Bank investors are grappling with the question of whether
All US lenders parked a chunk of their money in Treasuries and other bonds that dropped in value last year amid the Federal Reserve’s rapid rate hikes to contain inflation. But SVB took it to a different level: its investment portfolio swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%.
And while higher rates have made all banks fret about depositors going elsewhere, most lenders have very broad customer bases spread among individuals and companies. SVB grew rapidly thanks to its focus on tech startups as its primary clients.
“Once the initial shock has had some time to fade, people will realize that this bank is very different in nature compared to more traditional banks,” said
The bank said this week it offloaded a big chunk of its bond investments at a loss to increase its liquidity. Fears of an exodus of client deposits prompted shares to drop 60% on Thursday with another steep fall in early trading Friday.
Special case or not, bank investors aren’t waiting around to see how unique the problems are. In the US, the KBW Bank Index had its worst day since June 2020, as its members shed more than $90 billion of value. In Europe, the biggest banks lost more than $40 billion off their market caps on Friday.
While SVB was the worst performer of any company in the S&P 500 Index on Thursday, the index’s second worst performer was
In all, US banks’ had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the Federal Deposit Insurance Corp. The agency noted this month that those paper losses “meaningfully reduced the reported equity capital of the banking industry.”
Banks have been so profitable that for most of them, the paper losses have limited their potential stock buybacks but not otherwise been a major issue.
“All people who’ve been around banking would say higher rates in sort of a stable environment is good for banks in the long run, it can be painful getting there,” KeyCorp Chief Strategy Officer
Those unrealized losses don’t appear on the firms’ income statement, but some do affect lenders’ so-called accumulated other comprehensive income, or AOCI. Many banks also had other hedges that offset some of the losses. Swings in AOCI impact shareholder equity, the drop in AOCI has weighed on key capital ratios, forcing some to curtail share repurchases.
Some of SVB’s problems are specific to the company’s focus on venture capital-backed startups. For months, the company has warned that it’s been beset with deposit outflows as those firms burned through cash. Venture capital funding has largely dried up, meaning there wasn’t a way for those clients to replenish the money.
The company — along with
That differed from players like JPMorgan Chase & Co., which initially faced investor pushback when it didn’t immediately plow excess deposits into securities. Still, the move proved prescient as the Federal Reserve last year aggressively raised benchmark rates. Chief Financial Officer
“The cash position in simple terms, one reason for it to be elevated is simply the recognition of the amount of surplus liquidity in the system,” Barnum said at a conference. “Deposits are going to come down and it’s just easier and more straightforward to let that flow out of the cash balances rather than have to readjust securities positions when that happens.”
Even after months of headlines, this week’s news came as a shock to investors.
In January, when asked if the company was considering restructuring its balance sheet, Chief Financial Officer
A month earlier, Beck said the company was able to move certain customers into an off-balance sheet product that gave the company $90 billion of liquidity. He also noted the firm is able to borrow against its investment securities portfolio.
“So you’ve got $70 billion worth of additional capacity there before you even get to the available-for-sale book,” Beck said.
(Updates with JPMorgan details in 14th, 15th paragraphs.)
--With assistance from
To contact the reporter on this story:
To contact the editors responsible for this story:
Michael J. Moore, Tom Metcalf
© 2023 Bloomberg L.P. All rights reserved. Used with permission.