Indian Banks Are Well-Placed To Handle SVB-Like Stress, Says Jefferies

Silicon Valley Bank's collapse has caused concern worldwide but Indian banks appear well placed to handle similar problems.

<div class="paragraphs"><p>(Image credit: Shameer PK/Pixabay)</p></div>
(Image credit: Shameer PK/Pixabay)

Indian banks appear well-placed to handle stresses that took down Silicon Valley Bank, the sixteenth largest lender in the U.S., according to an analysis by Jefferies.

A quick flight of deposits—concentrated around the tech sector—and losses on its held-to-maturity bond portfolio took down SVB. The bank's deposits fell from $198 billion in March 2022 to $165 billion in February 2023.

Silicon Valley Bank "focused on a narrow tech corridor that not only increased concentration risk, but also flooded a small bank with deposits as the tech industry flourished during Covid that it was ill-equipped to handle," analysts at Macquarie wrote in a Monday report.

Its bond investments took a beating as interest rates started to rise. SVB held HTM securities with a fair value of $76.1 billion in December 2022, carrying unrealised losses of $15 billion. Its available-for-sale bond portfolio, on the other hand, was much smaller at $26 billion and had unrealised losses worth $2.5 billion.

Bucketing bonds under HTM or AFS is part of a bank's treasury management strategy. Unlike SVB, Indian banks don't hold a majority of their assets in the form of bonds.

Loans make up 65% of the assets for Indian banks and investments contribute about 25%, according to the Jefferies report.

SVB’s Failure Exposes Lurking Systemic Risk Of Tech’s Money Machine

Government securities occupy 80% of the HTM book for Indian banks, as compared to SVB which held about 75% of its HTM book in the form of mortgage backed securities as of December 2022. In a rising interest rate environment, the MBS got hit hard, leading to losses on the bond portfolio.

"After the tech cycle turned and the Fed raised rates, this caught the bank in a pincer movement between rising deposit withdrawals and the need to convert held-to-maturity to available-for-sale securities, forcing SIVB to recognise investment losses," the report from Macquarie said.

Indian banks also enjoy much more stickier deposits as 60% of them come from households, according to the Jeffries report. Saving deposits at Indian banks come with an average duration of three to five years, the report noted.

In a joint statement on Sunday, the US Federal Reserve, Department of the Treasury and Federal Deposit Insurance Corporation announced that Treasury Secretary Janet Yellen had approved measures to protect all depositors at SVB.

"Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer," the statement said. A similar plan of action has also been approved for Signature Bank, which was also shut down by regulators on Sunday.

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