Strategy Note /

Lessons for EM from Silicon Valley Bank’s woes

  • SVB shares fell 60% yesterday; its profitability took a hit after deposit withdrawals forced it to sell bonds at a loss

  • We highlight the emerging market banks most exposed to a similar scenario in the event of unexpected deposit withdrawals

  • LatAm banks seem most at risk, notably in Chile (Scotiabank), Colombia (Aval) & Brazil. SE Asian banks look less exposed

Lessons for EM from Silicon Valley Bank’s woes
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Tellimer Research
10 March 2023
Published byTellimer Research

Silicon Valley Bank’s (SVB) woes are hitting the US banking sector hard. Bond sales to fund deposit withdrawals have crystallised substantial losses, which have arisen because higher interest rates have reduced the value of low-yielding bonds. SVB had sought to raise fresh capital but a lack of investor appetite may instead force a sale of the business.

The deposit withdrawals themselves are linked to the much tougher capital-raising environment for private companies; SVB has been a big supporter of tech startups, including fintechs, which have had to draw down on their savings as funding rounds have been delayed or downsized.

As we have highlighted previously, some emerging market central banks have acted sooner and more aggressively to tackle inflation than their developed market peers. While there is much to commend from such proactive measures, commercial banks in these markets could be more susceptible to an SVB-like bond-loss scenario.

Banks tend to hold most of their sovereign bonds to maturity, and, accordingly, do not mark these securities to market through the income statement. But unexpectedly large deposit withdrawals could pressure them to sell these instruments ahead of time. If these are long-duration bonds and if interest rates have risen substantially post-purchase, banks may crystallise losses on these sale transactions. In turn, this could put pressure on their profitability and capital ratios.

We have previously warned investors of the risk of EM banks' exposure to indebted sovereigns from a credit risk perspective, but this episode also highlights the duration risk attached to these widely held debt instruments.

Quantifying the risk of an SVB-like scenario for EM banks

We have analysed over 180 emerging market banks with market capitalisations above US$2.5bn along the following metrics:

  1. The extent to which central bank policy rates have increased from the Covid-era troughs

  2. The liquidity of the banks’ assets

  3. The size of the banks’ equity cushion

Our results are summarised below; we have developed an ‘SVB risk index’, based on liquidity and capitalisation measures, to highlight those names that could be most exposed in the event of major unexpected deposit withdrawals. The risk of capital loss in such cases would likely be elevated for banks operating in markets experiencing larger central bank rate hikes.

Banks in the upper-right quadrant of this chart have been exposed to the largest interest rate hikes and present the highest risk concerning asset liquidity and capital cushioning. Those in the lower left should be better positioned, although Turkish banks would become more exposed if more orthodox monetary policies were to be reimposed. We provide the underlying data supporting this analysis in the Appendix.

Emerging markets banks: SVB risk matrix

Bank-level data once again feature Latin American names

Below, we repeat this presentation using entity-level data. Stocks appearing in the riskier, top-right quadrant include a range of Latin American banks, such as Scotiabank’s and Santander’s Chilean listings, Colombia’s Grupo Aval and Banco do Brasil.

EM banks SVB risk matrix: upper-right quadrant

 Those in the safer, lower-left quadrant include Turkish names like Akbank, Indonesia’s Bank of Central Asia and South Africa’s Capitec.

EM banks SVB risk matrix: lower-left quadrant

Our EM 1000 Index also highlights the Turkish banks

Taking a step back from this narrow prism of liquidity-driven risk, we note that our EM 1000 Company Index also scores banks in Turkey highly, while Polish banks languish towards the bottom. The Index uses 36 objective criteria (across the six dimensions shown below) to build a composite ranking for the largest, most investable emerging market firms. Further details can be found here. The dataset is located here.

In general, banking is a middle-ranking sector in the Index. Unlike their DM peers, EM banks score well for quality (eg sustained high operating margins and low share price volatility). Relative to other sectors, banks perform poorly for growth (both for the top line and total assets) and risk (they are notoriously leveraged businesses).

Banks that score well in relation to both SVB risk and according to the broader EM 1000 Company Index framework include Turkish and Indonesian banks. Those that fare poorly on both criteria include the Brazilian banks.

Tellimer EM 1000 Company Index: Banking sector scores

Appendix: Liquidity and capitalisation measures used in our analysis

We have used the ratios below to rank our sample from low to high risk, looking at both liquidity and capitalisation. Our selection consists of listed emerging markets banks with market capitalisations in excess of US$2.5bn for which we could gather sufficient data. 

SVB risk index: underlying EM banks data