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The collapse of the US-based Silicon Valley Bank (SVB) has soured the mood for global markets, as it is the largest bank to fail since the 2008 financial crisis. Known for funding early-stage startups, SVB is likely to have a wide impact on companies as well as the financial sector across the world.
Market participants don’t expect a big impact of the SVB crisis on Asia, but there are certain dark spots which might spook investors. So how deeply could this affect Asia, let us take a look.
Silicon Valley Bank and Asia
Based in Santa Clara, California, Silicon Valley Bank was ranked the 16th biggest bank in the US with $209 bn in assets at the end of 2022. President Joe Biden and other US authorities have said they will ensure that all depositors of the bank get their money back.
However, the larger impact on the US economy could not be ignored. US bank stocks took a dive after SVB collapsed, and there is a possible contagion effect as financials across Europe and Asia too came under pressure. Global financial stocks have shed over $465 bn in just two days on worries about the extent of the SVB crisis.
The MSCI Asia Pacific Financials index fell as much as 2.7% on Tuesday, hitting its lowest level since November 29.
In the US, treasury yields dropped as the market is now expecting the US Federal Reserve to back off from its hawkish monetary policy stance due to the turmoil in the banking system.
Banking stocks in the US suffered a much bigger fall compared to the Asian region, as the latter are expected to see their earnings grow 29% over the next year. Asian banks are unlikely to be affected on a larger scale as they have better growth prospects, higher profit estimates, a diverse customer base and improving asset quality.
The decline in Asian financials cannot be attributed merely to the SVB crisis, as the recent decision by Japan’s central bank to continue with the yield-curve control program led to declines in Japanese lenders. On the other hand, Japanese banks also have a large exposure to US bonds, which could cast a shadow over their financial health.
Meanwhile, startups and fund managers in China are looking to move their money out of SVB. These firms relied on the US bank due to easy access to dollar financing, and SVB too was the preferred choice for most new companies. There are concerns among Chinese start-ups that this might be a repetition of the 2008 global financial crisis.
However, there are some specific companies in Asia which have a higher exposure to the SVB collapse. Australia-based Nitro Software said it had about $12.8 m of its cash reserves deposited in SVB. Similarly, New Zealand’s Xero ($5 m) is another firms exposed to risk.
China’s state-owned lender Shanghai Pudong Development Bank Co, which has a joint venture with SVB, said its business is not affected by the crisis with its US partner.
In Japan, SoftBank Group Corp is one of the highly exposed firms as it has huge investments in tech startups, some of which have accounts with SVB.
Some of the other Asian firms which have disclosed their exposure to SVB include Hong Kong-based biopharmaceutical firm BeiGene Ltd, Japan’s Sumitomo Mitsui Trust Holdings, and India’s Nazara Technologies, among others.
What are investment experts saying?
“We are now beginning to see early signs of businesses that built their operating models around the false equilibrium begin to struggle, such as SVB Financial. Beyond this, we see material imbalance in household leverage and housing markets in several countries around the world beginning to consolidate. We also see evidence of zombie companies,” writes Iain Cunningham, Portfolio Manager at Ninety One. “Then there are the things we can’t see yet, which have a habit of floating to the surface as the rising cost of money and slowing growth begin to place pressure on cash flows.”
RBC Wealth Management in a note said that SVB grew significantly during the pandemic when monetary and fiscal liquidity were supportive and venture-backed firms were raising record capital, which caused the bank’s assets to surge.
Specific to Asia, Craig Bell, Head of Multi-Asset Portfolio Solutions at Eastspring Investments, says “The collapse of SVB should have limited implications for Asia, although it could influence the Fed’s rate decision in March… We believe that this is a short-term market event which is unlikely to impact our long-term investment process.”
Meanwhile, Chinese markets were barely affected, and yuan assets seem to be shielded from the concerns in the US banking system.
The South China Morning Post found in an analyst poll that the expectation of the US Fed not raising interest rates may benefit the Hong Kong property market and the overall economy. As per data from the Hong Kong Monetary Authority, at least 13 Hong Kong-listed firms technology and biotech firms have deposits in Silicon Valley Bank totalling $217.3m.
On the other hand, a weaker dollar may help Chinese equities, John Woods, chief investment officer for the Asia-Pacific region at Credit Suisse Group AG, told Bloomberg Television.
In India, banks are reliant on local deposits which shields them from the possible contagion of the Silicon Valley Bank, Macquarie Group told Bloomberg.
