By Moritz Rehmann, Fund Manager of DJE - Multi Asset & Trends and Analyst for the Banking, Insurance and Media Sectors
Liquidity becomes more precious
The bankruptcy of Silicon Valley Bank and the emergency takeover of the major Swiss bank Credit Suisse by its even larger rival UBS have unsettled the markets. While a broad banking crisis is unlikely, other consequences, such as for liquidity and credit, are foreseeable. DJE's banking analyst and fund manager Moritz Rehmann explains how DJE is dealing with the issue.
What happened so far
Silicon Valley Bank (SVB) recently announced a large loss of $1.8 billion and corresponding actions to shore up its own capital. The losses came from holdings on SVB's balance sheet (primarily U.S. government bonds) that had declined significantly in value as interest rates rose and had to be liquidated at a loss as customer deposits melted away. At the same time, customers withdrew funds from SVB out of concern for their deposits. This forced SVB to sell more assets, resulting in further losses.
What started as a crisis of a single bank with a very concentrated client base has now reached Europe with the takeover of Credit Suisse by UBS, as was announced over the weekend. This is causing a lot of volatility and uncertainty in the banking sector. However, investors should take a differentiated view of this sector, because the banks in trouble are institutions with rather poorly diversified business models (SVB) or those that have been in restructuring before (Credit Suisse).
Could there be a similar withdrawal of customer funds at large addresses as at SVB in the USA?
We do not expect this to happen, because with the relatively far-reaching deposit guarantees in retail banking, there is hardly any incentive for retail customers across the board to behave in this way. In the corporate customer segment, the reaction would be conceivable in the event of doubts about creditworthiness - but even then, the funds would remain in the system and continue to be available via the interbank market. The globally very strong and sweeping reaction can most likely be seen as a deterioration in sentiment, i.e. the mood, toward the sector.
Are there also winners in this situation?
Clearly, there is a "flight" to the large addresses with qualitatively sound balance sheets, diverse refinancing sources and good capitalization (such as JP Morgan) - these are also the institutions in which we focus our investments at DJE.
How does DJE currently handle investments in the banking sector?
We did not and do not have any securities of banks that are currently in trouble, neither on the equity side nor in bonds, and are therefore not affected by default risks of the corresponding bonds. We focus on globally leading, excellently capitalized banks without a strategic focus on niches. Within the banking sector, we therefore continue to hold stocks of banks that can take advantage of this situation in the medium term, as they can take over market shares of the troubled institutions. Nevertheless, when the troubles of Silicon Valley Bank became known, we reduced our weighting in the banking sector, as the current market conditions are changing for all institutions: Liquidity is getting tighter, refinancing is getting more expensive.
How are central banks reacting to recent events, also compared to previous crises in the banking sector?
Compared to the last financial crisis, the regulators and the central bank are very proactive and fast in their processes. In both the U.S. and Switzerland, it took only a few days to contain the risks. The concerted liquidity now provided by central banks over the weekend also speaks to a broad consensus for support. Unlike previous crises in the banking sector, the issue of funding is a relatively transparent one, unlike the conjecture about the quality of assets on the balance sheet as in the last financial crisis. This should mean that the problems that exist at individual institutions can be addressed very effectively, thus keeping the problems limited.
What lies ahead for the banking sector?
The market environment has changed for all institutions: Liquidity has become more precious, which is expected to lead to stricter criteria for loans or more expensive refinancing, and this in turn to lower loan growth. The refinancing of banks themselves will become more expensive with interest rate increases being passed on to deposit customers (the so-called deposit beta). The expected yield curve of the central banks (FED/ECB) has retreated significantly, which will slow down future growth in net interest income. Tighter lending standards also increase the probability of a recession and thus for loan defaults in the future. The profit outlook in the sector is thus deteriorating, but a wave of defaults is not on the horizon.
Note: Marketing advertisement - All information published here is for your information only and does not constitute investment advice or any other recommendation. The statements contained in this document reflect the current assessment of DJE Kapital AG. These may change at any time without prior notice. All statements made have been made with due care in accordance with the state of knowledge at the time of preparation. However, no guarantee and no liability can be assumed for the correctness and completeness.