To The Moon

I noticed our three local SG bank share price has declined quite a lot due to the SVB fiasco, which I find it puzzling because the collapse of SVB is largely a non-event to SG banks. I think that the market has overreacted too much, especially with the potential 50bps Fed hike on 22 March 2023.

Recap: What happened to SVB?

SVB's collapse was caused by mismanagement of assets and liabilities during a period of rising interest rates. The bank experienced significant inflows of deposits due to a technology-driven boom in 2019-2021, which SVB invested in long-term securities such as treasury and MBS.

However, when interest rates rose, SVB suffered significant unrealized investment losses on the asset side, while also experiencing a decrease in deposits from start-up customers. As a result, the bank was forced to sell part of its investment portfolio, and a capital raising effort further increased concerns about its liquidity and solvency risks. Eventually, SVB collapsed into FDIC receivership, but this was not a systemic incident since the issue was specific to the company's mismatch of assets and liabilities.

SVB's heavy exposure to investment securities and higher volatility in customer deposits set it apart from its peers. However, the underlying issue did not involve toxic, illiquid assets or over-leverage, which distinguishes this incident from the 2008 financial crisis. The total assets of SVB accounted for only 0.9% of the US banking sector, further highlighting the localized nature of the event. The fallout was contained swiftly by US regulatory intervention, where the US Treasury, Federal Reserve, and FDIC collaborated to protect 100% of SVB's deposits, offer the same protection for Signature Bank, which had also recently closed, and create a new Bank Term Funding Programme (BTFP) to support eligible depository institutions.

Impact to SG banks?

Firstly, SG banks do not really have primary or secondary exposure to SVB. SG banks do have a relatively small exposure to developed markets outside of Asia, accounting for around 15-16% of their asset books, but most of this exposure is to Australia and the UK, with loans primarily focused on property ventures by SG corporates. Nonetheless, the SG banks share prices were unjustifiably punished even though there is no direct exposure to the Silicon Valley tech sector.

Positive outlook for SG banks!

NIM expansion cycle is expected to continue for at least another 3-4 quarters, although the pace of uplift is likely to slow as Fed Fund rates approach their peak. This is due to the lag between the asset repricing and liability book pricing.

Banks to experience strong fee income growth in FY23 compared to the previous year. Biggest driver would likely come from wealth management fees, while transaction and loan-related fees, as well as card fees, have already shown significant recovery. Although AUM for all banks has continued to grow throughout the year, wealth management fees have shrunk significantly during the rising rate cycle as investors have been in a risk-off mode and have remained on the sidelines.

Loan growth is also likely to be another lever, with banks expecting mid-single digit levels. However, regional currencies remain a wild card against an expectedly strong Singapore dollar. Asset quality appears to be stable, with NPL ratios remaining benign.

Conclusion: Profit from the Panic!

SG banks are in good condition, and the overreaction presents some opportunity for accumulation. However, this article is not an advise for trading, so please always do your own due diligence!

@Daily_Discussion @TigerStars