Where Some Investors See A Banking Disaster, Others See Opportunities

If it’s true that every cloud has a silver lining, could the banking crisis precipitated by the downfall of Silicon Valley Bank and Signature Bank have an upside?

To some analysts, the answer is an emphatic yes. In the days after the headlines shook financial markets, these financial professionals were highlighting several promising possibilities.

“The large decline in bank stocks following the collapse of [these two regional banks] presents an unusually good opportunity to buy high-quality financials at very attractive valuations,” said Hunter Doble, a portfolio manager at Hotchkis & Wiley in Los Angeles who runs the firm’s Mid-Cap Value Fund.

In the aftermath of the bank failures, shares of all U.S. regional banks plummeted. Within one week, the benchmark SPDR S&P Regional Banking ETF, for instance, fell 15%. U.S. Bancorp stock plunged some 19%. And despite securing an influx of $30 billion from larger competitors, First Republic Bank shares ended the week down nearly 70%, fueling speculation of a takeover.

Even larger banks were not immune. Citigroup stock lost close to 9% of its value during the first week of panic, and over the weekend the Swiss banking giant Credit Suisse announced an agreement to be acquired by rival UBS.

All of this during a week in which the S&P 500 actually closed up nearly 1.5%.

Optimists pointed out that the failed regional banks were not typical of the industry. They “had very unique business models which made them particularly vulnerable to a loss of confidence on the part of their depositors,” said Doble.

SVB reportedly held many long-term Treasury bonds that had been purchased when interest rates were low. Over the past year, as rates went up, newer bonds became more valuable. But the bank was locked into its older, long-term Treasury notes. So when its customers—many of whom came from the beleaguered tech industry—wanted to withdraw funds, the bank had to sell off its bonds to provide liquidity. It still came up short.

Signature Bank’s demise was similar. Many of its customers were in niche industries, including crypto currencies. Rising interest rates also caused many customers to pull out money and put it into short-term bonds, for greater yield.

“While we believe the group is likely to remain volatile, we expect that, as the market comes to realize that most banks have far more resilient deposit funding than [Silicon Valley Bank and Signature Bank], the group should gradually recover most of its recent losses,” said Doble.

Nevertheless, despite the unusual business models of these two banks, could their failures be a harbinger of similar problems elsewhere? Could there be more trouble ahead for other, bigger financial institutions? The memory of the fall of Lehman Brothers and Bear Stearns still stings for many.

“The risk that the challenges faced by a handful of regional banks could spread to the investment banks and brokers is very low,” Doble said shortly before the UBS-Credit Suisse deal was announced.

Credit Suisse had suffered a series of management scandals and lawsuits over several years. Analysts say it was already teetering before the past week’s crisis caused nervous customers to abruptly withdraw.

To Doble, the current difficulties seem different from those that beset the industry during the global financial crisis of 2008. “Today, overall asset quality is very good, core profitability is very high, and capital is far greater than during the GFC,” he explained.

Moreover, the steps taken by federal authorities to create greater liquidity and make all depositors of Silicon Valley Bank and Signature Bank whole “substantially reduces the risk of contagion within the U.S. financial system,” said Doble.

The seized regional banks seem to have been in a particularly precarious position. Andy Kapyrin, co-CIO of CI Regent Atlantic Private Wealth in Morristown, N.J., said they were at risk from their “focus on venture-backed firms and high percentage of uninsured deposits,” referring to the speculative nature of their client base and large number of accounts that exceeded the usual FDIC guarantee limit of $250,000.

At the end of 2022, some 94% of assets at Silicon Valley Bank were in uninsured accounts, according to the Federal Financial Institutions Examination Council and the Financial Stability Board. At Signature Bank, 90% of deposits exceeded the threshold covered by federal insurance.

Their ultimate downfall “enhances the appeal of larger companies in both tech and in banking,” said Kapyrin.

Of course, a degree of caution is always advised.

“Bank and financial stocks need to be considered on a case-by-case basis,” said Rocco Carriero of Rocco A. Carriero Wealth Partners in Southampton, N.Y. “Diversified financial institutions with broad business models may be more desirable than more narrowly focused financial businesses.”

Serious study of each company’s financials will be key to successful investing in the sector, he stressed. “Fear itself can eventually create a problem when one did not exist,” said Carriero. “Seeing images of crowds outside a bank elicits feelings of anxiety. People need to understand their true risk tolerance and avoid making emotion-based decisions.”

On a similar note, Steve Braverman, co-chief executive officer and CIO at Pathstone, an independent advisory firm in Scottsdale, Arizona, advised clients not to give in to panic.

“Although this [week] may have brought back memories of 2008 for some, the Federal Deposit Insurance Corporation (FDIC) took swift action to isolate the situation and protect depositors,” he said by email. “Our assessment is that the direct exposure to Silicon Valley Bank is expected to be de minimis.”

Brian Andrew, CIO at Johnson Financial Group in Milwaukee, agreed that the two failed regional banks should not necessarily be considered the first in a series of falling dominoes. Silicon Valley Bank, for one, “grew very quickly over the last few years … largely from a narrow group of customers in a common industry,” he said.

“Does that mean we have nothing to worry about?” he asked. “No.” The rapid jump in interest rates and likelihood of a recession are bound to “break some things,” said Andrew.

Consequently, he is taking “a more defensive position” in his equity portfolios, “focusing on companies with more consistent growth, better free cash flow, and under-leveraged balance sheets,” he said.

Yet other investors are so turned off by the stock market turmoil that they are clinging to nontraditional assets such as precious metals. In the week after the bank failures, gold futures advanced 7.6%.

“People are thinking that there is no way to know if their bank will be next—and if so, whether the government will bail them out,” said Keith Weiner, CEO and founder of Monetary Metals, a Phoenix, Arizona-based precious metals specialist firm. “Many want a simple alternative to the opaque risks of the banking system, such as gold.”

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