Contagion fears spread, but impact of banking crisis on Asia largely contained

While Asia has, so far, been largely unaffected by the collapse of U.S. banks including Silicon Valley Bank, as well as by UBS' takeover of Credit Suisse, money managers have still had to calm clients about the risk of contagion.

Sources said clients have needed reassurance regarding the risk of bank closures in the Asia-Pacific region and about their investment exposure to the affected banks. Regulators across the region, meanwhile, have rushed to keep confidence levels from dipping over concerns about the resilience of their respective banking systems.

"In Hong Kong, the general view seems to be that we are mostly unaffected by the bank collapses, but there are a few (high net worth individuals) and (hedge funds) that are probably taking big losses on their AT1 holdings," said Stewart Aldcroft, a Hong Kong-based independent asset management consultant.

As far as he knows, there has been no data or evidence to suggest that any bank in Asia-Pacific is at risk of a collapse.

It is a sentiment shared by others in the region. Singapore-based Sue Trinh, co-head of the global macro strategy at Manulife Investment Management, believes that direct exposure to ailing banks remains low and that Asian banks have strong enough liquidity coverage ratios. Manulife IM has $442 billion in assets under management.

"Direct exposures to failed banks appears to be limited at this moment," she said in an emailed response to questions on Wednesday. Asia stands out for multiple reasons including "widening growth differentials, benign inflation in aggregate, some Asian (corporate banks) pivoting dovishly and asymmetric risk to the upside for non-resident capital inflows."

In emailed commentary earlier in the day, Ms. Trinh wrote that banks in the region are well capitalized, liquidity coverage ratios are high and deposit bases tend to be sticky. She added that current account deficits in Asia are benign except for New Zealand, the Philippines and Thailand, where deficits exceed 3% of GDP. However, "although there are signs of strain, most measures remain far below crisis levels," she wrote.

"Far more important to the Asian regional outlook is the event's impact on global growth, USD funding conditions, and USD strength. If the global economy manages to avoid a hard landing, and USD funding costs remain low (with the USD staying below its 2022 peak), Asia should be able to weather the storm," she wrote.

Still, money managers have had to address concerns from their institutional clients about their own and their portfolio companies' exposure to the affected banks — including SVB, Signature Bank and Credit Suisse — as well as the resilience of the financial sector holdings in their portfolios.

"People are definitely asking a lot of questions about exposures in the financial sector, AT1, et cetera," Ricky Tang, managing director and co-head of client portfolio management of Value Partners Hong Kong, said in a written response.

The Swiss Financial Market Supervisory Authority said on March 19 that Credit Suisse's additional tier 1 debt will be written down to zero under the takeover by UBS.

"Risk appetite definitely has decreased," he added. "All eyes are on the Fed decision tonight and because deposit rates are still okay, people are likely sitting on the sidelines in the near term."

Value Partners had $6.3 billion in assets under management as of Feb. 28.

Clients have also asked if Asia or China-based banks run the risk of having a similar event to SVB's collapse, but he believes chances are low. "Banks are run much more conservatively in Asia, and yields in Asia haven't seen the same increase vs. the U.S., so the asset-liability mismatch risk is much lower," he said.

Asian central banks have learned from the 1997 Asian financial crisis, tend to be conservative in their oversight of the banks and apply strict standards when it comes to bank funding parameters, Sundeep Bihani, Eastspring Investment's Singapore-based Asian equities portfolio manager, wrote in a note on Tuesday.

Eastspring, the investment management arm of Prudential, has $221.4 billion in assets under management.

Mr. Bihani and his team are continuing to look for long-term opportunities in the financial sector, favoring banks that manage interest rate risks, do not actively use hold-to-maturity securities and have short durations in their domestic bond portfolios.

Regulators in Asia-Pacific have been quick to put out statements to maintain confidence levels.

"The Singapore banking system has insignificant exposures to these failed banks in the U.S. Banks in Singapore are well-capitalized and conduct regular stress tests against interest rate and other risks," the Monetary Authority of Singapore wrote in a statement on March 13, after the closure of SVB and Signature Bank.

"MAS stands ready to provide liquidity through its suite of facilities to ensure that Singapore's financial system remains stable and financial markets continue to function in an orderly manner," the statement said.

On March 16, Bank Negara Malaysia said that any indirect exposure from counterparties or borrowers with linkages to the U.S. banks is very limited and the Malaysian banking system remains well capitalized, according to Bloomberg.

After the acquisition of Credit Suisse by UBS, Singapore's MAS published another statement on Monday to say the bank was continuing operations without interruption and that "the takeover is not expected to have an impact on the stability of Singapore's banking system."

On the same day, the Hong Kong Monetary Authority said that it welcomed the acquisition and that the total assets of the Hong Kong branch of Credit Suisse represented less than 0.5% of the total assets of the Hong Kong banking sector.

The takeover had an impact on Australian regulators, which said on Wednesday that they will be monitoring valuations of unlisted assets provided by the country's superannuation funds in the wake of the banking crisis, Bloomberg reported.