Are DBS, OCBC, UOB safe in the US bank crisis?

The US bank crisis seems to be getting worse every day. If you’re worried about your money in the local banks, you are not alone. That said, we think the local banks are pretty safe for now, I share reasons why.

But first, let’s get you up to speed on the US bank crisis:

What sparked the US bank crisis?

You should have a good idea of what’s going on in the US bank crisis by now. If not, you can read our post about what happened in the United States here.

In essence, Silicon Valley Bank, which specializes in financing tech start-ups, went bankrupt the week before. This comes after the bank invested heavily in long-term US government bonds, which ultimately saw their value plummet when central banks raised interest rates. Due to its highly concentrated start-up customer base, which required additional financing owing to the poorer economic conditions, SVB was forced to sell its bonds at a substantial loss, causing panic about liquidity issues.

This fear has also led to the closure of another comparable bank, Signature Bank, although it appears that the authorities have stepped in promptly to ameliorate the situation, first by assuring that any deposits held at both institutions are fully guaranteed.

It didn’t stop there…

Credit Suisse joins the party

In the week following that shocking development, we have another bank that is on the verge of collapse. We explained the details here but in short, Credit Suisse has been dealing with several scandals for several years now, including top management changes and multibillion-dollar losses following the collapse of investment funds Archegos and Greensill Capital.

With what was happening in the US, worries spread. And with Credit Suisse revealing that clients had withdrawn 110 billion Swiss francs of funds in the fourth quarter, and the bank suffering its largest loss since the financial crisis, its doom became immanent.

Even with the Swiss National Bank financing more than 50 billion Swiss Francs in support, it wasn’t enough. Fortunately, at the time of writing, UBS would be purchasing Credit Suisse for more than $2 billion (Credit Suisse’s current market valuation is close to $7 billion).

This agreement was largely influenced by the Swiss National Bank, the country’s central bank, with Swiss authorities poised to amend the country’s statute to skip shareholder vote to finalize the merger before the market opens on Monday. This simply demonstrates how serious the situation is, and we should not underestimate it.

Moreover, given that Credit Swiss is one of 30 worldwide systemically significant banks, it is simply another indication that its failure would send shockwaves through the whole financial system.

Will SG banks’ (DBS, OBCBC, UOB) collapse?

The question now is whether this will have an impact on Singapore banks. Will we see DBS and UOB merge?

Thankfully, it’s unlikely.

Here’s why:

1) Well diversified lending

Of course, there are still worries that similar events will occur to other banks. But (so far), the fears have been concentrated on banks that are similar to SVB in terms of profile and geographic location, such as Western Alliance Bancorp (NYSE: WAL) and PacWest Bancorp (NASDAQ: PACW), whose stock prices have fallen significantly.

When we look at larger financial institutions, such as our local banks, we see that they have a more diverse lender and depositor base, as well as a better risk management profile, and are unlikely to be much impacted by this.

With DBS’ data, it is easy to examine how our local banks’ loans are frequently distributed across varied locations, industries, and business units. Furthermore, with a more steady customer base, the bulk of which are significant corporations as well as more premium clientele, the risk of mass withdrawal seen with startups is reduced.

Apart from that, customer deposits are spread out over several deposit categories and also consist of a larger consumer base than SVB, which mostly consists of start-ups with each holding more than the deposit insurance could guarantee.

Hence, the risks of a bank run are reduced. Also, savings in Singapore are also covered by the Singapore Deposit Insurance Corporation for up to $75,000, this already covers a wider group of individuals who are less likely to withdraw due to fear.

Another argument to support this is that, unlike SVB, which pumped the majority of its new deposits into securities, Singapore banks, which are much more established and have seen deposit growth at a slower rate, have been focused on using these deposits to increase their loan growth instead of investment into securities.

With the rise in interest rate, such cost was then simply passed directly to the customers as the majority of the loans were on a floating rate.

2) Well managed Bond losses

How about bond losses, doesn’t Singapore make such investments?

Indeed, Singapore banks have experienced bond losses as a result of their investments, but unlike SVB, Singapore banks have generally focused on growing bank loans rather than pumping such capital into investments, and they did not face the same problem of having too much cash as SVB.

Furthermore, Singapore banks with a bigger proportion of variable rate loans can pass on higher interest rates to customers, minimizing their losses in bond investments.

3) Limited Exposure to Credit Suisse

Exposure to Credit Suisse is another key source of anxiety, as its status as a global systemically important bank meant that its failure would have repercussions throughout the economy, not just the financial sector.

But, the Monetary Authority of Singapore has stepped in and stated that our local banks’ exposure to the banking giant Credit Suisse is small, lessening any potential direct impact from the fallout.

At the same time, with the rapid response of the Swiss authorities, it appears that a catastrophe has been averted for the time being.

4) SG banks are well capitalised

In our recent updates on Singapore banks, we saw how well-funded our banks are and that routine stress tests against credit and other risks are conducted regularly. 

Indeed, our local banks are well funded and have adequate provisions to weather any need for write-downs, and are considered among the strongest and safest in global rankings and benchmarks, so there isn’t much to worry about for the time being.

In reality, because it is perceived as a safe haven, it may be one of the benefactors as individuals and businesses begin to shift their capital from smaller banks to larger ones, fearing that the smaller banks will be less stable and a similar incident could unfold.

Conclusion

All in all, while our local banks are safe for now, we should not rule out the small possibility of a contagion effect if regulators are unable to calm fears and a bank run starts to occur in a ripple effect.

In the United States, a coalition of midsize US banks has already requested that the government insure all deposits for the next two years, regardless of loan size. This was requested to ensure that smaller banks can navigate the current banking crisis, as many are witnessing a deposit exodus.

So, while it may appear that everything has been resolved, there is still a lot of fear on the street, albeit only affecting the smaller banks for the time being.

What happens next is heavily dependent on how the authorities react or do not react, and whether they are able to stabilize the market and quell anxieties before they spread to the larger market.