Asian Financials Have Weathered the Banking Crisis Better Than Global Peers

Central bankers in Asia have have had strict control over regional banks since the 1997 Asian Financial Crisis. It has paid off, argues Eastspring.

Illustration by II

Illustration by II

The financial sector throughout Asia has so far weathered the banking crisis that is unfolding in the U.S. and Europe.

The recent collapse of Silicon Valley Bank, Signature Bank, and the emergency takeover of Credit Suisse by UBS has caused an upheaval in the financial sectors of both the U.S. and Europe. In Asia, experts credit central banks that have remained rigorous in their oversight over the years, containing much of the impact.

Between March 8 and March 20, when Silicon Valley Bank made a surprise announcement that it needed to raise $2.2 billion, the MSCI World Financials Index has dropped 10 percent amid mounting fears of more bank failures to come. (U.S. bank stocks rallied on Tuesday ahead of the Federal Reserve meeting, with First Republic gaining almost 30 percent.) In contrast, the MSCI Asian Financial Index has only declined 4 percent during the same period.

“Financials in Asia have done better than their peers elsewhere,” Sundeep Bihani, lead portfolio manager for regional Asia equity strategies at Eastspring, told Institutional Investor in an interview. Banks in Asia have stronger balance sheets because they have been more conservative in managing funding sources and have more strict accounting methods for recognizing good-quality assets, Bihani said. He added because many Asian countries implemented expansionary monetary and fiscal policies during the Covid-19 pandemic, their banks are well-equipped to handle any potential funding squeeze.

“The Asian Financial Crisis [in] 1997 is quite vivid in the memory of the central bankers,” Bihani said. In the late 1990s, a currency crisis began in Thailand and quickly spread to other countries in East and Southeast Asia, leading to devalued stock markets and soaring foreign debt. Coming out of the crisis, major central banks in Asia tightened their control of smaller banks and non-bank financial companies, according to Bihani.

Unlike Silicon Valley Bank, many Asian regional banks have low levels of held-to-maturity securities, which means their assets and liabilities are well matched, Bihani added. Held-to-maturity securities played an important role in the downfall of Silicon Valley Bank. Investors were spooked when SVB incurred big losses when it sold held-to-maturity assets, which are not marked-to-market on a daily basis. That eventually led to a liquidity crisis at the bank. But held-to-maturity assets don’t make up a big chunk of balance sheets at Asian banks and are “less likely to be a risk in Asia compared to the rest of the world,” Bihani explained.

Yet despite the overall positive outlook for Asian financial stocks, Bihani said he’s monitoring signals of a potential second-round effect from the crash of Silicon Valley Bank. Anxiety about the health of the banking system has been growing as more bank teetered followed the fall of SVB, including First Republic and Credit Suisse. If investors continue to spot weak earnings, tight U.S. dollar liquidity, and widening credit spreads, then it’s possible that a global recession is already underway, according to Bihani.

In addition to Asian banking stocks, Bihani also favors consumer, infrastructure, and travel sectors in the region as China reopens its borders. He noted that Chinese tourists traveling to countries such as Thailand and Vietnam are creating new opportunities for investors.

“We are quite excited about the opportunities in Asia, particularly compared to the rest of the world,” Bihani concluded. “It’s all about expectations. Asian markets have done poorly over the last 10 years, while Nasdaq did very well. Therefore, today, the expectations from Asia are quite low…[That means] it’s easier to beat those expectations.”