Fitch says banks in Asia are resilient to risks from US bank failures

The sign of financial agency Fitch Ratings is seen on a building in London’s Canary Wharf commercial and shopping district, Thursday, March 1, 2012.

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Asia-Pacific banks are “risk-tolerant,” Fitch Ratings said on Thursday, adding that Silicon Valley Bank and Signature Bank’s exposure to regional banks covered by the agency is negligible, with the U.S. banking sector failing.

“The direct exposures we know of to SVB and Signature in APAC of Fitch-rated banks are not material to their credit profiles,” Fitch said in a note.

“Weaknesses that contributed to the failure of the two banks are among the factors considered in the APAC bank ratings, but they are largely offset by structural factors,” Fitch said, adding that the risks would be greatest in India and Japan. .

Fitch’s assessment of banks in the Asia-Pacific region came as US Treasury Secretary Yellen said overnight that not all uninsured deposits would be protected in the event of future bank failures.

We generally consider the valuation risks of the securities portfolio to be manageable for APAC banks.

“Sovereign Support”

While Fitch sees a significant risk of volatility in deposits for the region’s digital banks, it notes that governments in the Asia-Pacific region will step in to support their banks if needed – an opportunity that could help mitigate future risk.

“We believe that the risks arising from valuation costs are offset by the ability to support banks with liquidity if the authorities need it,” the agency said, citing regulators in Australia and Japan as examples.

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Officials in the region are emphasizing “stronger management of interest rate risk”, including setting minimum requirements for non-traded interest rate exposure in Australia, analysts say, as Japanese banks reduce investment and duration in securities.

“Ultimately, the creditworthiness of many Fitch-rated banks in APAC will be heavily impacted by the prospect of extraordinary sovereign support,” the note said.

“We generally view securities portfolio valuation risks as manageable for APAC banks,” Fitch said.

The Fed’s next steps

Fitch said even if the Federal Reserve makes earlier-than-expected changes to monetary policy, such as cutting the benchmark interest rate instead of an expected rate hike, the region’s banks will still be largely unaffected.

The agency noted that Fitch does not see recent events leading to major changes in US monetary policy.

“If they lead to a cut in US peak rates or an earlier cut in the US than we expect, that could mean that monetary policy in some APAC markets will be looser than our baseline,” he said.

“Overall, we believe this will be credit negative for APAC banks as the impact on net interest income will outweigh security valuations, but it will help asset quality and we do not expect a significant impact on bank ratings.”

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