[ANALYSIS] Silicon Valley Bank "SVB" (SIVB): Contagion fears spark a global banking sell-off (UPDATED)

OVERVIEW:

The US banking sector fell into panic mode following a string of concerning developments this week, with the latest - the Silicon Valley Bank saga – sparking a global sectoral selloff.

To round up the main headlines for the sector this week:

• 
  KeyCorp (KEY) warned of elevated deposit betas (the percentage of change in fed funds passed on to depositors holding interest-bearing accounts).


• Crypto-focused bank Silvergate (SI) announced liquidation following the collapse of the crypto exchange FTX.


• Tech-startups-lender Silicon Valley Bank or “SVB” (SIVB) announced a share sale to shore up finances after a USD 1.8bln loss following the sales of a loss-making bond portfolio, consisting mostly of US Treasuries.

Desks suggest that some of the contagion panic seen across larger “systemically important” US banks yesterday was overdone - with Silvergate’s and SVB’s woes more idiosyncratic and larger exposures in different sectors (crypto, tech startups) versus banks such as Bank of America (BAC), Citi (C) and JPMorgan (JPM). Analysts also suggested that since the 2008 financial crisis, regulators have forced the largest lenders to hold more capital, thus resulting in a more insulated balance sheet to the risks facing the smaller banks.

However, others remind us that problems in the banking industry persist (whilst contagion risks from the Silvergate/SVB events remain low). Analysts suggest banks’ Net Interest Income/Margin (NII/NIM) look to have peaked in aggregate while credit is weakening at a modest pace.

SILICON VALLEY BANK:

• A broader downturn in the tech startup industry sparked high deposit outflows, analysts suggest, whilst SVB also projected a sharper fall in net interest income – SVB does business with almost 50% of all venture capital-backed startups in the states - with a focus on healthcare and technology.


• SVB announced a USD 2.25bln share sale to plug losses after selling USD 21bln in a loss-making bond portfolio - the portfolio was yielding an average 1.79% return, far below the current 10yr Treasury yield.


• Investors were spooked over whether the capital raise would be sufficient, whilst several venture capitalists (VCs) – including Peter Thiel’s Founders Fund, Union Square Ventures, and Coatue Management – reportedly instructed portfolio firms to limit exposure and pull cash from the bank, according to Bloomberg sources.


• SVB CEO Greg Becker, on a call, told investors to stay calm and not to panic.

REGULATOR RESPONSE

• FDIC announced SVB Financial has been closed by California regulators, and have moved to protect the insured deposits. As of December 31st, 2022 SIVB had c. USD 209bln in total assets, and USD 175.4bln in total deposits. At the time of closing, the FDIC said the amount of deposits in excess of the insurance limits was undetermined and it will be determined once additional information is obtained. However, according to the co.'s 10k filing on February 24th (for the year ending December 31st, 2022), its uninsured deposits in US offices were USD 151.5bln. 


• US Treasury Secretary Yellen and financial regulators convened today and expressed reliance in the banking system. They stated regulators have effective tools to address this type of event. While expressing "full confidence in banking regulators to take appropriate actions in response".

REACTION:

• 
  SVB Financial Group (SIVB) plunged 60% on Thursday and even further in pre-market trade before being halted. 


• 
  KBW Bank Index (which includes regional lenders) slipped some 7.7% on Thursday, dragging the SPX to its lowest level since January 19th, before falling further on Friday.


• Financial companies in the index tumbled over 4% on Thursday, with JPMorgan (JPM) dragging the benchmark lower after sliding over 5%. JPM pared some gains on Friday, although GS, BAC,  MS & C, slipped further.


• 
  S&P Regional Banking ETF (KRE) saw steep losses on both Thursday and Friday.


• 
  APAC banks were hit, and European banks dominate the Stoxx 600 laggards.

VIEWS:

• 
  Chief strategist at Interactive Brokers Sosnick said “A nasty reminder that this is not a great environment for smaller banks. An inverted yield curve is a huge headwind if you’re in the business of borrowing short-term and lending long-term. As for Silicon Valley Bank, their unique niche in the tech world is a real boon when that business is booming, but a problem when it’s not.”


• 
  Pershing Square's Bill Ackman tweeted that a failure of SVB Financial (SIVB) could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. "If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered."


• 
  Prominent economist El Erian tweeted “While the US banking system as a whole is solid, and it is, that does not mean that every bank is; Due to the volatility in yields after the prior protracted period of the leverage-enabling policy, the most vulnerable currently are those vulnerable to both interest rate and credit risk; Contagion risk and the systemic threat can be easily contained by careful balance sheet management and avoiding more policy mistakes”


• 
  Goldman Sachs (GS) credit strategists suggested: "The risk of a large US bank experiencing a 'capital or liquidity event' due to mismatches in assets and liabilities or concentrated positions in securities portfolios is remote", according to Bloomberg.


• 
  Morgan Stanley (MS) said "We want to be very clear here... we do not believe there is a liquidity crunch facing the banking industry... the headwind for the banking industry is that the cost of liquidity is high and rising... This is a headwind for net interest margins, revenue and EPS", via Bloomberg.


• 
  Liberum said “This isn’t a canary in the coal mine, more a risk of a butterfly flapping its wings IF customers move deposits, banks are forced to shrink bond portfolios and loan books... Risk is not systemic due to banks’ high capitalization levels post-financial crisis; banks will continue to lend... High net interest margins had been the main reason to own bank stocks. With increasing competition, NIMs will start to compress.”, via Bloomberg.


• 
  Wells Fargo (WFC) strategists said "We are confident in overall bank industry stability, but it’s unclear how SVB will play out. Until it’s resolved, risk will likely trade heavy.", according to Bloomberg.

10 Mar 2023 - 20:27- EquitiesEconomic Commentary- Source: Newsquawk