Key points: 

  • Morningstar has made no changes to our earnings forecasts for Australian banks following the failure of US-based Silicon Valley Bank (SVB).
  • Morningstar's Nathan Zaia says the conditions that allowed a run to happen on SVB doesn't exist for the Australian banks. 
  • The biggest risk for the Australian banks, he says, is the SVB failure leading to higher costs on debt funding for banks globally.

Transcript:

Nathan Zaia: Yeah. I think it's the fear that deposit holders, be it retail or other businesses, now question, well, this happened to SVB. Does the bank I have my money with have similar problems in terms of sitting on unrealized losses that are quite material? So, then, it can (kind of) lead to a run on customer deposits that pushes a bank to have liquidity problems when otherwise it might have been fine if customers just stayed put. So, I think we're going to see, or we are seeing more of the pressure on the smaller banks, and we could even see more money flow into the larger banks. But I think the selling has been more widespread than that because people just don't have certainty around how big an issue this could be for the stability of the financial markets altogether.

So, the Fed's response has been – well, the first part of it is to guarantee that all deposit holders will get access to their funds. And the second one is to provide banks that do find themselves in a bit of a liquidity crunch access to debt from the government to try and hold them over. So, in essence, they're bailing out the deposit holders, but the actual banks, so the shareholders, they're not being bailed out. So, they do lose their investment in the bank. So, you do take a risk investing in some of these businesses, and the government is not bailing out the shareholders.

I think probably the biggest risk for the Australian banks is the SVB failure leading to higher costs on debt funding for banks globally. Like, people will just see risk as elevated, so they want a better return, and that could weigh on margins in the near term. But the banks do have very large variable loan books and the variable component is growing. So, over time, you would expect that to be repriced.

We don't think Australian banks will face a similar liquidity problem and there's a few reasons for that. So, the mismatch between the duration of assets or the investments and the liabilities of a customer deposits, which caught out SVB, isn't present with the Australian banks. So, the Australian banks typically, they run their business by using customer deposits to fund loans. So, the interest income on the loan covers the interest paid to the deposit holders. Hence their investment portfolio is much, much smaller as a percentage of total assets. So, we're talking around 10% whereas it was north of 50% for SVB, so a very big difference.

We also think regulatory oversight in Australia plays an important role in lowering the chance of something like this happens. The banks are having to follow pretty strict liquidity and capital rules. And something we touched on earlier, the concentration of SVB's customer base was also a major contributor. In Australia, household deposits make up 40% to 50% of bank deposits, and they do tend to be quite sticky, whereas for SVB, it was around 5%. So, if you think about how many individual customers it takes to start pulling out funds before it adds up to what a single business can do in an instant, and the Australian banks' business customer deposit base is also very well diverse, reflective more of the economy and not just one sector.