Do we have anything to worry about with PH banks?
(Corrected, 4:52 p.m.) It’s hard not to watch what has happened with Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse, and wonder if our banks are vulnerable to any of the risks that flattened these giants. Our own Secretary of Finance, Benjamin Diokno, came out to say that Philippine banks had “no exposure” to SVB or to Credit Suisse, but that statement didn’t address whether or not our own giants, like BDO [BDO 127.60 5.0%], BPI [BPI 101.20 1.6%], and Metrobank [MBT 57.40 2.5%], were carrying the same kind of bond issue, or were vulnerable to the same kind of bank-run exploit. As I’ve said many times before, I am not familiar with the ins and outs of analyzing domestic banks, nor am I particularly knowledgeable (beyond my reading of the news) when it comes to the nuances of global banking giants like Credit Suisse, so I’ve pulled together a collection of local voices who know about this topic to try and get a better sense of how things are going for BDO, BPI, MBT, and the rest of the banks, and what we can expect going forward.
First, some background:
SVB is a bank that specialized in handling the deposit accounts of startups and investment types in the San Francisco Bay area. While interest rates were low, startups were raising a ton of investment capital in cash, and SVB actively courted these companies to get them to deposit that capital with the bank. SVB’s deposits grew so quickly that its loans department actually struggled to keep pace with the deposits, which were earning a higher-than-normal interest rate for the tight-knit startup community. The banks customers didn’t really need loans, because they were flush with cash from investors. So instead of making loans, SVB invested the deposits in long-term bonds to net 1.56% on the interest rate differential between what the bonds were paying and what SVB paid clients for deposits. But the rising rates of 2022 posed a problem, in that value of SVB’s long-term bonds was sensitive to interest rate increases, so that when the US Federal Reserve began its unprecedented string of increases to fight the sudden inflationary monster that appeared in early 2022, the value of SVB’s bonds plummeted in a predictable fashion. People began to take notice of this issue, and a few prominent startup personalities encouraged all their associates, clients, and partners to take their money out of SVB because of the risks posed by the bond issue. SVB tried to satisfy whatever withdrawals it could, but was forced to liquidate huge portions of its bond portfolio at a loss as the run on the bank picked up steam. That’s when the FDIC stepped in to seize control of the bank.
Are PH banks dealing with the same bonds issue?
One bank analyst that reached out privately (and requested anonymity) said that the main difference between SVB and the PH giants is that SVB held more than 60% of its assets in securities (like those bonds that plummeted in value), and the PH giants tend to have more than 70% of their assets in loans. The source said that while PH banks do hold some securities, those holdings are small in comparison to each particular bank’s asset base.
What about concentration risk?
One of the key triggers in the SVB story is the bank’s over-reliance on a depositor base of tech startups and venture capital firms that tended to exhibit a herd-like mentality in terms of following the lead of key personalities within that industry. That’s referred to as concentration risk. Rachelleen Rodriguez, a research analyst with Maybank Securities, reached out to say that that our banks’ exposure to the startup community is relatively minimal (less than 5% in communications and transportation, which are the industries that are most likely to contain startups here), and that “PH bank loan portfolios are also highly diversified chiefly among the real estate, trade,and manufacturing segments”, with each of those segments “forming no more than 25% of loan books”.
Ok, but what about Credit Suisse?
This is something of a different animal, because Credit Suisse is a G-SIB (global systemically important bank), which means that it is considered to be so large and interconnected with other financial institutions that its failure could potentially have a significant impact on the global financial system. While the bSP has already come out to say that PH banks have “no reported exposure” to Credit Suisse, and that our banks’ clients may only have small exposure, what happens with Credit Suisse (for better or worse) might have knock-on effects that are difficult to predict. Enrico Patiga Villanueva, a senior lecturer of economics at the University of the Philippines Los Baños, said on Twitter that because it is a G-SIB, a potential collapse “will have global impact”. Mr. Villanueva said that, in his opinion, the “pathways” to PH banks’ exposure to a Credit Suisse collapse “can be deposits, bonds, loans, derivatives or payments,” but with nostro accounts (foreign currency accounts that our banks have abroad) derivatives and payments the most likely threat vector.
MB BOTTOM-LINE
Things are changing for SVB, Credit Suisse, and the global banking market even as I write this. However, based on the feedback that I’ve received from professionals that analyze banks and quantify risk in the financial sector here, our large banks don’t appear to be vulnerable to the specific issues that caused the sudden (in the case of SVB) and gradual (in the case of Credit Suisse) downfalls of the foreign banks that are currently in the news.
Our banks are generally less speculative in terms of their assets (generally loan-heavy), more conservative in terms of their business practices, and benefit from a much more diversified depositor base. Still, the sheer panic of US depositors that initially faced the possibility of losing their deposits in excess of the FDIC-guaranteed amount should be instructional. Our own Philippine Deposit Insurance Corporation (PDIC) guarantees depositor accounts of a failed bank up to only P500,000 per depositor, per bank. That amount was established back in 2009, and accounting for inflation, it represents much less of a protection than it did at that time. The inflation-adjusted value of P500,000 in 2009 in today’s currency is P721,500. The $250,000 per depositor amount that the US-based FDIC protects is about 50% lower than the average non-rural home price in the United States, however, the P500,000 per depositor level protected by our PDIC is actually 88% lower than the average non-rural home price here in the Philippines.
I don’t even know if those home prices are a useful metric in this discussion, it only seemed like a reasonable place for me to start when comparing the viability of the depositor protections that the FDIC currently offers to Filipinos. Sell the average fully-owned home in the US for cash, and your proceeds are 100% covered by two accounts. Sell the average home here, and you’d need to spread that amount across nine banks to achieve the same level of protection.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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