Australia expected to dodge the worst of the banking crisis but it faces higher borrowing costs

Silicon Valley Bank’s blow-up shouldn’t happen here but Australia’s banking sector faces higher borrowing costs, experts say.

The US Federal Reserve Bank is reconsidering how banks are overseen following the collapse of Silicon Valley Bank. Picture: Getty Images

A week which began with the blow-up of Silicon Valley Bank and ended with a thrashing of Credit Suisse is expected to hit Australian company balance sheets through higher funding costs.

Market watchers say the disasters that unfolded across chunks of the American banking industry – in which tech-dominated SVB sunk alongside Signature Bank and First Republic Bank and PacWest Bancorp were suspended from trading – point to tougher times for lenders as interest rates continue to trend north.

Data shows Australian bond yields rose on Thursday night as international markets responded to the crisis at Credit Suisse, climbing 17 basis points.

This continued throughout Friday, with yields further climbing across long and short dated bonds.

S&P Global Ratings financial institutions ratings team director Sharad Jain said if wholesale market costs rise, this could compress earnings margins at banks and may trigger tougher competition for deposits.

Already Commonwealth Bank, Australia’s largest lender, flagged its net interest margin was trending lower after peaking in October amid higher competition for depositors.

In a note to investors on Friday, ratings agency Fitch said few banks in Australia had deposit profiles similar to SVB that left it vulnerable to a run, but warned digital banks in the region faced deposit volatility risk.

“However, the ratings of the two digital banks in Fitch’s APAC portfolio are driven by expectations that parent entities would provide extraordinary support if needed, mitigating this risk,” analysts noted.

Sydney-based Pella Funds Management managing director Steven Glass said Credit Suisse’s troubles risked sparking further contagion fears.

“It becomes a crisis of confidence – Pella’s opinion is we’re not there yet,” he said.

Mr Glass said the latest banking crisis “rhymes with the GFC, but it’s not an exact replica”.

He said even if Credit Suisse were able to move on from its latest issues, the bank would still be oversized, which would lead it to take more risks in future.

“I don’t know what the end game is for Credit Suisse, I wouldn‘t say it’s positive,” Mr Glass said.

S&P Global Ratings said banks in the Asia Pacific region could be vulnerable to contagion risk flowing from the collapse of SVB, as price movements in response to market volatility punish exposed operators.

Japanese banks are seen as the most exposed financiers in the region, due to significant holdings of US-government debts.

But Australian banks are expected to do well out of the uncertainty, with positive risk trends expected to drive deposits towards the banks.

Credit Suisse was offered a 50bn Swiss francs ($81bn) liquidity backstop by the Swiss National Bank and regulator Finma.

S&P Global Ratings warned although SVB’s failure had no immediate impact on banks in the region, the knock on effects in the coming weeks could morph into bigger problems “that are harder to predict”.

“They could also connect or combine with other stresses causing a confluence of negative developments that could yet test buffers across the Asia-Pacific banking sector,” analysts wrote.

Mr Jain said Australia’s banks were different to the rest of the world, with a more diverse mix of assets and less exposure to bond market fluctuations.

But he said banks would face a direct impact in the secondary market.

“Given the way Australian banks manage their funding and liquidity, the banks have the ability to wait out these short periods of fluctuation,” he said.

“The banks are under no pressure to immediately issue long term debt into the market when the spreads could have widened.”

The chaos unfolding comes as financial giant Credit Suisse was offered a 50bn Swiss francs ($81bn) liquidity backstop by the Swiss National Bank and regulator Finma amid concern depositors and investors could flee the ailing bank.

The Australian Prudential Regulation Authority is closely monitoring Australian banks in the wake of SVB’s collapse, after an urgent meeting of the nation’s peak financial regulators on Monday.

APRA, the RBA, Treasury, and the Australian Securities and Investments Commission met on Monday amid concern the collapse could flow to Australian lenders.

Several current and former peak regulators spoken to by The Australian, who declined to be named, noted their surprise and concern surrounding SVB’s collapse.

Speaking earlier this week to The Australian, former NAB chair and veteran public servant Ken Henry said the nation’s banking system was far better prepared and regulated than other nations.

Dr Henry warned tense international markets may see the RBA pause its 10-month-long run of cash rate rises when it next meets, but noted it was unlikely central banks would be dissuaded for long from further ratcheting up rates in response to inflation.

Canaccord Genuity analyst Tony Brennan in a note said the RBA was “explicitly wary” of global tightening, citing it as a key risk.

“While there do not seem to have been particular concerns about Australian banks in the past week, nonetheless, the accumulating pressure of higher interest rates is also unfolding here, and will be felt by households, businesses, and financial intermediaries, including as the large batch of fixed rate mortgages are required to be refinanced at markedly higher rates this year,” he said.

The week of drama has seen shares in listed financials sold off by wary investors.

Shares in Credit Suisse were down almost 31 per cent on Wednesday, before recovering on Thursday.

CBA copped a bruising earlier in the week, falling 3.53 per cent on Tuesday but recovered to close the week up 0.47 per cent or 45c to $96.45.

Trading platform Stake analyst Megan Stals said investors used the sell off to plug funds into safer stocks, with a “three-fold increase in buy orders of the big four banks”.

“While Australia is certainly not immune to the impacts of the global economy, the local financial sector is well regulated, meaning an SVB style collapse is highly unlikely,” she said.

“It appears that Australian investors agree, and are still adding to their positions.”

Stake said it saw some US investors flocking to larger listed US financial last week

Ms Stals said this “correlates to reports of large deposit inflows to the major banks”.