SVB restructures financial portfolio – and explodes banking industry

Shares of SVB Financial Group continued to slide in premarket trading on Friday after it sold assets at a loss following a drop in deposits. The impact rippled through the banking sector, which many investors considered largely insulated from recession worries and rising rates.

SVB’s troubles have forced the Silicon Valley-based lender to sell bonds to restructure its portfolio in response to higher interest rates, while managing low deposit levels from customers.

SVB stock (ticker: SIVB ) fell 60% to $106.04 on Thursday and fell 42% to $61.41 on Friday. Jupiter’s declination is steepest in company

S&P 500

This is the largest percentage decline ever.

The sell-off led traders to take a closer look at all bank stocks—especially their deposits.

KBW Nasdaq Bank Index

(BKX) will fall 7.7%, marking the worst since a 9% plunge on June 11, 2020.

SVB, the parent of Silicon Valley Bank, had a bull run in 2021 as it lent to venture capitalist-backed start-ups in technology, life sciences and healthcare and Napa Valley wineries in an era of low interest rates and easy money.

Advertisement – Scroll to continue

Since then it has fallen on hard times. SVB’s stock has fallen more than 80% from its record high in late 2021 as interest rates have risen, which increases the cost of the deposits the bank uses to fund loans. In its press release on Wednesday, the company said its recent actions were partly due to expectations of a continued high-interest-rate environment and partly due to lower deposit levels.

Given the current volatile economic climate, venture-capital firms are unwilling to fund start-ups – a problem for SVB, which receives deposits from VC-backed start-ups. As of Feb. 28, SVB had $326 billion in customer funds, down from $341 billion at the end of last year.

See also  More important as you get older – stretching, balance work or strength training?

“What we’ve learned over the last 12 to 24 months is that in a fast-rising rate environment, customer deposit dynamics have been different than we expected,” Chief Financial Officer Daniel Beck said in a conference call with Bank of America analyst days. Ahead of Wednesday’s update.

Advertisement – Scroll to continue

Dwindling deposits forced SVB to take drastic measures. After the market closed on Wednesday, SVB said it had sold all of its $21 billion in securities classified as available-for-sale (AFS), which is essentially a portfolio of U.S. Treasuries and mortgage-backed securities. It said it incurred an after-tax loss of $1.8 billion to be recorded in the first quarter of 2023 as a result. Prices of fixed income securities such as MBS and Treasuries tend to fall when interest rates rise.

The company plans to reinvest the proceeds from the sale into short-term debt to take advantage of rising rates. SVB said it will raise $2.25 billion, including $500 million in a $1.25 billion convertible preferred and common stock offering to private equity firm General Atlantic and investors.

“The sale of all our AFS bonds will help us increase our asset sensitivity, partially lock in finance costs, better control and improve Net Interest Income (NII) and Net Interest Margin (NIM) from the impact of higher interest rates. Profitability,” SVP said.

Advertisement – Scroll to continue

Since the Federal Reserve began efforts to raise interest rates to curb inflation last year, banks’ sales of what are known as AFS bonds have been a risk lurking in the market. Rising inflation has forced customers to spend their deposits – a low-cost source of funding for banks. When that dries up, banks are forced to turn to their bond portfolios to raise capital, but as bond prices fall, banks sell those bonds at a loss.

See also  Angels' Shohei Ohtani hits again with 493-foot home run

As the broader market lost its interest in high-growth stocks, some of that concern was expected to shift to the venture capital space. And they did. “Concerns about a slow-to-recover VC environment have kept us cautious on SIVB shares and a potential headwind as rates are raised,” DA Davidson analyst Gary Tenner said. He rates the stock at neutral and cut his target to $200 from $250.

Concerns should persist. Moody’s, for instance, downgraded SVB Financial Group (SVB) and its banking subsidiary Silicon Valley Bank on Thursday and changed its ratings outlook from stable to negative.

Advertisement – Scroll to continue

“SVB’s balance sheet restructuring repositions its balance sheet towards asset sensitivity, benefiting profits at the cost of realized losses on the sale of investments. Still, Moody’s doesn’t anticipate the environment
SVB’s profitability has recovered sufficiently to improve funding and liquidity, prompting today’s action,” analysts at Moody’s wrote.

Fears that other banks will face similar problems explain Thursday’s selloff in the industry. Banks take deposits, which they then use to issue loans or buy bonds. If their deposits fall, they will be forced to sell properties at a loss, as SVB did.

Some observers argue that the concerns are overblown. SVB had a separate source of funding, which made life difficult for start-ups when easy money ran out. According to Wells Fargo Securities analyst Mike Mayo, the nation’s largest banks have more diverse funding sources that could help protect against SVB’s problems.

“[The] “The ‘SIVB moment’ doesn’t exactly represent the industry, but affects sentiment,” Mayo wrote Thursday.

See also  China promises economic growth of 5% by 2023

However, sometimes, feeling is what counts.

Write to Karishma Vanjani at [email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *