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U.S. Banks: SVB Situation More "SV" Than "B"
Jesse Rosenthal – Head of U.S. Financials / Senior Analyst - Banks and Specialty Finance
Peter Simon, CFA – Senior Analyst - North American Banks and Brokers
George Milonopoulos – Analyst - U.S. Banks
EXECUTIVE SUMMARY
- We provide initial thoughts on the market reaction to SVB Financial’s capital raise and sale of AFS securities. The bank sector sold off in both the equity and bond markets as risk fears gripped the market amidst the news on SVB and smaller crypto-focused peer Silvergate. Moody’s and S&P have each downgraded SVB by a notch.
- Our initial take is that the issues at SVB are idiosyncratic based on its business model and especially its funding profile, and are not a reflection of broader banking system issues. The situation says more about “SV” than “B”, that is, more about the dynamics playing out in Silicon Valley VC investing ecosystem than it does about the banking industry as a whole.
- SVB’s deposit and funding profile is a decided outlier among large banks. The funding profile features a high percentage of uninsured, non-transaction accounts, and deposit balances went through a far more accelerated (compared to the overall banking system) expansion and contraction cycle coinciding with the boom and bust within Silicon Valley over the past several years.
- Unrealized losses on AFS securities flowing through AOCI and pressuring tangible capital levels have been a theme over the past year as rates rose. We maintain our view that this only becomes an issue in cases where liquidity forces selling and the codification of securities losses. For the large regionals and money centers, subject to the LCR (which SVB was not), liquidity still looks more than ample.
- SVB’s customer base on both the loan and deposit side is uniquely (among top-20 banks) concentrated in innovation technology and VC-fund space. SVB’s customer base and balance sheet construction are not remotely comparable to the large regional banks in our coverage, let alone the even larger and more diversified money center banks.
- We plan to follow up with further thoughts on SVB and related issues for the sector as the situation develops and in response to client inquiries.
Banks got rolled in both equity and credit markets in what looked like fairly indiscriminate selling as risk fears gripped the market—those fears clearly (if not completely) catalyzed by a surprise equity raise from SVB Financial. Silvergate’s crypto-driven ‘failure’ certainly didn’t help. And with all this happening in the same week that Powell’s testimony reinvigorated terminal rate questions and recession concerns, investors are spooked (our inbox can attest). Thursday was the third-worst day for bank equities compared to the broader market post-2009.
But with the necessary caveat that we don’t formally cover SVB (or Silvergate), there are ample reasons to see these as idiosyncratic risks isolated to each bank’s individual business model and, importantly, funding profile—not a reflection of broader banking system issues. For the purpose of this piece we will set aside Silvergate given its far smaller footprint and crypto-concentrated backstory, which can fairly easily be put in the idiosyncratic camp; SVB is a different story narrative-wise, not least of all due to its size—SVB is the 18th largest BHC in the country, whereas Silvergate was 124th. But what started as an atypical liquidity and asset/liability mismatch issue for SVB could very, very quickly morph into a classic bank run–a crisis of confidence for the company.
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