It has been a turbulent two weeks for the US and global banking sectors.
Silicon Valley Bank (SVB), the 16th largest bank in the US, was shut down by regulators on 10 March, becoming the second-largest US bank to fail since the Great Financial Crisis (GFC).
SVB was well-known for serving start-ups and venture capital firms and had assets of around US$209 billion as of December last year.
Just two days later, Signature Bank became the third-largest US bank failure when it suffered a US$10 billion run on its deposits, making it insolvent.
Over in Switzerland, Credit Suisse (NYSE: CS) is also facing a crisis of confidence.
The country’s second-largest bank has been rescued by its larger competitor, UBS Group AG (NYSE: UBS), in a government-backed deal.
With the ongoing turmoil in the banking sector, investors may feel jittery about the trio of local banks and whether they can weather this storm.
We dig deeper to see if DBS Group (SGX: D05), United Overseas Bank Ltd (SGX: U11), or UOB, and OCBC Ltd (SGX: O39) qualify as safe investments.
The root cause of SVB’s collapse
Before we can do so, we need to find out what caused SVB to collapse in the first place.
The crisis began when the bank announced a US$1.8 billion loss on its bond portfolio in tandem with the surge in interest rates.
Simply said, bond prices move in the opposite direction to interest rates.
When interest rates rise, bond prices tend to fall. The converse also happens – a decline in interest rates will result in bond prices rising.
Another key aspect was the bank’s client base, of which 44% comprised venture-backed technology and healthcare IPOs.
The sharp rise in interest rates had dented confidence in growth stocks, while debt funding for expansion also became much more expensive.
Being tech-savvy, the CEOs and founders of these start-ups were also using online channels to communicate and panic had, therefore, spread much faster than a traditional bank run.
Reviewing the three banks’ investment exposure
SVB had recognised a US$1.8 billion loss on its US$21 billion available-for-sale (AFS) securities portfolio as of 31 December 2022.
For DBS Group, it had reported an unrealised loss of S$1.86 billion on its bond holdings for 2022.
Singapore’s largest bank, however, had a solid equity base of S$56.9 billion as of 31 December 2022.
For UOB, its unrealised losses on its bond portfolio stood at S$1.34 billion on an equity base of S$43.4 billion.
OCBC reported fair value losses of S$2.16 billion on its investment portfolio but had a robust equity base of S$53.1 billion at the end of 2022.
These numbers show that all three local banks suffered unrealised losses on their bonds portfolio, but the ability to hold these securities to maturity means that the losses will not impact the lenders’ net profit.
Diving deeper into the trio’s client base
Turning to loan composition, we review if there is any stress on the major client segments for each of the three banks.
For DBS Group, building and construction loans made up slightly more than a quarter of gross loans while housing loans took up 19.2% of its loan book.
The construction sector is seeing an improvement in its fortunes as pandemic-related restrictions have been eased, while property-related loans are backed by suitable collateral in physical property.
UOB also has slightly more than half of its loans in the two sectors above.
OCBC, like its peers, also has 51% of its loan book in building and construction and housing loans.
These percentages provide investors with assurance that the three banks’ exposure is not start-ups or technology IPOs that usually struggle to generate consistent free cash flow.
Get Smart: Maintaining confidence
Investor psychology can be volatile and unpredictable.
Fear and panic were on full display over the past fortnight as investors yanked their money out of mid-sized US banks at a record pace.
Other than just looking at marked-to-market losses and a bank’s clientele, investors should also look at the country and regulators involved in the bank’s country of domicile.
Singapore’s Monetary Authority of Singapore (MAS) has affirmed that Singapore’s banking system remains “sound and resilient”, with insignificant exposures to the failed banks in the US.
Moreover, the three banks are well-capitalised with healthy liquidity positions.
With the above facts and the assurance from MAS, investors in the three local banks should breathe easier.
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Disclosure: Chin Hui Leong owns shares of DBS Group, UOB and OCBC.