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SINGAPORE – Local bank stocks slumped when the market opened on Thursday morning, following a plunge in the shares of Switzerland’s second-biggest bank and fears of wider financial contagion globally amid a string of United States bank collapses.
DBS shares tumbled 1.12 per cent to $32.60 as at the midday break, while OCBC fell 1.06 per cent to $12.14 and UOB dropped 0.74 per cent to $27.99. The benchmark Straits Times Index was down 0.6 per cent.
The battering comes after Credit Suisse sank as much as 30 per cent on Wednesday after its largest shareholder Saudi National Bank ruled out investing any more in the bank on regulatory grounds. The cost of insuring the bank’s bonds against default for one year surged to levels not seen for big international banks since the 2008 financial crisis.
But Asian stock markets pared losses later on Thursday morning after Credit Suisse announced it will borrow up to 50 billion Swiss francs (S$72.6 billion) from the Swiss National Bank, adding it was taking “decisive action to pre-emptively strengthen its liquidity”.
Financial markets globally have been roiled by the collapse of US mid-sized lender Silicon Valley Bank (SVB) and the closure of Signature Bank in New York state over the past week.
US regulators had to step in and provide guarantees that all depositors from SVB and Signature Bank would be repaid in full. Up to US$25 billion (S$33.8 billion) was also made available to fund a new lending programme allowing one-year loans to banks under easier terms.
Crypto-focussed lender Silvergate Bank announced earlier last week that it planned to wind down and voluntarily liquidate its operations.
Mr Kelvin Tay, chief investment officer for Asia-Pacific at UBS, said markets are clearly struggling with three interrelated but different issues – bank solvency, liquidity and profitability.
“Bank solvency fears are clearly overdone as most banks, including European banks, have strong liquidity positions and depositors remain well-protected.
“But a number of individual banks may require central bank liquidity support if funding conditions remain challenging for an extended period of time, hence the panic over Credit Suisse last night when its biggest stakeholder ruled out further support,” he said.
Earlier this week, the Monetary Authority of Singapore (MAS) said local banks have “insignificant exposures” to the failed US banks and that the banking system here remains sound and resilient despite heightened volatility in global financial markets.
“Banks in Singapore are well-capitalised and conduct regular stress tests against interest rate and other risks. Their liquidity positions are healthy, underpinned by a stable and diversified funding base. These factors will allow them to weather potential stresses from global financial developments,” MAS said on Monday.
MAS added that it stands ready to provide liquidity to ensure that Singapore’s financial system remains stable and markets continue to function in an orderly manner.
Analysts said the current situation is unlikely to be an echo of Lehman Brothers, whose failure in 2008 triggered the global financial crisis.
Mr Tay said banking stocks sold off on Wednesday night amid growing concerns of counterparty risk, which together with the collapse of SVB and troubles at First Republic Bank is evoking memories of the 2008 crisis.
“But this is not a highly correlated liquidity situation, or contagion. Rather, this is a typical risk-off event and reflects the typical behaviour seen in recessions or at the beginning of recessions,” said Mr Tay.
Manulife Investment Management portfolio manager Ryan Lentell and senior portfolio manager Susan Curry said many of the issues faced by the now-shuttered banking entities are likely specific to these institutions due to their high concentration in industries that were facing significant funding, regulatory, or legal pressures.
“Some banking stocks that are coming under pressure today don’t face that same issue, having customer bases that are diversified across many industries, which reduces their liquidity risk. Additionally, we believe that most banks have assets that have benefited from higher interest rates,” they added.
Ms Monica Defend, head of Amundi Institute, said big systemic banks have been well-capitalised and highly regulated since the financial crisis.
“Overall, we think systemic banks are in a much better condition than in 2008 and we are not worried by them, per se, in terms of solvency and their capacity to absorb shocks,” she noted.
However, there are some risks for smaller banks, which have less stringent capital rules that may fail to prevent such situations, she added.
“We particularly need to closely monitor the non-systemically important financial institutions and some other non-banking financial institutions. This is because we could see some lagging effects of higher policy rates on their balance sheets and ability to access funding, resulting in some imbalances built here and there,” she said.
On that note, another so-called US regional lender, San Francisco-based First Republic Bank, is reportedly exploring strategic options, including a sale, after its credit rating was downgraded on Wednesday by Fitch Ratings and S&P Global Ratings.
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