Malaysian banks rating intact despite US bank failures - RAM Ratings

 

Malaysian banks rating intact despite US bank failures - RAM Ratings

Publish date: Sat, 18 Mar 2023, 08:06 AM

KUALA LUMPUR - RAM Rating Services Bhd (RAM Ratings) sees no rating impact on Malaysian banks from the failure of the United States Silicon Valley Bank (SVB) and two other smaller banks last week.

The rating agency said that in Malaysia, banks' credit fundamentals remained robust and resilient supported by strong regulatory supervision to weather heightened volatility in global financial markets.

"Compared to SVB, we see fundamental differences in the business and balance sheet profiles of commercial banks in Malaysia.

"Domestic commercial banks typically engage in more lending activities as opposed to relying on bond investments which are exposed to market volatility. The proportion of domestic banking system assets invested in bond securities is less than 25 per cent," it said in a statement today.

SVB, on the other hand, had more than 50 per cent of its asset base in such securities, which led to huge unrealised losses amid rapid and steep interest rate hikes in the US.

Moreover, less than 40 per cent (on average) of bond holdings in Malaysia's eight major banks are classified as held to maturity (HTM), while the rest are marked to market.

"This means that fair value losses on bond securities are already largely reflected in the banks' capital position. In contrast, SVB classified almost 80 per cent of bond securities as HTM (only a little over 20 per cent were marked to market), indicating that unrealised losses had not yet been reflected in its equity.

"HTM bonds are carried at amortised cost in the balance sheet given the intention to hold these securities to maturity, so fair valuation losses are not captured in the capital," it said.

RAM Ratings said fair value losses in Malaysian banks were also significantly smaller, thanks to Bank Negara Malaysia's (BNM) milder pace of rate hikes and banks' prudent strategy of holding shorter-tenure bonds in recent times.

The domestic banking industry's common equity tier-1 capital ratio stayed at a robust 14.9 per cent at end-2022 from 2021's 15.5 per cent.

"Further valuation losses, if any, should be less severe given the central bank's cautious stance on further rate hikes," said the rating agency, adding that banks in Malaysia are predominantly funded by customer deposits, with high granularity.

Their liquidity profiles are also sound with liquid assets to deposits ratio of around 20 per cent and a net loans to deposits ratio of 88 per cent, it added.

According to BNM, domestic banks have no direct exposure to the three failed US banks.

"The central bank's robust prudential oversight and good track record - which have been evident in previous financial crises - should ensure the continued financial stability of the Malaysian banking system," it noted.

- BERNAMA

 

https://www.nst.com.my/business/2023/03/890196/malaysian-banks-rating-intact-despite-us-bank-failures-ram-ratings

 

What has gone wrong at Credit Suisse - explained

Updated: 15 Mar 2023,Edited By Sayantani Biswas

Credit Suisse's Chief Executive Officer Ulrich Koerner told Bloomberg that the reshaped bank will be more focused and less risky. (AFP)

The annual bonus pool has Credit Suisse hanging their hopes on a 70% jump in stock prices

Credit Suisse Group AG's annual bonus pool plunged 50% to 1 billion francs after 2022 brought a loss that wiped out a decade’s worth of profit. Reasons? 

• A plunging share price, 
• an exodus of wealthy clients and 
• erosion of bank’s credibility.

Currently, the annual bonus pool has them hanging their hopes on a 70% jump in stock prices. At such a time Credit Suisse's Chief Executive Officer Ulrich Koerner told Bloomberg that the reshaped bank will be more focused and less risky. “We will be very profitable and we will reward shareholders."

Meanwhile, Credit Suisse Group AG’s top executive said he expects to take the firm’s carved-out investment bank, First Boston, public by 2025, Bloomberg reported.

What went wrong with credit Suisse?

On Tuesday, 14 March, Credit Suisse said in its 2022 annual report the bank 

• has identified "material weaknesses" in internal controls over financial reporting and 
• not yet stemmed customer outflows.

The reporting weaknesses come as Credit Suisse is seeking to recover from a string of scandals that have undermined the confidence of investors and clients. Customer outflows in the fourth quarter rose to more than 110 billion Swiss francs ($120 billion).

Where did it all begin?

