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JPMorgan, $JPM, Bank of America, $BAC, Wells Fargo, $WFC, and Morgan Stanley, $MS - $55 billion wipe out

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Why the SVB-Triggered Selloff Is a Buying Opportunity in Big Bank Stocks

 

The dramatic selloff in shares of SVB Financial Group SIVB –60.41%  has bank investors on tenterhooks, worrying that the troubles at the Silicon Valley-based lender may be indicative of more pain to come across the industry. It may be a buying opportunity instead.

First a recap. SVB Financial (ticker: SIVB) shares plunged 60% Thursday after revealing that it had realized a $1.8 billion loss after selling $21 billion of its “available-for-sale securities” from its portfolio. To make up for the loss—and to shore up its finances—SVB said it planned to raise $2.25 billion to build up its finances. The sales came as SVB revealed that it has seen a sharp drop in deposits as its client base, composed mostly of venture capitalists and start-ups, has been burning through cash.

The action at SVB reverberated across the industry Thursday, sending the KBW Nasdaq Bank Index (BKX) down 7.7%, its worst showing since June 11, 2020, when it fell 9%. 

Now investors are left fretting that other banks could be subject to similar woes at SVB. There’s no denying that banks face challenges as the Federal Reserve appears intent to continue to raise rates to crush inflation but it is unlikely that the whole banking sector is as vulnerable as SVB—particularly not the larger banks.

“We believe the selloff 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,” Vivek Juneja, analyst at J.P. Morgan Securities, wrote Friday.

Still, it’s not hard to see why investors are worried—and it starts with higher interest rates. Higher rates pressure deposits in two ways. First, as rates rise, banks are pressured to pay more to savers to avoid having customers flee to higher-yielding products. When that happens, bank profits get squeezed. Rising rates also cause depositors to spend down their balances to deal with rising costs elsewhere. or search for better places to put their cash. For banks, the dwindling deposits mean that they lose a low-cost source of funding.

At a bank like SVB, which caters to a niche client profile, that drop in deposits came quickly. With a client base of VC-backed companies, pressures to funding caused by rising rates caused basically everyone to pull their money out all at once. That niche client profile helped SVB to do especially well during the pandemic when there was a flurry of deal activity and IPOs, which Barron’s noted in September 2021, when the stock was still rising.

But without being able to rely on deposits as a source of funding, banks like SVB then have to sell securities on their balance sheet, which are generally Treasuries and other fixed-income securities. Unfortunately, in doing so, the banks get hit by the effect of higher interest rates again since bond prices move in the opposite direction to yields meaning banks may be selling those securities at a loss. 

These issues didn’t come out of nowhere. Just last month, the Federal Reserve Bank of St. Louis warned of an SVB-like situation. Since the pandemic, banks increased their bondholdings as deposits increased due to fiscal and monetary stimulus even as loan growth weakened. That was fine when deposits were plentiful and bond prices were stable but it was recently estimated by the Federal Deposit Insurance Corporation that U.S. banks have a combined $620 billion in unrealized losses in their securities portfolio. It isn’t a great spot to be in for a bank’s risk profile but it’s especially difficult if banks are forced to crystallize those losses to raise capital.

“For many banks, these unrealized losses will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons,” the St. Louis Fed wrote.

Large banks, however, might not have the same issues. SVB is unique in that its client base is concentrated in industries that have been especially hurt by the impact of higher rates. Larger banks like Bank of America BAC –0.88%  (BAC), JPMorgan JPM +2.54%  (JPM), and Wells Fargo WFC +0.56%  (WFC) have much more diversified client bases and funding sources. Larger banks are also subject to much tighter regulation since the global financial crisis and are subject to annual stress tests in which they have to prove their durability in myriad negative economic scenarios. Their businesses also look nothing like those of SVB.

“Essentially, [SSVB] funded long-dated fixed-rate assets (that are required to be marked-to-market) with variable-rate funding in a rising interest rate environment,” writes RBC analyst Gerard Cassidy. “SIVB’s deposit and asset mix differs significantly from that of all the other top 20 banks, which in our view implies that other banks are not expected to experience anything similar to SIVB.”

That doesn’t mean large banks won’t feel some pain from the current dynamics—as we witnessed Thursday—but it isn’t likely to be as catastrophic. Far from it. Cassidy, for one, sees opportunities in Bank of America, Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), JPMorgan, KeyCorp (KEY), M&T Bank MTB –1.44%  (MTB), PNC Financial Services Group (PNC), Regions Financial (RF), and U.S. Bancorp (USB). “[The] sell-off provides investors an opportunity to buy high-quality banks with strong, low-cost consumer deposit franchises…at a discount,” he writes. “We believe that by owning these stocks, investors will be rewarded with capital appreciation and a strong dividend yield.”

Get them while they’re not hot.

 

 

 

 

Chat GPT summary for the above news article...

The recent selloff in shares of SVB Financial Group has raised concerns among investors about potential troubles in the banking industry. SVB Financial's losses were due to a sharp drop in deposits from its niche client base, composed mostly of venture capitalists and start-ups, due to rising interest rates. However, larger banks are unlikely to face similar issues as they have more liquidity, are more diversified, have better risk management, and are subject to tighter regulation. While large banks may feel some pain from the current dynamics, it is unlikely to be as catastrophic as SVB Financial. Investors may see this as a buying opportunity in high-quality banks with strong low-cost consumer deposit franchises at a discount.

 
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30 minutes ago, JaiBalayyaaa said:

What's the bailout amount of 2008 bro

$160B.. appears like loose change after the last 3 yrs of dollar printing

they did a stress test on banks and gave them gov gave them loans to cover their risks for allowing liquidity in the banking, many banks returned them with profits though

any banks which took money from govt cannot file H1's was the condition at that time, i see we are heading in that direction specially when this govt is actually being run by Obama/Rice behind the scene

next crisis in banking will need half trillion for sure

 

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