OUR VIEW ON SVB - Efficient Private Clients
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Contributed by Eben Louw, NAVIGA

The abrupt collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has caused much panic and volatility in the market. SVB is the biggest lender to fail since the 2008 financial crisis and the 16th largest bank in the United States (US). The 15% drop last week in the broader banking index suggests panic about a wider national banking crisis in the US, however the fear is likely unwarranted as the conditions that gave rise to the crunch at these tech-focused groups are not shared by most banks.

SVB and SB’s problems are unique: their deposit bases are highly concentrated in one economic sector, namely US Tech. SVB provided banking services predominantly to venture-backed technology start-ups. SVB and SB experienced significant growth from the boom in the US Tech sector over the last few years, as extremely low borrowing costs and ‘easy liquidity’ supported these ventures. According to reports, the bank’s assets increased from $71-billion in 2019 to $220-billion in March 2022.

Unfortunately, interest rates have been increasing globally, which resulted in banks being exposed to $620-billion of unrealised losses on the bond holdings in which deposited capital was invested. This was owing to a fall in bond prices as the Fed moved interest rates higher. These unrealised losses typically only become an issue if a bank needs to sell its holdings before bond maturity in order to raise cash – the premature sale crystalises the losses in the bank’s market value. In the case of SVB, the bank sold sell approximately $21-billion in securities at a loss of $1.8-billion.

As the cost of borrowing has been rising and liquidity has been drying up, it has become especially tough for Tech companies to raise new venture-capital funding, resulting in more withdrawals to fund operations and growth.
The safety net offered by the Federal Deposit Insurance Corporation (FDIC), which insures deposits to protect the capital that depositors place at banks in case of a failure, unfortunately also had little application in the case of SVB and SB. Nearly 90% of SVB’s deposit base was uninsured (protection applies only to deposits below $250 000). The industry average for uninsured deposits is about 52%.
After SVB incurred the $1.8-billion loss, the bank also announced that it would try to raise $2.5-billion in funding through a share offer to address a surge in withdrawals driven by depositor concerns. This caused a sell-off in the stock, and a further rush from clients to withdraw deposits as more people feared a repeat of the banking collapse that took place during the global financial crisis. Ultimately this led to swift regulatory intervention, as Federal authorities took over, eventually guaranteeing deposits, and effectively saying to all depositors in the US that “you don’t have to worry, you don’t have to withdraw your money, we will stand behind the banks”.
Although banks across the world have been under pressure and could remain under pressure amid the tough economic environment, South African banks are relatively removed from the specific reasons for the collapse of SVB and should not be materially impacted over the longer term. What is clear, however, is that the significant increases in interest rates are starting to put pressure on global economies and financial systems.

So far, the Banking Association of South Africa (BASA) has not made any public comments on a possible impact on South African banks, saying that the problems relate to operational matters at individual banks. The South African Reserve Bank (SARB) has also not made any public comments or voiced concerns regarding financial stability of the markets.
Below are a few key things to highlight when considering the impact of this on local banks and investment portfolios:

  • Banks in general have much stronger financial buffers today than they did during the global financial crisis and are generally less at risk.
  • South African banks have high liquidity levels and are well-capitalised, with very good risk management. The SARB is very conservative relative to global peers, requiring high capital adequacy and liquidity levels.
  • SVB had a highly-concentrated exposure towards the Tech sector, which is especially sensitive to interest rates, while South African banks (especially the top 4) are generally much more diversified.
  • US authorities have put extensive measures in place and have acted aggressively to ensure stability and prevent further spill-over or contagion into global markets.
  • The larger US banks (compared with SVB) have much better risk management controls in place and typically hedge-out a big portion of their interest rate risks.

In our Efficient Private Clients portfolios, we do have exposure to local banks, owing to their attractive valuations and prospects, but we do not hold bank shares in the Global Model Portfolio as other sectors offer better opportunities. The recent sell-off has created some potential opportunities for global large-capitalisation banks, but for now we remain on the cautious side.