In the 1980s and 1990s, Credit Suisse merged with First Boston to create Credit Suisse First Boston, which was its investment banking division till 2006.

At the end of 2021, Credit Suisse reported over 1.6 trillion Swiss francs in assets and over 50,000 employees in the institution.

Credit Suisse has a domestic Swiss bank plus wealth management, investment banking, and asset management operations.

Credit Suisse's Troubles

In 2019, the Chief Operating Officer, Pierre-Olivier Bouée was discovered to have hired private investigators to spy on high-level employees and was fired shortly after. The private investigator also mysteriously "took his own life," the bank reported, while announcing Bouée's removal.

In March 2021, a month before the Archegos scandal went public, Credit Suisse also announced that it was closing and liquidating several investor funds, worth $10 billion, provided to another financial services company, Greensill capital. Greensill declared insolvency in March 2021.

Investors reportedly lost close to $3 billion because of this.

In February 2022, a massive leak of over 30,000 of Credit Suisse's clients revealed over $100 billion in wealth held by people who had profited from "torture, drug trafficking, money laundering, corruption and other serious crimes," according to The Guardian.

This revelation also hurt the bank's reputability further, amplifying investor concerns.

The bank has also changed top leadership multiple times since 2019, with the most recent changes coming in July 2022, with the group getting a new CEO.

The group's Chairman Axel Lehmann only took over from previous chairman Antonio Horta-Osorio in January 2022, after Horta-Osorio resigned for breaking quarantine rules during the pandemic.

Will the 2025 IPO be their salvation?

Ulrich Koerner, the chief executive officer of Credit Suisse, on Tuesday informed that the bank plans to take Credit Suisse's carved-out investment bank First Boston public by 2025. 

This comes amid a search for investors. 

While the First Boston spinoff is a centerpiece of Koerner’s restructuring plan, the CEO seeks to protect the best-performing investment bank parts, such as advising on mergers and acquisitions, while pivoting the parent company further toward wealth management.

Credit Suisse announced earlier today that senior leaders in the carved-out unit are expected to receive up to 20% of shares. Employees would receive restricted share units after an IPO, which would vest three years later and be subject to a further holding requirement.

https://www.livemint.com/

EPF delivers competitive returns amid tough investment climate in 2022, reaffirms focus to rebuild members’ savings

Summary of EPF’s 2022 Investment Performance; EPF’s Dividend Chart from 2010 until 2022; and EPF’s Investment Assets as at 31 December 2022.

Tables of EPF Year-To-Date December 2022 Members/Employers Registration; Savings of EPF Members by Age Group (as at 31 Dec 2022); Savings of EPF Members by Race Group (as at 31 Dec 2022).

Savings of EPF Members by Savings Level Group (as at 31 Dec 2022).

https://www.theborneopost.com/2023/03/05/epf-delivers-competitive-returns-amid-tough-investment-climate-in-2022-reaffirms-focus-to-rebuild-members-savings/

 

Europe Outlook 2023: Is a recession really avoidable?

MARCH 12, 2023, SUNDAY AT 12:09 AM

ON the back of macroeconomic data which has come through better than expected, the biggest drivers of the rally to date in the STOXX 600 can be attributed to the 

• weakening of the USD, 
• lower rate expectations and 
• falling bond yields.

After posting one of the worst years in decades in 2022, equities and bonds had one of their best Januarys on record year-to-date, rallying more than 20 per cent from its lows in late September 2022, as it has become clear that Europe has managed to avoid the near term energy crisis this winter.

However, the rally is likely driven by investor sentiment rather than fundamental reasons, with 

• systematic algorithms, 
• trend-following investors buying back into equities, and 
• hedge funds massively short-covering from an overly pessimistic positioning from last year.

Furthermore, with strong economic data coming from the US and Eurozone inflation numbers falling back to single digits, investors are increasingly hopeful of a potential soft landing. Combined with the expectation that central banks are heading towards the end of the monetary tightening cycle this year, investors have a renewed sense of optimism, resulting in a risk-on climate.

However, we argue that the markets may be overly optimistic, and the current rally is not sustainable. While high frequency indicators suggest that the Eurozone may defy the odds of potentially avoiding a recession, it is unlikely that the European economy will go unscathed from the delayed effects of the rapid ECB tightening, so there could be more downside risk ahead should Europe experience an economic contraction, especially after the recent rally.

