Stockbroker Abacus Securities Corp. said the country’s top three banks — BDO Unibank Inc., Metropolitan Bank and Trust Co. (Metrobank) and Bank of the Philippine Islands (BPI) — may benefit from the risk aversion brought by the collapse of the US’ Silicon Valley Bank (SVB) over the weekend.
“Given how singular SVB was, we do not expect significant spillover for the broader US economy. Of course, there are still risks and human behavior is always unpredictable. Local shares, therefore, especially bank stocks, may weaken on risk off sentiment. There may be a flight to (perceived) quality which may benefit the big three — BDO, Metrobank and BPI — at the expense of smaller banks,” it said in an investors’ note.
Abacus Securities said the debacle that crushed SVB may be far off for local banks given that “local interest rates on long dated government securities have never been close to zero and bank boards here are far more conservative.”
This leads Abacus Securities to believe the duration of local banks’ hold to maturity (HTM) portfolios are much lower compared to that of US banks.
“Even if there are unrealized losses here, we believe the impact on regulatory capital will not be severe even if such HTM holdings are forced to be liquidated (which is unlikely),” it said.
Touted as the second biggest bank collapse in US history, SVB was put into receivership last week by the Federal Depository Insurance Commission after a bank run that stifled the bank’s ability to raise capital and fund the withdrawals, amid a hugely discounted securities it held, booked as a HTM in its balance sheet, realizing a loss when sold in the market.
“Investments classified as HTM are not marked to market which means that when rates began to climb in the first half of last year, SVB didn’t have to book losses on its portfolio of government bonds and mortgage backed securities. However, by January of this year, a few were already pointing out that the unrealized losses on the bank’s HTM portfolio meant it was technically insolvent, making it vulnerable. This happened not just because its HTM position was very large relative to its size, making it an outlier, but due to management’s failure to hedge against interest rate risk. They could have entered into relatively simple interest rate swap but they didn’t,” Abacus Securities said.
“At the same time, the tech bubble deflated and many firms in Silicon Valley began to draw on their cash reserves. Concerns grew about SVB’s ability to service withdrawals until last week when the bank was forced to liquidate part of its HTM portfolio at a huge loss, nearly wiping out its capital. Management wanted to raise new funds to shore up its capital but (venture capitalist) Peter Thiel and others advised clients to take their money out of the bank which triggered a massive run that eventually killed SVB,” it added.
