How will the US banking crisis affect ASX banks: Morgan Stanley

Silicon Valley Bank and Signature Bank are no more, and now Credit Suisse is on the brink of collapse after its biggest shareholder – the Saudi National Bank – ruled out further financial support.

What a terrifying time to be alive.

Naturally, this begs the question – just how safe are Australian banks and is there any possibility of contagion on a global scale? 

Global banking crisis implications

“We believe direct risks for the major Australian banks from developments in the US are modest given there is material excess liquidity, deposit franchises are robust, and mark to market risk is low,” Morgan Stanley said in a note on Thursday.

“We believe that APRA and the major Australian banks learned the lessons of the 2008 global financial crisis and have significantly strengthened their liquidity, funding and capital.”

To elaborate on these key factors: 

• Large liquidity buffers: The average major bank liquidity coverage ratio was approximately 132% in the December quarter. This ratio measures the amount of high quality liquid assets available and is supposed to be above 100%

• More stable funding: The average major bank net stable funding ratio was approximately 122% in the December quarter. Deposits and equity accounted for 70% of total funding and household deposits contributed to 47% of Australian deposits. This ratio is supposed to be above 100% and measures how easy it is for the bank to turn its assets into cash 

• Healthy capital position: “Under APRA’s ‘new’ capital framework, we estimate that the major banks will have an average proforma ex dividend CET1 ratio of 11.4% at 1H23, implying an ‘excess’ of $7bn above target levels and $21bn above the minimum regulatory requirement of 10.25%.”

An earlier and lower peak for margins

On the flip side, the banking crisis is expected to drive competition for bank deposits resulting in higher deposit rates, higher expenses as banks seek to enhance customer experience and lower fees, which could lead to more pressure on all-important net interest margins.

Still, the positive tailwinds from rising interest rates is expected to boost major bank margins by 17 bps in FY23 but fall approximately 8 bps in FY24, says Morgan Stanley.

There’s also been a record level of refinancing activity, which jumped 22.4% year-on-year in January, to $18.6 billion, slightly below the record high of $19.0 billion in December 2022.

“We believe that a pick up in mortgage refinancing and discounting will lead to an earlier and lower peak in margins, while deposit pricing and mix headwinds have now emerged,” said Morgan Stanley.

Major ASX banks are down another 1.5-2% in early trade on Thursday and down around 4-5% since SVB’s collapse last Thursday.

ANZ (Blue), CBA (Yellow), NAB (Red) and Westpac (Green) performance since 8 March (Source: TradingView)