 

STOXX 600 has rallied furiously ever since bottoming in late September 2022.

Growth outlook has improved from before but remains weak

With the recent release of GDP figures, Europe managed to narrowly avoid a fourth-quarter contraction projected in November 2022, on the back of a warmer-than-expected winter and a strong labour market.

Since the last economic projections, there have been favourable developments which have improved the growth outlook for 2023. The diversification of supply sources and a drastic drop in consumption has left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-Ukraine war levels.

Furthermore, Europe’s labour market continues to remain strong, with unemployment rate coming in at 6.7 per cent for 2022, which is the lowest figure in the past few years, well below the 5-year and 10-year rolling average figures (Figure 2).

In addition, consumer confidence is slowing rebounding ever since bottoming in September 2022, but figures remain at secular lows even as conditions have improved in the short term.

However, looking at leading economic indicators such as the PMI, the data points towards a possible mild economic contraction. Although there has been a small uptick in the both manufacturing and services PMI, manufacturing PMI continues to be contractionary territory, dimming the near-term growth outlook.

Next, the tightening to date has begun to pass through to less supportive conditions for households. Higher borrowing costs have significantly increased the debt service costs of existing borrowers and made new mortgage borrowing less attractive and these have led to a decline in home prices.

As home prices fall, there will be a negative impact on household wealth, which can lead to a decrease in household spending and ultimately impact economic growth.

With the recent turn of events and rosier than expected macroeconomic backdrop, GDP forecasts for the Eurozone have been revised upwards on a quarterly basis. However, coming off a low base, these revisions are likely to be overly optimistic as Europe still faces longer-term issues, like the ongoing energy crisis which is structural in nature, and lagged effect of policy tightening which has yet to be reflected in consumer spending.

Even with the recent revisions to the upside, GDP in Europe is expected to expand by only 0.3 per cent in 2023 for the entire year, which lags behind that of US and Japan, making it the weakest developed market within our coverage.

 

Labour market continues to remain tight as unemployment rate trends down.

Euro area inflation remains elevated

Next, headwinds arising from rising prices continue to persist, which affects both consumers and businesses detrimentally.

Although the headline inflation in the Eurozone has been trending down towards single-digit territory from its peak of 10.6 per cent year-over-year back in October 2022, it is still currently running at multi-year highs.

Furthermore, core inflation (which excludes volatile items such as energy and food) has yet to peak and was still rising in January, which erodes the purchasing power of households.

Although the surge in European inflation was initially concentrated in energy and goods, the problem has become more broad-based. The more alarming issue is the pickup in nominal wages, on the back of tight labour markets. Higher incomes can cause a self-reinforcing cycle of spending, making it more difficult for the ECB to achieve its two per cent target inflation.

As these inflationary pressures persist, it would be difficult for the ECB to put the brakes on monetary tightening, at least until they see a meaningful deterioration in economic and labour market conditions, which will weigh on business activity and could cause a drag on investments.

Combined with the fact that the ECB is set to start quantitative tightening in March, which further lowers the availability of money circulating in the economy and drains liquidity away from the financial markets, these concerns look under-reflected in the relatively optimistic pricing of European equities.

 

Services PMI may have rebounded but Manufacturing PMI remains in contractionary territory.

Energy situation unlikely to be resolved soon

With the help of a milder than expected winter and targeted government policies to curb the use of natural gas, Europe has managed to escape the worst-case scenario of a severe energy crisis, with natural gas prices falling sharply from their previous peaks.

This has helped to partially diminish the effects from the rapid rise of headline inflation, and has provided some cushion to real spending.

However, the energy problem in Europe is structural, with a lack of sufficient and proper infrastructure to keep up with the demand of energy consumption in Europe.

Today, more than half of Europe’s energy consumption still comes from imported sources, leaving it vulnerable should there be any political or economic wars with other countries.

This issue has been brought to light during the Russia-Ukraine war, which has led to huge investments into renewable energy to accelerate the path to energy independence.

With that being said, the setting up of these supply chains and infrastructure upgrades require time, thus energy prices are set to continue remain elevated in the near to mid-term.

