For days, there were long snaking queues of frustrated-looking customers desperately waiting to withdraw their money from a bank fighting for survival. As the frantic bank run entered the second week, the embattled financial institution – drained of its coffers – was forced to seek assistance from the country’s financial authorities, which eventually seized full control of its operations before placing it under a recapitalisation and restructuring program.
As recent as it may sound, the above narratives on a bank run are not depicting the plight of recently collapsed US banks. No, we are not talking about Silicon Valley Bank (SVB) nor Signature Bank, but Indonesia’s Bank Central Asia (BCA) back in 1998.
Fast forward to today, BCA is now the largest and amongst the most well-run banking franchises in Asia with a whopping Common Equity Tier 1 ratio of 25.9%. Yes, that is right, roughly one quarter. Given the ongoing turmoil in the developed world’s banking systems, we thought it would be apt to pen our thoughts about risk of contagion in the Asian banking sector and what has been changing for regional banks in recent years.
Any parallels between Western and Asian banks?
Let us first address whether there are any parallels between what has occurred in the banking arena of the US and Switzerland and the Asian bank universe. In our view, the recent blow-ups of SVB, Signature Bank and California’s Silvergate Bank as well as the Swiss government-brokered buyout of troubled Credit Suisse by rival UBS all seemed to boil down to two things – the pressure exerted by higher interest rates and ultimately poor risk management and oversight.
While interest rates continue to rise globally, we would note that rate hikes across most Asian countries have been of a smaller scale (240 basis points [bps] on an equally weighted average) as compared to the US, whose central bank has raised rates by a total of 475 bps since March 2022 in a bid to tame rising inflation.
Second, interest rates in the region, despite moving higher over the past year, are only back to their 10-year averages and still well below the levels during the pre-global financial crisis era. In addition, there has been a notable step up by Asian central banks such as those of Singapore, South Korea and Taiwan in terms of their prudent regulation and supervision to limit the negative impact on credit costs and banking system stability.
In terms of the growing concerns about the over-reliance on Additional Tier 1 (AT1) capital and contingent convertible (CoCo) bonds, we would point out that these capital debt instruments are few and far between in Asia, where most banks significantly exceed the regulatory targets on core equity capital.
Risks and opportunities in Asia’s banking sector
We do not, however, look at Asia through rose-tinted spectacles. There are some pockets of risk within the region. Although the likelihood of deposit runs on the majority of Asian banks remain low, that cannot be said for all recently formed digital banks, where the build-up of fast money deposits is likely to witness some volatility. Thankfully in most countries in Asia, these entities have not grown to be sizable parts of the overall financial system.
Nonetheless, we would view with caution standalone players that do not have strong parentage or are not part of a broader company ecosystem (such as in e-commerce).
In addition, the stock of debt is high in countries like China, South Korea and Thailand, while credit growth as a percentage of GDP has risen materially in Indochina, which is now being worked through in the case of Vietnam. These are areas we should remain vigilant on, but as China re-opens, Asia as a whole should see some welcome growth impulse.
On the whole, positive change has been more abundant in recent years. Once we get through this current US-led rate tightening cycle and rationalisation of those financial institutions that were addicted to zero interest rates (more in the non-bank financials we suspect), the future seems bright for Asian banks, which are now trading at much more attractive valuations.
Peter Monson is a senior portfolio manager at Nikko Asset Management. The views expressed above should not be taken as investment advice.