Large concentration on securities, majority in “held-to-maturity” securities
As at FY22, SVB had 57% of its assets in securities, with the majority in government backed securities. As the interest rates started to rise, bond prices fell sharply causing a decline in SVB’s securities portfolio. When purchasing securities, US banks are able to decide up-front whether they intend to hold them to maturity, and can designate these securities as “held-to-maturity” (HTM) or “available-for-sale” (AFS) assets. The key difference being that AFS assets are marked-to-market. As at 31 Dec 2022, SVB had US$15.2bn of unrealised losses on their HTM securities, which makes up ~93% of their total equity.
In comparison, the three local Singapore banks only hold securities amounting to ~15% of total assets. While Singapore banks also faced bond losses, there were less significant as majority of assets were variable rate loans where they could pass on the higher interest rates.
Assets and deposits growth spiked, but LDR and CASA ratio remained low
SVB’s asset grew at a CAGR of 44% over 3 years while deposits grew at 41% over the same period, due to the rise in venture capital funding during the pandemic and many of SVB’s customers becoming flush with cash. However, with loan demand weak, SVB channelled the majority of these fresh deposits into securities portfolios or kept as cash. As interest rates started to rise in 2H22, losses on the securities portfolios started to appear.
Singapore banks differ in this aspect, asset and deposit grew over the last 3 years but at a much lower pace with both assets and deposits growing at a CAGR of 6.9% and 6.7% over 3 years. The focus was kept on loans growth with the loan-to-deposit ratio kept high at ~83%, and CASA ratio at ~53%. With the rise in interest rates, Singapore banks were able to pass on the higher funding costs directly to their customers as majority of the loans were on a floating rate and the remaining fixed rate loans could be repriced.
Lack of Liquidity Coverage Ratio requirement
As a rule of thumb, interest rate risk is usually overseen by regulators through the Liquidity Coverage Ratio (LCR) and banks are required to hold enough high-quality liquid assets which can be sold during such a scenario. However, in SVB’s case, they were never subjected to the Federal Reserve’s LCR requirement as they did not have at least US$75bn in nonbank assets. This meant that when SVB’s customers started to pull out deposits, they were unable to withstand the deposit outflows.
In Singapore, all three local banks are required by MAS to meet the minimum LCR requirements of 100% for both all-currency and SGD. The Singapore banks currently have a LCR of ~144% as at 31 Dec 2022. This means that they would be able to withstand a surge in deposit outflows in a worst-case scenario.
Capital and leverage ratios similar to Singapore banks
Interestingly SVB’s Common Equity Tier-1 (CET1) ratio of 12.05% is similar to that of Singapore banks at ~14.4%. SVB’s leverage ratio of 13.2x is also higher than Singapore banks’ leverage ratio of ~11.6x.
Investment Action
Maintain OVERWEIGHT. We remain positive on Singapore banks. Bank dividend yields are attractive at 5.7% with possible upside surprise due to excess capital ratios and push towards higher ROEs. Singapore banks differ from SVB as majority of assets are in loans and higher interest rates can be passed on to customers.
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Glenn covers the Banking and Finance sector. He has had 3 years of experience as a Credit Analyst in a Bank, where he prepared credit proposals by conducting consistent critical analysis on the business, market, country and financial information. Glenn graduated with a Bachelor of Business Management from the University of Queensland with a double major in International Business and Human Resources.