Instant View: SVB meltdown triggers gyrations in global bank shares

(Reuters) – California banking regulators on Friday closed SVB Financial Group, the largest bank failure since the financial crisis, moving quickly to protect depositors as a crisis at the startup-focused lender rippled through global markets and hit banking stocks.

The regulator appointed the Federal Deposit Insurance Corporation (FDIC)as receiver. The failure of troubled tech-lender SVB Financial Group’s rippled through global markets and sent shares of many banks tumbling, although some larger U.S. banks recovered in morning trade.

The SBV meltdown, which began on Thursday, spread concern about hidden risks in the banking sector and its vulnerability to the rising cost of money.

After a 6.6% decline on Thursday, the S&P 500 banks index steadied from an early fall on Friday, briefly turning higher, while the KBW Regional Banking index was down 3.5%. Europe’s STOXX banking index fell almost 3.8%, marking it biggest one-day percentage slide since June 2022.

COMMENTS:

CHRISTOPHER WHALEN, CHAIRMAN, WHALEN GLOBAL ADVISORS, NEW YORK

    “I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail then the Fed is faced with a very tough situation which may force them to drop interest rates.”    “There could be a bloodbath next week as banks are in trouble, the short sellers are out there and they are going to attack every single bank, especially the smaller ones.”    “I think Silvergate started it. That one was the first pebble to go off the mountain and now we have a boulder and more are likely to follow.”    “Investors are concerned on where they should be putting their money in and it is not good for the smaller banks when these questions are getting asked by customers. It has a ripple effect and other smaller banks may suffer.”

MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES

“The concerns emanating from the financial sector are rippling across the market in general. Whether there’s specific concerns about any other companies in the financial space outside of Silicon Valley Bank, when you combine the debacle of Silvergate with the collapse of Silicon Valley Bank … that’s creating a ripple effect of concern for the overall market stability.”

    “During a period of uncertainty, the initial reaction is going to be to reduce positions. You saw that yesterday and that’s continued somewhat today. Even though the jobs number wasn’t extremely hot, it was above expectations. And that only adds to elevated anxiety about where the equity market is going to be a couple of months down the road.”    

    “The situation in the financial sector this week is having a far greater effect on market sentiment and mentality than the jobs report this morning. It’s a matter of what’s dominating market sentiment and mentality today.”

    “They’re going to be incredibly volatile for the next few days.”

JAKE DOLLARHIDE, CHIEF EXECUTIVE OFFICER, LONGBOW ASSET MANAGEMENT, TULSA, OKLAHOMA

    “We were all fed the theory that higher interest rates are going to be great for banks. Now we have higher interest rates and banks are the worst-performing group.”

    “There are obvious cracks in the system, and the worry is if the Fed raises rates (50 basis points) in two weeks, will that break something in the banking system. That’s why the banks are selling off and the market is nervous.”

    “Also, is there contagion? Is it going to come into the Midwest and the East Coast?”

DAVID TRAINER, CEO, NEW CONSTRUCTS, INVESTMENT RESEARCH FIRM

“SVB’s issues show that companies, including banks, need to be much more discerning about whom they do business with. The market has been punishing companies that have no business models since the bear market began in January 2022 and SVB’s woes are the latest frontier in the market’s reckoning. The market is tired of companies that do business with unprofitable companies or that are unprofitable themselves.”

“We do not believe there is contagion risk for the rest of the banking sector on the heels of SVB’s struggles. The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health.”

R. SCOTT SIEFERS, MANAGING DIRECTOR, PIPER SANDLER

“This week’s events increased our fears that it will be tough for this space to find sustained higher ground until some of the myriad uncertainties crystallize. And while this week’s stock price action may have seemed shocking, the reality is that some of the related issues could certainly take a while to resolve. For instance, while funding pressures seem to be moving very quickly, history suggests they are unlikely to abate until well after the Fed has completed its tightening.”

VIVEK JUNEJA, ANDREW DIETRICH, SAI NETTEM, ANALYSTS, J.P.MORGAN

“Large bank stocks sold off sharply yesterday following events among a couple of smaller banks. We believe the sell-off was overdone as large banks have a lot more liquidity than smaller banks, they are more diversified with broader business models, have a lot of capital, are much better managed in regards to risk, and have a lot of oversight from regulators… We don’t expect a fire sale of securities from our banks, unlike at some smaller banks due to their liquidity positions and large, diversified deposit funding.”

EBRAHIM H. POONAWALA, ANALYST, BOFA SECURITIES, NEW YORK

“We believe that the sharp sell-off in bank stocks yesterday was likely overdone as investors extrapolated idiosyncratic issues at individual banks to the broader banking sector. However, the sell-off also highlights a (belated) realization among investors that higher for longer interest rates are negative for the sector’s earnings per share outlook.

While bank stocks could bounce in the short term on macro data that soothes inflation concerns, we believe that the group will struggle to shed the late cycle mindset that has taken hold among investors since last year. We remain biased towards maintaining exposure to the sector via mega-cap banks.”   

ERIKA NAJARIAN, BANK ANALYST, UBS SECURITIES, NEW YORK

“The sector’s knee-jerk reaction is understandable, but likely overdone. While the lion’s share of investors appreciated the uniqueness of SIVB’s situation, investor concerns over deposit outflow and mix shift are still heightened . If investors are concerned about deposit flow, why punish the stocks who have sticky, operational retail checking deposits?

