Regulators act as banking sector takes a hit

Global and Philippine Market Update
March 9 to March 15, 2023

Global Markets

Global Stocks retreated over concerns that the recent bank failures may spread to other financial institutions.

• Silicon Valley Bank (SVB) collapsed on March 10. It is one of the most prominent lenders that support the start-up ecosystem and became the largest bank failure since the 2008 crisis, and put USD175 billion in deposits under regulators’ control. Prior to the collapse, SVB tried to shore up its balance sheet and raise USD2 billion as customer deposits came in lower than forecasted. Upon hearing of the bank’s liquidity problems, customers began to panic and pull their deposits, leading to your typical bank run scenario. SVB tried to work with financial advisers to find a buyer, but by midday regulators seized the bank with the Federal Deposit Insurance Corporation (FDIC) named as receiver. 

• Problems at Credit Suisse Group AG turned into a full-blown crisis this week. The panic started after its biggest shareholder, the Saudi National Bank, stated that it will not inject more cash into the bank. This unnerved investors, who were already on edge due to the US banking failures. Credit Suisse is a global systematically important banking institution, and its perceived weakness impacts the whole banking sector. To calm markets, the Swiss central bank said it was ready to provide financial support to the bank. Credit Suisse said it would borrow USD53.7 billion to strengthen its liquidity position.

• The US government took emergency measures to shore up the banking system and backstop the deposits of SVB and Signature Bank in New York. All deposit accounts at both institutions will be guaranteed according to the Federal Reserve (Fed), the Department of Treasury and FDIC. However, the government clarified that no losses will be borne by taxpayers. Treasury Secretary Janet Yellen ruled out any federal bailout but is focused on trying to meet depositors’ needs.

Philippine Stocks  

Philippine Stocks pulled back in line with global markets.

• The Philippine Stock Exchange Index (PSEi) breached the 6,500-level due to concerns over the health of the global financial sector. Risk-off sentiment spread throughout the market as investors stayed on the sidelines. The added risks from Credit Suisse did not help as it led to additional concerns over the possibility of contagion to other banks. However, according to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla, Philippine banks are not heavily exposed to global banks because they primarily deploy their US dollar deposits in loans, Philippine US dollar bonds and sovereign bonds of countries with high credit ratings. S&P Global Ratings also noted that Asia-Pacific banks, including the Philippines, have negligible exposures to SVB and secondary impacts are manageable.

• The Bureau of Internal Revenue (BIR) expects that any revenue losses from the reduction of income tax to be offset by higher consumer spending. Household consumption is one of the biggest contributors to gross domestic product (GDP). Higher disposable income is expected to provide a boost to the economy and help it expand within the governments 6-7% target.

• New vehicle sales increased by 27.2% year on year in February, which is a clear indicator of progress for the auto industry at it moves further away from the pandemic. The auto industry is optimistic that it could hit 395,000 units in sales this year, which would surpass the 369,941 units sold in 2019. Higher mobility is one of the major signs of a recovering economy.

Philippine Bonds  

Philippine Bond Yields have started to decline as demand spike due to risk-off sentiment.

• The Bureau of Treasury (BTr) fully awarded a reissued 25-year treasury bond with a remaining life of 12 years and six months at an average rate of 6.167%. This was 0.09% lower than secondary market levels for the same bond series at the time of auction. Demand for bonds surged globally as investors move towards safer assets given the banking crisis in the US.

• Wholesale prices of building materials in Metro Manila rose to their slowest pace in six months in February. Prices rose by 9.1% in February compared to 9.4% in January. This coincided with recent weakness in construction jobs and may be a direct impact of negative investors sentiment due to prevailing macroeconomic risks. Although the construction sector may experience slower growth it does have the benefit of pulling inflation lower. 

FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.

Sources: (1) https://www.nytimes.com/article/svb-silicon-valley-bank-collapse-timeline.html (2) https://www.bloomberg.com/news/articles/2023-03-15/global-banks-rush-to-safeguard-against-credit-suisse-contagion (3) https://edition.cnn.com/2023/03/15/investing/credit-suisse-shares-saudi-national-bank/index.html (4) https://www.cbsnews.com/news/silicon-valley-bank-deposits-guaranteed-signature-bank-federal-reserve-fdic/ (5) https://www.bworldonline.com/stock-market/2023/03/13/510308/psei-drops-on-worries-over-global-financial-sector/(6) https://www.bworldonline.com/top-stories/2023/03/15/510612/bir-says-personal-income-tax-cuts-to-help-boost-consumer-spending/ (7) https://www.bworldonline.com/top-stories/2023/03/14/510327/new-vehicle-sales-up-27-in-february/ (8) https://www.bworldonline.com/banking-finance/2023/03/15/510581/treasury-fully-awards-reissued-bonds-as-global-yields-decline/ (9) https://www.bworldonline.com/top-stories/2023/03/16/510868/ncr-construction-material-prices-rise-at-slower-pace-in-february/

Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.