03/13/2023 | Press release | Distributed by Public on 03/13/2023 11:45
"It was Ernest Hemingway who asked, 'How do you go bankrupt? Two ways. Gradually, then suddenly.' Silicon Valley Bank's share priced peaked in November 2021 and its customers had begun to steadily withdraw their money a year ago before the final dash to retrieve cash last week, so the author's axiom has proved its worth yet again" says AJ Bell investment director Russ Mould. "But investors now have so much more to ponder, because in the case of SVB, they are going to be bailed in and therefore lose out, while its American depositors are to be kept whole by a new liquidity scheme, backed by the US authorities and British ones by HSBC's swoop for the bank's UK assets.
"There are six key issues still to be addressed."
Source: Refinitiv data
Net interest margin: FTSE 100 banks |
||||||||
Q1 2021 |
Q2 |
Q3 |
Q4 |
Q1 2022 |
Q2 |
Q3 |
Q4 |
|
HSBC |
1.21% |
1.20% |
1.19% |
1.19% |
1.26% |
1.35% |
1.57% |
1.74% |
Standard Chartered |
1.22% |
1.22% |
1.23% |
1.19% |
1.29% |
1.32% |
1.43% |
1.58% |
NatWest Group |
1.51% |
1.49% |
1.42% |
1.40% |
1.45% |
1.69% |
1.91% |
2.11% |
Lloyds |
2.49% |
2.51% |
2.55% |
2.57% |
2.68% |
2.87% |
2.98% |
3.22% |
Barclays UK |
2.54% |
2.55% |
2.49% |
2.49% |
2.62% |
2.71% |
3.01% |
3.16% |
Net interest margin: US Main Street banks |
||||||||
Bank of America |
1.68% |
1.61% |
1.68% |
1.67% |
1.69% |
1.86% |
2.06% |
2.22% |
Citigroup |
1.95% |
1.92% |
1.93% |
1.98% |
2.02% |
2.24% |
2.31% |
2.39% |
JP Morgan |
1.64% |
1.57% |
1.58% |
1.58% |
1.61% |
1.68% |
1.79% |
1.99% |
Wells Fargo |
2.06% |
2.02% |
2.03% |
2.11% |
2.16% |
2.39% |
2.83% |
3.14% |
Source: Company accounts
But charges for sour loans have started to go up, too. The years 2020 and 2021 were unusual, as the former saw huge loan loss provisions owing to COVID and then the latter saw banks write some of those back as the worst-case scenario failed to develop and more borrowers came through the pandemic than expected. But as the combination of higher interest rates and inflation put the squeeze on many borrowers' those borrowers have struggled to pay interest and service their debt, with the result loans have gone sour. This has forced the banks to take higher bad loan charges on both sides of the Atlantic. Higher rates are not a win-win for banks. The good news is the Big Five FTSE 100 banks trade at or below book, or net asset, value, so this is to some degree priced in. With the exception of Citigroup, the Big Four Main Street and big Two Wall Street banks do not, so their share prices may be more exposed to tougher economic times.
Source: Company accounts
Nor have regulators covered themselves in glory. According to the Basel III rules, the Tier 1 Capital ratio is a key measure of a bank's financial strength and it is measured by dividing a bank's core equity against its risk-weighted assets (RWAs). RWAs are weighted for their perceived credit risk and the regulations give government bonds a zero-risk weighting, the same as cash. For investors to belatedly remember that bond prices usually go down as interest rates (and therefore government bond yields) go up is proving a nasty shock, but some may question whether the regulations are correct to allocate a zero-risk weighting to Treasuries.
The Fed may now find itself between a rock and a hard place. It wants to tighten policy to keep a lid on inflation but will now face questions as to whether policy is already too tight, given this nasty wobble in the banking system and the pressure higher rates are already putting on many companies' cash flows.
If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of Quantitative Easing (around a quarter of US GDP) without something breaking somewhere. Money was cheap and tossed around with abandon as a result of the zero cost associated with it. Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble.
For all of the Fed's efforts to tighten, the Fed Funds rate is still below where it was before the Great Financial Crisis started in 2007 and the central bank may yet struggle to get back there, if the SVB drama is anything like a reliable guide.
Source: US Federal Reserve, Refinitiv data
Russ Mould's long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993, he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell's Investment Director in summer 2013.
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