Asia Tea Time - Cup 3 ☕

This week, we cover news on SVB, AIA Group, and Hong Kong Tourism Authority.

Macro in Asia

Silicon Valley Bank woes extend to Asia

The rapid collapse of Silicon Valley Bank (SVB), which was taken over by US state regulators in California on Friday 10 March, caused shockwaves across the globe.

Why it’s happening

• Silicon Valley Bank was drowning in the deposits of clients – those poor high-growth tech companies!

• With all that cash to splash, SVB went out and bought a huge bunch of bonds. With fast-rising interest rates, and clients who were withdrawing deposits like there was no tomorrow, that didn’t work out too well.

• The situation wasn’t helped by the fact that the bank didn’t even have a Chief Risk Officer for eight months last year – no joke.

Why it matters

• Banks are supposed to lend money, not lose it and then collapse. The SVB dumpster fire scared the crap out of a lot of depositors of other smaller banks in the US.

• It even impacted Asian banks and their share prices – “But we’re so fiscally responsible!” you say. Yep true, but contagion doesn't discriminate.

• Cash isn’t free anymore, people. We’re in a “new normal” where Jay Powell (Federal Reserve Chair) is intent on getting inflation to behave.

What’s next?

• Credit Suisse, not wanting to let SVB hog all the headlines, decided to keep us on our toes this week by asking for a teeny bit of help from the Swiss central bank.

• Watch out for the Fed’s interest rate decision this Wednesday (22 March). That’s going to be a biggie.

Tim’s Take

• Questions abound about whether this is 2008 all over again. While that was a structural issue with the whole financial system, this is much more about SVB just being incredibly ill-disciplined in how they managed their risk.

• Of course, fears will swirl for a while about the stability of banks globally. With regards to Asia, most banks are well-capitalised and have learnt lessons the hard way – via the Asian Financial Crisis of 1997/1998.

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In Singapore, for example, the three big banks (DBS, UOB, OCBC) have only around 15-20% of their assets in bonds. That compares to 57% of SVB prior to its bankruptcy.

If banks have ample risk management and diversified client bases – not just rich techies – then they should be fine. Banks in Asia are generally well positioned in this sense.

Company spotlights

AIA Group shares in Hong Kong take a hit

In Hong Kong, major insurance companies saw their shares fall on the back of the SVB scandal in the US.

Shares of pan-Asian insurer AIA Group Ltd (SEHK: 1299) were down around 6% for the week.

Why’s it news?

• AIA is one of the strongest Asian-focused life and health insurers and just happened to report its full-year 2022 earnings the morning SVB went kaboom.

• That wasn’t why its shares tanked though. Being an insurance firm, it’s apparently in the same “financials” bucket as banks so…take that says the stock market!

Why it matters?

• Insurance companies across the board were tarred with the SVB bankruptcy brush.

• Shares in the likes of China-focused Ping An Insurance (SEHK: 2318) and Prudential plc (SEHK: 2378) got whacked even as their businesses recover with China’s reopening.

• As for AIA, the company is going to benefit from China’s reopening as Mainland Chinese tourists stream over the border in search of insurance plans.

What’s next?

• One of the most overlooked sectors of the whole China reopening story has been insurance. It will be interesting to see how the sector capitalises on Chinese peoples’ willingness to spend again.

Tim’s Take

• AIA has been the gold standard of Asian insurance stocks for a long time. The selloff in AIA, and other insurance stocks, definitely seems to be a bit of an overreaction.

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Think about insurance for a minute. You’re paying money in premiums to buy protection so having a “run” on an insurance company is kind of non-sensical (it has long-term liabilities).

Even so, AIA’s capital structure is extremely robust and its flex number is a 380% solvency ratio; a full 280% above the regulatory minimum. Not bad.

• And yes, AIA did used to be owned by the OG of bad risk management during the 2008 crisis – AIG – but it has no business whatsoever in the US or Europe.

Story of the week

Hong Kong is back on the world stage which is what the Hong Kong Tourism Authority would have you believe.

Besides some promo ads from octogenarians telling us to “get your groove on” in Asia’s World City, the city has now approached recent Oscar winner Michelle Yeoh.

According to the SCMP, the city is set to splurge an extra HK$800 million (roughly US$100 million) and has approached Yeoh for her to fill one of several tourism ambassador roles.

The city has also decided to give away 500,000 airline tickets to the city in a bid to attract tourists.

If she does take it up, Michelle will be one busy lady – probably trying to be Everything Everywhere All At Once.