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Stock market corrections happen from time to time. And what we saw last week was kind of shocking. Financial stocks tumbled after Silicon Valley Banka key lender to technology startups, it dumped a portfolio of assets, mainly US government bonds, in a bid to stabilize its finances.
The institution’s shares fell 65% as investors feared an old-fashioned bank run.
So let’s take a closer look at what happened and where there might be an opportunity.
fear of contagion
Investors wiped $52.4 billion off the market value of the four largest US banks (by assets) on Thursday after NASDAQ-listed SVB got into trouble.
Shares in the UK financial sector also plunged on Friday. He FTSE 100 closed down 1.7% at the end of the day. But bank stocks suffered the most losses: the FTSE 350 banking index fell around 4.1%.
HSBC fell more than 5%, lloyds 4.5%, NatWest 3%, standard charter 3.3% and barclays 3.6% But other finances were also affected. legal and general fell 2.5% and Hargreaves Lansdown 5%.
So why did this happen?
SVB’s $21 billion bond portfolio had a yield of 1.79% and a duration of 3.6 years; Currently, the 3-year US Treasury note has a yield of 4.7%. The point is that bond prices fall as yields rise, and banks don’t need to include these unpublished losses in their results.
The fiasco is a reminder that many financial institutions are sitting on large unrealized losses on their fixed income holdings. These losses have occurred because rising interest rates have made these bonds less valuable.
Why am I buying now?
With financial stocks falling on Friday, I’m now thinking of buying stocks, like Standard Chartered, or adding to my holdings, including HSBC and Lloyds, while they’re cheap. The thing is, I think the risks are greatly exaggerated here.
And the news that HSBC bought SVB for £1 in the UK and a backing in the US, to protect deposits across the nation, will buoy markets in the short to medium term.
SVB is something like one time only. The bank tripled its deposits in a year and focused almost entirely on the technology sector. Instead, I see the event as a reminder that deposits should be held in safe and well-regulated institutions. As Davide Serra of Algebris Investments said, the largest and most secure institutions can benefit.
The deposit base of the major banks is much more diversified than that of SVB and the big banks are in good financial health.
My first choice is Lloyds. The UK-focused bank is heavily skewed towards the mortgage market. So there is minimal connection to the SVB fiasco. But its trading arm may benefit as companies seek the relative safety of larger institutions.
Some analysts also suggest that central banks, predominantly in the US, will raise rates more slowly as a result of the fallout from SVB. Higher rates could exacerbate concerns about unrealized bond losses.
Higher interest rates are good for banks until they’re not. Today, interest rates are providing a big boost to banks as net interest income soars.
But many people are of the opinion that central bank rates will soon be too high for banks. Demand for loans may fall, debt may worsen, and bond losses may increase. The sweet spot is between 2% and 3%.
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