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Asian Banks’ Vulnerability to Bank Runs Is Low, but Suddenly Earnings Outlooks Are Under Pressure

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Securities In This Article
HSBC Holdings PLC
(HSBA)

Shares of Asian banks HSBA in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse, which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

Rather than financial stability, the bigger concern for Asian bank shares, in our view, is the earnings outlook. For Japanese banks, the developments are negative because Japanese bank shares rose substantially in the past year on hopes for higher Japanese yen interest rates that now seem misplaced. Therefore, we now think Japanese banks’ net interest margins, or NIMs, may stay flat or fall instead of rising as many in the market had hoped. For Korean banks, we already expected net interest margins to start narrowing in the second half of 2023, and the change in outlook is smaller. Singapore and Hong Kong banks, on the other hand, still incorporate expectations of NIMs staying at wide levels, which could prove to be overly optimistic now if the Fed were to pivot to interest rate cuts. Also, if the global economy moves toward recession, banks everywhere will face higher credit costs.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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