesses that contributed to the US bank failures are often offset by structural factors, such as regulation and Fitch’s expectations that authorities would extend liquidity support if necessary.

That being said, Fitch believes there could be some risk of deposit volatility when it comes to digital banks in Apac, although these risks are mitigated by expectations that parent entities would step in if extraordinary support is required.

“We generally view securities portfolio valuation risks as manageable for Apac banks, although exposures tend to be greatest in India and Japan,” Fitch said.

On top of market-specific structural factors, interest rate increases in most Apac markets were smaller compared to the US, Fitch said, expecting the trend to continue in 2023.

Regulators emphasised strong interest-rate management, especially in markets such as Australia, which levies minimum requirements for non-traded interest rate risk.

“Many developed markets incorporate the minimum Basel liquidity rules, which smaller US banks are not subject to,” Fitch noted.

It added that ultimately, the “creditworthiness” of many Fitch-rated Apac banks is influenced by prospects for extraordinary sovereign support.

Things, however, could take a turn for Apac banks if recent developments in the US cause any major shift in US monetary policy. If these events result in lower peak US rates or earlier US rate cuts than expected, monetary policy in Apac markets could become looser under Fitch’s baseline.

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“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,” Fitch said.

For now, direct exposures among Fitch-rated Apac banks do not seem to be material to credit profiles. For example, total assets from Shanghai Pudong Development Bank’s joint venture with SVB only comprised 0.3 per cent of the former’s total assets as at the end of the first half of 2022.