PH banks face minimal risk of collapse

Financial markets encountered significant volatility last week, triggered by the collapse of Silicon Valley Bank (SVB) and the closure of Signature Bank by regulators.

Although SVB and Signature bank are US-based banks, shares of other global banks were also sold off due to concerns that the factors responsible for the demise of the two banks would also hurt their operations.

After all, higher interest rates caused by rising inflation make banks vulnerable to loss of deposits if depositors move their funds to higher yielding money market funds. Banks are also at risk of booking significant losses if they are forced to sell their bond holdings to meet liquidity requirements.

However, we think the risk that Philippine banks will suffer the same fate as SVB and Signature Bank is very minimal.

One of the reasons is our banks’ insignificant exposure to startups and cryptocurrencies. SVB was heavily exposed to startups while Signature Bank was friendly to crypto companies.

The two groups were among the hardest hit by the rising interest rate environment, as funding for startups dried up while the value and trading volume of cryptocurrencies collapsed.

It seems doubtful that any local bank would have a big exposure to those two industries given our country’s smaller and less mature capital market.

Philippine banks are also very liquid, with loans to deposit ratio of only 65 percent as of end January, based on Bangko Sentral ng Pilipinas (BSP) data. This means that local banks are in a good position to fund withdrawals without having to sell their held to maturity long-term bond holdings.

Philippine banks also have high exposure to current accounts and savings accounts (Casa) deposits, at around 78 percent of total deposits according to BSP data. Because Casa deposits are funded by many clients with smaller account sizes, they are stickier and are less sensitive to changes in bank deposit rates. This makes local banks less vulnerable to a steep decline in deposits because of rising interest rates.

Finally, even if Philippine banks are forced to sell their long-term bond investments because of liquidity requirements, potential losses are not big enough to force them to desperately raise fresh capital to meet minimum capital requirements.

For example, on the average, the disclosed mark to market losses of listed banks’ held to maturity portfolios (as of end September or December 2022) is equivalent to 11.4 percent of their total capital base. Even if we factor in those losses, listed banks’ total capital ratios will still be above the BSP’s minimum requirement of 10 percent.

Moreover, with bond rates currently lower than where they were as of end September and December last year, potential losses from bond sales are smaller.

Admittedly, even though we don’t think the Philippines is at risk of seeing a banking crisis like the United States, local stocks could still be sold down due to concerns that “the worst is not yet over.” Because of heightened uncertainty, selling could become indiscriminate as fund managers “sell first, ask questions later.”

Nevertheless, this could create an opportunity for investors with excess cash or dry powder to buy Philippine stocks, including local banks, which are more resilient to the US banking crisis.

The risk that the collapse of SVB and Signature Bank will lead to a full-blown banking crisis has been reduced with the US government’s creation of a “Bank Term Funding Program” that will offer loans to depository institutions that suffer from liquidity pressures.

There is also an increasing likelihood that the US Federal Reserve will become less aggressive in raising rates and tightening its monetary policy. In fact, it may even start cutting rates later this year, benefiting banks with large long-term bond holdings.

Once volatility diminishes, there is a good chance that local stocks will recover faster than US stocks since the profitability and balance sheets of Philippine banks and companies will most likely remain healthy despite the prevailing challenges. INQ