Furthermore, Russia has stated that they will cut oil output by about five per cent in March this year, after the West imposed price caps on Russian oil and oil products. This can exacerbate the supply side constraints for energy in Europe and keep energy prices higher for longer, further fueling inflation concerns.

 

Earnings may be revised downwards

The fall in European equities in 2022 was due multiple compression on the back of rising real interest rates. Just as the expected recession has not arrived yet, neither has the anticipated sharp downgrade to corporate earnings.

In fact, earnings estimate for European equities have seen strong revisions to the upside in the past few weeks, as fear of an energy crisis subsides and better than expected macroeconomic data has buoyed investor sentiments.

However, consensus estimates of EPS growth and resilient margins may be too optimistic, as we have yet to fully grasp the delayed effects of the fastest pace of rate tightening in the ECB’s two-decade history. As it stands, current projections are pricing in a mild recession or soft landing with markets pricing in the end of the tightening cycle soon.

Nonetheless, a hot labour market does not offer much room for a policy U-turn just yet, especially when core inflation has not peaked yet.

Fortunately, if the unemployment rate does not spike, it is possible to avoid a negative spiral seen in many past recessions, where falling demand leads to falling employment, which further compounds falling demand. Therefore, even if Europe experiences a recession, the downturn might be shallower than most expect.

With European equities currently trading below its historical average P/E ratio, there is room for further upside.

However, the margin of safety is shrinking as P/E multiples have rebounded from its recent lows and is approaching its long-term average (Figure 9), leaving considerably less room for any disappointment moving forward.

https://www.theborneopost.com/2023/03/12/europe-outlook-2023-is-a-recession-really-avoidable/

What history says about the past. A basic appreciation of how valuation dictates the future can go a long way.

Why bonds produced such dreadful returns after 1945

In the 1940s, interest rates had been falling for the better part of 20 years as the Great Depression drove knee-jerk risk aversion, and hit record lows as various policies and incentives moved to cheaply finance wartime deficits. 

According to Yale economist Robert Shiller, 10-year Treasuries yielded 

• 5% in 1920, 
• 3% by 1935, and 
• 2% by the early 1940s. 

The consensus came to believe low rates were a permanent fixture. "Low Interest Rates for Long Time to Come," read one newspaper headline in 1945.

But as the saying goes, if something can't go on forever, it won't. 

• By 1957, 10-year Treasuries yielded 4%. 
• By 1967, 5%. 
• They breached 8% in 1970, and zoomed to 
• 15% by 1981 as inflation scorched the economy. 

Since bond prices move in the opposite direction of interest rates, this was devastating to returns. Deutsche Bank has an archive of Treasury returns in real (after inflation) terms, which tells the story:

Period	Average Annual Real Returns, 10-Year Treasuries
1940-1949	(2.5%)
1950-1959	(1.8%)
1960-1969	0.2%
1970-1979	(1.2%)

Source: Deutsche Bank Long Term Asset Return Study.

Don't underappreciate how awful this was. In real terms, $1,000 invested in 10-year Treasuries in 1940 would have been worth $584 by 1979 -- this for an investment often trumpeted as "risk-free."

Lessons

No one knows if the same performance will be repeated over the coming years. 

Japan is a good example of extremely low interest rates sticking around for decades. 

But the risks are obvious. 

• With 10-year Treasuries yielding 1.5%, there is virtually no chance of high returns over the next decade. 
• The odds of being hammered and suffering negative real returns are, however, quite good.

http://www.fool.com/investing/general/2012/07/10/stocks-or-bonds-the-easy-choice-.aspx

 

What does the bond market turmoil mean for investors?

US Treasuries have suffered the worst start since 1788 after falling by 9.8 per cent this year, triggering experts to question the 60/40 portfolio strategy

The bond market has suffered a record $10 trillion sell-off this year. AP

Harvey Jones

Jul 05, 2022

Investors fretting over this year’s $13 trillion global stock market crash may have overlooked similar carnage in a market that is actually more important for the global economy.

The bond market has also suffered a record $10tn sell-off and this could hit investors just as hard because a strange thing is happening.

Both shares and bonds are crashing at the same time. That is something financial experts say isn’t supposed to happen.

But in 2022, it is. Which means there is no hiding place for investors in this troubled year. There may also be an opportunity, if you are sharp.

