The Collapse of Silicon Valley Bank
The collapse of Silicon Valley Bank (SVB) on Monday caused losses for US and European banks, with regional banks being hit the hardest. Despite the Federal Reserve offering additional funding to banks, the joint guarantee by the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation proved to be insufficient. SVB was the first bank, excluding crypto-focused bank Silvergate, to collapse due to higher interest rates.
However, some analysts believe that the recent sell-off in regional banks has been overblown, and there are still opportunities in the sector, particularly for mid-size and small community banks. Banking analyst Dick Bove recommends Fifth Third Bank and Trust as top sector picks, praising them for their innovation and strategic decisions. While the recent deposit scare has caused concern, there have not been widespread withdrawals from banks in recent days, and some banks have even seen net inflows from deposits.
Bank stocks suffer losses
On Monday, bank stocks in the US suffered losses following the collapse of Silicon Valley Bank (SVB), despite the Federal Reserve offering additional funding to banks. European markets were also affected by the collapse, with Stoxx 600 falling 2.58%, driven by a 5.65% drop in bank stocks. Although depositors in SVB and Signature Bank were able to withdraw their money, President Joe Biden stated that investors in the banks would not be protected, citing capitalism as the reason. The yield on the 2-year Treasury dropped by a full percentage point, with investors seeking safer assets amid contagion across the banking sector.
SVB was the first bank, excluding crypto-focused bank Silvergate, to collapse from higher interest rates. A chart shows the bank’s unique spread of assets and how it set itself up to fail. The joint guarantee by the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation were not enough to stop the bank rout. Regional banks were hit hardest by the second and third-largest bank collapses in US history, with First Republic Bank, Western Alliance Bancorp, and KeyCorp being among the biggest losers.
Despite all this, markets and analysts expect the Fed to proceed with rate hikes, with Goldman Sachs’ prediction that the Fed would stay its hand being a rare exception. A better indicator of rates’ trajectory would be the consumer price index coming out later today. The banking sector’s crisis seems contained for now. However, bigger banks such as Bank of America and Charles Schwab also suffered losses, even as the broader economy appears to be in good shape, with the Nasdaq Composite adding 0.45%. Pharmaceutical companies such as Pfizer, Johnson & Johnson, Eli Lilly, and Moderna benefited from the news that Pfizer is acquiring Seagen, a developer of cancer therapy, for $43 billion. Seagen rose 15% while Pfizer gained 1.5%.
The SPDR S&P Regional Banking ETF (KRE) suffered its biggest one-day loss in the recent past. PacWest and Charles Schwab also moved higher, but the KRE rose slightly as other regional banks struggled to hold onto their gains. The volatility was evident in Zions Bancorp. and Western Alliance, which each turned negative briefly in afternoon trading after rising earlier in the session. The banks then finished the day with gains. The moves came after regional banks fell sharply on Monday, even though US regulators took extraordinary measures to backstop all depositors in the now-failed Silicon Valley Bank. First Republic fell 61.8% on Monday. However, there has not been widespread withdrawals from banks in recent days, according to Raymond James analyst Daniel Tamayo. Confident statements from finance executives seemed to help support Tuesday’s rally. Charles Schwab CEO Walt Bettinger said on CNBC’s “The Exchange” that the firm was seeing inflows in “significant numbers.” KeyCorp CEO Chris Gorman said on CNBC’s “Squawk on the Street” on Tuesday that his bank has not seen significant deposit outflows in recent days and is actually getting cash inflows from retail customers.
Banking analyst Dick Bove of Odeon Capital Group believes that the recent sell-off in regional banks has been overblown and that there are still opportunities in the sector. He suggested that investors focus on mid-size and small community banks, which he believes are excellent plays. He praised Truist for selling a portion of its insurance unit, giving it a competitive advantage among regional banks. Bove expects the sector to pare its losses and return to trading at book value and higher as the storm calms and the seas part.
Investor’s Note
The collapse of Silicon Valley Bank and Signature Bank has caused panic and led to a deep sell-off in the banking sector, particularly affecting regional banks. However, some analysts believe that the sell-off has been overblown and that there are still opportunities in the sector, particularly among mid-size and small community banks. Despite concerns about deposit outflows, some banks have even seen net inflows from deposits, suggesting that the sector may rebound in the near future. While the situation remains volatile and unpredictable, it is clear that investors and analysts will be closely watching the banking sector in the coming days and weeks to see how it responds to recent events.