RAM says it does not expect the knock-on impact from the failure of Silicon Valley Bank (SVB) and two other smaller US banks last week to have a rating impact on Malaysian banks. Headquartered in California, in the US, SVB collapsed after a loss of confidence caused a bank run. In Malaysia it said banks’ credit fundamentals remain robust and resilient, supported by strong regulatory supervision to weather heightened volatility in global financial markets.
SVB’s collapse was triggered by massive withdrawals following depositors’ concerns over significant unrealised losses from its “held to maturity” (HTM) bond portfolio amounting to USD15 bil – equivalent to almost all the bank’s equity. Compared to SVB, RAM sees fundamental differences in the business and balance sheet profiles of commercial banks in Malaysia.
Domestic commercial banks typically engage in more lending activities as opposed to relying on bond investments which are exposed to market volatility. The proportion of domestic banking system assets invested in bond securities is less than 25%. SVB on the other hand had more than 50% of its asset base in such securities, which led to huge unrealised losses amid rapid and steep interest rate hikes in the US.
Moreover, less than 40% (on average) of bond holdings in Malaysia’s eight major banks are classified as HTM while the rest are marked to market. This means that fair value losses on bond securities are already largely reflected in the banks’ capital position. In contrast, SVB classified almost 80% of bond securities as HTM (only a little over 20% were marked to market), indicating that unrealised losses had not yet been reflected in its equity. HTM bonds are carried at amortised cost in the balance sheet given the intention to hold these securities to maturity, so fair valuation losses are not captured in capital.
Fair value losses in Malaysian banks were also significantly smaller, thanks to Bank Negara Malaysia (BNM)’s milder pace of rate hikes and banks’ prudent strategy of holding shorter-tenure bonds in recent times. The domestic banking industry’s common equity tier-1 capital ratio stayed a robust 14.9% as at end-2022 (end-2021: 15.5%). Further valuation losses, if any, should be less severe given the central bank’s cautious stance on further rate hikes.
Loans and deposits domestically are diversified across sectors in comparison to SVB’s heavy focus on the tech sector and start-ups. Banks in Malaysia are predominantly funded by customer deposits, with high granularity. Their liquidity profiles are also sound with a liquid assets to deposits ratio of around 20% and a net loans to deposits ratio of 88%. According to BNM, domestic banks have no direct exposure to the three failed US banks. The central bank’s robust prudential oversight and good track record – which have been evident in previous financial crises – should ensure the continued financial stability of the Malaysian banking system.