Retail investors may pay little attention to the bond market but institutions and governments have been known to obsess over it.

For them, the bond market is the big one. It is about triple the size of the global stock market and plays an essential role in keeping economic activity ticking. At the end of last year, the bond market was worth about $120tn, against $41.8tn for global shares.

If the bond market gets bumpy, everybody is in for a rough ride.

Governments issue bonds to raise money for their spending while companies use them to generate the funds they need to grow. Both promise to pay investors a fixed rate of interest over a preset term, with a guarantee to return their original capital afterwards.

At maturity, the issuing government or company must repay the debt. If it cannot, there is trouble.

Bonds are traded by investors, which means their value can constantly change, depending on factors such as inflation, interest rates and demand. As is the case with shares, bond prices can rise and fall. Just not as much. Usually.

Ordinary investors rarely buy individual bonds but invest through a fund holding a spread of government or corporate bonds.

Bonds offer them a fixed rate of interest plus capital growth if prices rise, with fewer of the ups and downs you find with shares.

The two are supposed to be non-correlating assets. So, when shares fall, bonds are supposed to mitigate losses by standing firm.

The one thing they are not supposed to do is crash simultaneously. Yet, that is what is happening right now.

In doing so, they have destroyed a golden rule of portfolio planning.

For decades, financial planners said the safest way to generate steady, strong long-term returns is to invest 60 per cent of your money in shares and 40 per cent in bonds.

The classic 60/40 portfolio strategy has generated an impressive average return of 11.1 per cent a year over the past decade.

You can even buy exchange-traded funds (ETFs) that automatically deliver this, such as the BlackRock 60/40 Target Allocation Fund or the Vanguard 60% Stock/40% Bond Portfolio.

The writing was on the wall for the 60/40 strategy last year, as US large-cap stocks hit record-high valuations, while US Treasury government bond yields neared record lows.

“For all intents and purposes, we think investors have many reasons to be concerned that the 60/40 might be dead,” Nick Cunningham, vice president of strategic advisory solutions at Goldman Sachs Asset Management, said last October.

This will hit investors who had even never heard of the 60/40 rule because “we see shades of the classic 60/40 present in many portfolios due to an over-concentration in the most familiar asset classes", Mr Cunningham added.

As this warning proves prescient, it may be worth looking at your portfolio to see how exposed you are to this double jeopardy.

This has been a challenging year across the board, says Jason Hollands, managing director of investment platform Bestinvest.

“2022 has seen one of the worst starts to a calendar year for core US assets on record,” he says.

US Treasuries have suffered the worst start to a year since 1788, according to Deutsche Bank, falling 9.8 per cent. Bloomberg

US Treasuries have suffered the worst start since 1788, according to Deutsche Bank, falling by 9.8 per cent. That isn’t supposed to happen to the bond market.

“At the same time, the S&P 500 Index of US shares has fallen 20.38 per cent, the worst first half for US equities since the Great Depression in 1932,” Mr Hollands says.

This is happening because central banks, led by the US Federal Reserve, are throwing monetary policy into a sharp reverse.

After decades of slashing interest rates and pumping out stimulus, they are tightening as fast as they dare to curb inflation.

“Central bankers have now yanked away the key supports for equity and bond markets that turbocharged them in 2020 and 2021,” Mr Hollands says.

Rising interest rates are bad news for shares because higher borrowing costs squeeze both businesses and consumers, hitting profits.

Bonds suffer because they pay a fixed rate of interest, which looks a lot less attractive when rates are rising and investors can earn higher yields elsewhere.

The stock and bond sell-off isn’t over yet despite signs of a recovery in recent days, says Fawad Razaqzada, market analyst at City Index and Forex.com.

Optimists convinced themselves that the Fed would curb rate increases for fear of tipping the US into recession, but this is a misreading.

“The Fed is in a hawkish mood. I think the start of another equity and bond market sell-off is nigh,” Mr Razaqzada says.

It is not all bad news, though.

Bonds do this odd thing that sometimes confuses private investors. When bond prices fall, yields rise.

While the bond price crash is bad news for existing holders, new bond investors are earning a higher rate of income. Yields on 10-year Treasuries have almost doubled from 1.63 per cent to 3.06 per cent this year.