“In the era where funding and liquidity is a top concern, we think the money centers, especially JPMorgan Chase & Co would be the best place to ‘hide.’ And Bank of America’s more than 6% decline in the stock feels too much for the institution that has one of the best and stickiest retail deposit bases in banking. Wells Fargo’s funding should have the least amount of ‘surge’ given its asset cap. And US Bancorp’s  7% decline is befuddling, given a very conservatively managed balance sheet.”

GLENN YIN, HEAD OF RESEARCH AND ANALYSIS FROM AETOS CAPITAL GROUP:

“The root of this crisis can be traced back to a broad-based downturn in tech startups, and SVB being a venture capital-focused lender, has experienced larger-than-expected deposit outflow. 

By nature, venture capitals are a survival game, only a very small percentage of startups can make it through incubation and grow into their ultimate form after years of careful management and constant fine tuning. 

As a result of SVB’s rout, we are seeing prominent players in US VC pulling cash out the bank, dramatically escalating the domino effect and draining scarce liquidity even further. 

We are also seeing traditional banks taking damage from SVB’s rout, stock prices in Bank of America, JPMorgan and Wells Fargo all fell over 5% as many of today’s elements resemble those just before the GFC in 2007~2008.

I don’t think SVB would create a nuclear event as a standalone event but considering fragile sentiment and the expectation of a higher terminal rate from the Fed, the true risk lies in whether SVB could become the last straw to break the camel’s back. A ripple effect of such (an event) is the last thing we want now.”

ALFONSO PECCATIELLO, FOUNDER & CEO OF THE MACRO COMPASS:

“This (banks which will be forced to sell available-for-sale securities at a loss) is much less of an issue at large banks because they have stronger balance sheets and they can repo securities out rather than selling them outright. Moreover, AFS bonds (unrealized) losses are already accounted for in the bank’s capital position, so much more disclosed than HTM unrealized losses. Selling these bonds would crystallize losses through the P&L but would be much less of a surprise.

Smaller banks are more affected. Reserves at small banks have declined much faster than at large banks and the competition for retail deposits from T-bills and MMF yielding almost 5% weights on small banks much more than large banks, which have a more diversified funding base.

I expect banks to buy less Treasuries overall, and this has been the case already for months. There are less reserves around due to the Fed’s QT and that changes the incentive schemes for banks – it makes them less aggressive when looking for bonds to buy.”

RYAN DETRICK, CHIEF MARKET STRATEGIST AT CARSON GROUP:

“Silicon Valley Bank is the 15th largest bank in the country, so everyone is wondering just how much their troubles could spread to other banks. The good news is they are in trouble because they specialized in venture-backed technology and lending to startups, while other more traditional banks aren’t heavy in those areas.

Currently we are in the middle of a sell first and ask questions later market, but the health of other banks is still solid and this appears to be only an issue with Silicon Valley Bank.

SIVB is truly in a unique situation, as they were one of the only banks that was hurt by the slowdown in 2022 of funding in venture capital and private equity. Traditional banking relies on deposits from businesses and customers, not how venture capital is doing. As of now, larger banks are in sound financial shape and have maintained healthy deposits.

Small banks, think regional banks, are the area that has taken the brunt of the selling. Whereas larger banks have other ways to make money, regional banks do it the old fashioned way, but lending it out to customers longer-term and at higher rates. With short rates higher than longer-term rates currently, this is pressuring regional banks at their core.”

JASON BENOWITZ, SENIOR PORTFOLIO MANAGER AT CI ROOSEVELT:

“There are some aspects to what is occurring at SVB Financial that are common to the banking system more broadly. But we believe there are important aspects of the crisis that are unique to SVB Financial that suggest that contagion across the banking system is unlikely.

Across the system, banks hold fixed income securities with unrealized losses because interest rates have moved up so rapidly over the last year. And the Fed’s balance sheet reduction program is reducing the total amount of deposits held by all banks, creating a systemwide headwind. Those aspects of the SVB crisis are common to the banking system more broadly.

But SVB Financial is unique in its exposure to venture-funded startups. The bank reports that 39% of its deposits are from early-stage companies in the technology and healthcare sectors. These companies generally keep their operating funds at SVB as noninterest bearing deposits.

Early-stage companies typically operate at a loss which draws down those deposits. And, in the current environment, replenishing those funds with additional venture capital funding rounds has become very challenging. This unique aspect to SVB Financial sparked the bank’s need for liquidity, which led it to draw down on its available for sale securities and rapidly realize a significant loss on these holdings, impacting its capital position.

The headwind of the Fed’s balance sheet reduction program on system-wide bank deposits is more gradual, and we would not expect it to create sudden liquidity crises at other major U.S. banks in the way that challenges in the venture capital funding market affected the depositors at SVB Financial.

As the Fed drains liquidity from the system via quantitative tightening, we would generally expect larger banks to more successfully retain or grow deposits as compared to smaller ones. Larger banks typically provide a broader suite of services to their customers which makes their deposits stickier. But all banks may feel increasing pressure to raise the rates they pay on deposits in order to retain them as they compete with attractive Treasury and money-market yields.”

(Writing By John O’Donnell, Noor Zainab Hussain and Paritosh Bansal; Additional reporting by Niket Nishant, Jo Mason, Marc Jones, Iain Withers Yoruk Bahceli and Mehnaz Yasmin; Editing by Toby Chopra)