In banks, things move at the speed of light. Within the span of just one week, three large US banks had failed – Silicon Valley Bank, Silvergate and Signature Bank. The collapses ignited global fear of contagion in the financial sector, leading to another massive financial crisis not seen since 2008. The fear is not unfound as Credit Suisse got rescued by Swiss National Bank with a US$54 billion loan while a consortium of US banks loaned First Republic a whopping US$30 billion to prevent a contagion from spreading in US. Against this backdrop, what is the implication for OCBC share price?
The narrative for OCBC share price had certainly turned scary in 2023. When I invested in OCBC in August 2021, my thesis was that bank stocks should perform well in high inflationary environment as high interest rates generally lead to higher net interest incomes for the banks. Back then, I had anticipated that US Federal Reserves would hike interest rates in 2022 and that Singapore bank stocks would be the biggest beneficiary from the rate hikes. However, it seems that the series of interest rate hikes by US Federal Reserve could be tipping global economy into a financial crisis instead.
In particular, the overnight disappearance of Silicon Valley Bank had not only sparked off a global shockwave, but also sent numerous tech companies in US into a tailspin as many of them had deposited funds in the bank. OCBC share price was also rattled as well.
The huge influx of hot cash saw deposits in Silicon Valley Bank (SVB) rocketed to US$198 billion in March 2022 from just US$74 billion in June 2020. The problem with the bank is that it used US$91 billion of these funds to purchase long-term US Treasury bonds, which are pretty safe if they are held to maturity. But then, the rising interest rates caused bond prices to nose-dive (bond prices move inversely with the interest rates). For this reason, SVB faced explosive marked-to-market losses as they sold off these bonds at prevailing market conditions. To compound matters, many of its depositors are tech companies which are drawing down funds due to rising rates. This miscalculation by SVB caused the epic bank run.
Will local banks be affected like what it happened in 2008? I doubt so because the financial contagion in 2008 was driven by subprime mortgage. This time round, I doubt local banks are directly exposed to similar assets of SVB. Furthermore, the three Singapore banks are so well-capitalized nowadays and most of their loans are in housing and construction loans. In this regard, the money of bank depositors should be safe in my view. However, the same cannot be said for bank stocks. In this article, I will share my view on the outlook for OCBC share price in 2023.
Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. I am not vested in this counter at the moment.
OCBC share price on knife-edge
Following the implosion of the three US banks, OCBC share price came under heavy shelling from short-sellers as short-selling swelled to a high of 3.8 million on 14 March 2023. Despite short-selling attacks, OCBC share price held out pretty well. The only plausible reason for the resilience of OCBC share price that I could think of is that [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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