SVB collapse: Large domestic deposits cushion Indian banks, say analysts

Mark-to-market impact on Indian banks seen limited thanks to HTM provisioning

The collapse of Silicon Valley Bank (SVB) has spooked banking stocks worldwide. With the US Federal Reserve (Fed) embarking upon an interest-rate increase spree to tame inflation, the Street fears that the SVB crisis — triggered largely due to asset-liability mismatch — is only the beginning.

Amid rout in global banking stocks, the Bank Nifty Index — a gauge for the performance of leading Indian banks — has dropped over 4 per cent in just two trading sessions.

While banking stocks will continue to remain under pressure as the SVB crisis unravels, analysts believe Indian banks’ deposit mix provides the requisite cushion.

“Amid all the doom and gloom in global banks and a contagion impact from the SVB issue, banks in India stand out with hardly any exposure — directly or indirectly to SVB. It remains a domestic deposit-funded system, with investments in Indian government securities (G-secs). Banks in India also largely don’t fund start-ups and hence, any impact on the start-up world should be manageable to a large extent,” said Suresh Ganapathy, analyst, Macquarie, in a note.

Indian banks have total deposits of close to Rs 173 trillion. Of this, nearly two-thirds, or Rs 108 trillion, are from domestic households, which don’t tend to withdraw in a hurry.

Against the backdrop of SVB, Jefferies did a test on Indian banks on the quality of their deposits and the impact of mark-to-market (MTM) loss on the held-to-maturity (HTM) book.

“On funding, more than 60 per cent of deposits are (from) households. Savings deposits are stickier (duration three to five years), and people don’t move to G-secs quickly. On assets, loans are 65 per cent of assets and 25 per cent of investments. HTM is allowed on G-secs and forms 80 per cent of that and 15 per cent of assets. Indian banks are well placed,” said Jefferies in a note.

On average, G-secs form 18 per cent of total assets for private banks and 22 per cent for public sector banks. Jefferies says the impact of MTM loss on the HTM portfolio is 6 per cent of networth for private banks and 15 per cent for state-owned banks.

This impact is far lesser than what SVB has suffered, leading to its downfall.

SVB meltdown

SVB was popular among technology (tech) start-ups, with most parking excess cash with the lender. The bank, in turn, invested a large portion of its deposits in long-dated government bonds, which are considered to be safe.

However, when the Fed started to hike rates rapidly, SVB’s bond portfolio suffered MTM losses. If SVB was able to hold on to these bonds until maturity, it could have received its capital back.

However, amid the unfurling of post-pandemic stimulus measures, tech companies started to withdraw their deposits with SVB. Since the bank didn’t have enough cash in hand, it had to sell some of its bonds at a loss to repay depositors.

On March 8, SVB announced it would be required to raise close to $1.8 billion in capital. This startled the market and depositors, leading to its collapse.