Stock and bond market crashes have one thing in common. Both can throw up opportunities for forward-looking investors.

The Fed will continue to raise rates this year but it also wants room to cut when the US economy slips into recession as a result, probably in 2023, says Lisa Emsbo-Mattingly, managing director of asset allocation research at Fidelity Investments.

“If inflation comes down, real rates, which are yields minus the rate of inflation, could rise further into positive territory after being below zero for the past two years,” she says.

This would allow government bonds to carry out their old job of providing a steady level of income for lower-risk savers and pensioners. Bonds could then start making a meaningful contribution to that balanced 60/40 portfolio split again.

Bonds are cheaper than they were after this year’s dip and are starting to look better value for money.

It could soon be time to start buying bonds again, ideally before the Fed starts cutting rates next year to reverse the recession, at which point bond yields will fall again, Ms Emsbo-Mattingly says.

“But the window of opportunity for yield-seekers may be brief,” she says.

There are hundreds of bond ETFs to choose from, including iShares Core 1-5 Year USD Bond ETF, iShares Global Government Bond UCITS ETF (IGLO) or db x-trackers II Global Government Bond UCITS ETF.

Accurately timing bond fund purchases is no easier than timing the stock market, yet recent volatility is throwing up an opportunity.

It may even make bonds exciting.

Updated: July 05, 2022, 1:00 PM

https://www.thenationalnews.com/business/money/2022/07/05/what-does-the-bond-market-turmoil-mean-for-investors/?utm_source=paid+google&utm_medium=paidsearch&utm_campaign=us+uk+always+on&utm_term=&gclid=Cj0KCQjwtsCgBhDEARIsAE7RYh1ru7FE_OrhxgydUWGygjSPzvR2gW8TwdoBc7cuP1pnWRt4dXjGcFYaAslIEALw_wcB

Silicon Valley Bank receivership. WHO WILL GET PAID FIRST?

We encourage clients with SVB accounts in excess of the FDIC insured limit to contact the FDIC toll-free number at +1.866.799.0959, or as otherwise indicated here.

WHO WILL GET PAID FIRST?

The Federal Deposit Insurance Act specifies the order in which claims will be paid under the receivership as follows:

1. Secured claims
2. Administrative expenses of the FDIC as receiver
3. Insured deposits (the standard insurance amount is $250,000 per depositor, for each account ownership category)
4. Uninsured deposits
5. General/senior liabilities
6. Subordinated debt and similar liabilities
7. Shareholders of SVB and its parent, SVB Financial

SVB has been cited as having relied more heavily on large—and therefore uninsured—deposits than have other banks. This means that the amount of funds allocated for satisfying insured deposit claims in the tier immediately above uninsured deposits should be much smaller than at most banks with more traditional deposit bases. Assuming that the amount of secured claims and administrative expenses will also be relatively modest, this should mean that more funds will be available to satisfy the claims of uninsured depositors. Recoveries for uninsured depositors and creditors junior to them are not guaranteed by the FDIC and will more heavily depend on proceeds available from liquidation of SVB’s assets.

For now, the FDIC has advised that insured depositors should have access to their accounts and insured funds on Monday, March 13, 2023. The FDIC has also announced it will pay uninsured depositors an advance dividend the week of March 13 and will issue receivership certificates for remaining amounts. Depositors will not have to file a claim for their advanced dividend. It is not known what percentage of uninsured deposits will be paid through next week’s advance; the closure order reports that at the close of business on March 9, 2023, due to a “run on the bank,” SVB had a negative cash balance of $958 million. Subsequent dividends are likely, although the amounts and timing of such distributions will be determined by the FDIC in its discretion.

WHAT ARE MY DISCLOSURE REQUIREMENTS AS A PUBLIC COMPANY?

Public companies should consider whether disclosure is required based on their specific facts and circumstances in coordination with their boards and trusted advisers. Any disclosure relating to the possible impact should be limited to the facts known at the time that the disclosure is made, and companies should exercise caution in drawing any definitive conclusions as to the materiality of impact given the evolving nature of the situation. Careful consideration should also be made to Regulation FD compliance, and any forward-looking statements should be identified as such and accompanied by meaningful cautionary language.

https://www.morganlewis.com/pubs/2023/03/silicon-valley-bank-collapse-initial-issues-raised