Silicon Valley Bank – the next Lehman Brothers?

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The investing world is still trying to determine whether there is another banking crisis on the horizon following the collapse of Silvergate Capital (SI) and the shoring up of Silicon Valley Bank. Shares of the latter’s parent company, SVB Financial (SIVB), tumbled 60% on Thursday and fell another 20% in the AH session to $82.90. Panic quickly spread to the broader market as bank shares across Wall Street reacted to the developments, and pushed the S&P 500 Financials Index Sector (SP500-40) down 4% by the close, marking its worst drop since June 2020.

What happened? Stirring up fear among investors, SVB Financial Group announced it would raise $2.25B in new capital through two offerings and a private placement. The money would go to shore up its balance sheet, which was dented by the sale of a loss-making bond portfolio consisting mostly of U.S. Treasuries. The bank apparently lost $1.8B on the trade as it rushed to sell off its low-interest bonds, with an inverted yield curve creating headwinds for those that are borrowing short-term and lending long. One thing to note is that the average Wall Street analyst rating stands at Buy.

Compounding the situation: If too many customers tap their deposits at once, a bank run can ensure or trigger sector contagion. On Thursday, SVB Financial CEO Greg Becker held a conference call with clients and urged them to “stay calm” as tech entrepreneur Peter Thiel’s Founders Fund reportedly asked its companies to move their funds (Bill Ackman is advocating for a bailout). Silicon Valley Bank was known for its bets on what has now been deemed frothy tech, and as the Fed continues its aggressive monetary policy path, much of the capital and liquidity that was there is leaving the system. SIVB also revised its outlook to reflect a sharper decline in net interest income, expecting rates to stay higher for longer.

Outlook: “We remain on the sidelines with regard to SIVB and want to stress that we see it as an outlier in the industry. Other banks have underwater bond portfolios as well, but they generally have lots of retail deposits, which are much less rate-sensitive than SIVB’s deposits,” Oppenheimer analyst Chris Kotowski wrote in a note. “While we view these actions combined with a weaker guide as a clear negative, we do not believe that SIVB is in a liquidity crisis, especially following the significant proceeds received from the AFS sales, capital raise, and low loan-to-deposit ratio in the mid-40s.” Will he be right, or is another crisis unfolding?


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