Research Insights - Silicon Valley Bank (and Credit Suisse) update
Silicon Valley Bank Update
On Friday 10th March it was announced that US bank, Silicon Valley Bank (SVB), had collapsed which resulted in a flight to safety with investors selling equities and buying bonds and gold. The initial shock reminded investors of the 2008 Global Financial Crisis (GFC) and the fragility of the financial system. Importantly, the US Treasury has taken measures to allow the Federal Deposit Insurance Corporation (FDIC) to protect all deposits at SVB.
Who is Silicon Valley Bank?
Silicon Valley Bank (SVB) was the 16th largest bank in the US prior to financial regulators shutting down their operations and seizing control of its deposit base on Friday. It is estimated that nearly half of all venture-capital funded startups in the US were customers of SVB. The collapse of Silicon Valley Bank is the biggest bank failure in the US since the global financial crisis in 2008.
What happened?
On March 8th 2023 it was revealed by SVB that it had lost US$1.6 billion on the sale of US Treasury securities that were used to help shore up its balance sheet and provide capital for lending. This disclosure triggered concerns by some depositors with SVB surrounding the safety of their money. As a result, several depositors began to withdraw their deposits (aka a run on the bank) placing pressure on the capital base of SVB. This dynamic was further exacerbated by prominent venture capital firms advising their portfolio companies to pull their business from SVB.
In an effort to bolster its capital base SVB Financial Group, the parent of SVB, announced plans to raise US$2.25 billion via various capital instruments including shares and preferred stock. Despite this intention the shares of SVB Financial Group plunged 60% on Thursday. With deposit outflows moving faster than the proposed capital raising this forced the hand of financial regulators to step in and shut down SVB on Friday, in the process seizing control of SVB’s deposit base.
Over the weekend US Treasury Secretary Janet Yellen, US Federal Reserve Board Chairman Jerome Powell and Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg announced that depositors with SVB would be protected, allaying fears of contagion within US and global banks.
Importantly the protection of deposits will not be borne directly by the taxpayer and will be funded by the FDIC. Shareholders and certain unsecured debt holders will not be protected under the measures announced.
Another two US Banks closing or seized by regulators
Silvergate Capital, a lender to the crypto industry, announced last week it would be winding down operations and liquidating its bank. In addition, Signature Bank, which is much larger than Silvergate Capital, but also focused on crytpo-related activities was seized by banking regulators over the weekend.
Implications of the collapse of Silicon Valley Bank
It remains unclear what the flow-on impact of these bank failures will have on other companies and the broader economy. Importantly, US authorities reacted quickly to protect deposit holders at Silicon Valley Bank which helped buoy public confidence in the banking system and avoid potential “runs” on other banks.
Whether start-ups can attain alternative sources of funding in the short-term is a question that is difficult to answer. It is not unreasonable to suspect that lenders will demand more from these companies than they have in the past few years given the higher interest rate environment, recent collapses of crypto-related companies and lack of alternative sources of funding.
Faith in both US banks and US regulators has taken a hit as a result of the collapse of Silicon Valley Bank and Signature Bank. Ratings agency, Moody’s has cut its outlook on the US banking system to “negative” citing a “rapidly deteriorating operating environment”.
Australian Companies with exposure
Sezzle Inc – the company disclosed it has about US$1.2 million of exposure to SVB or 2.0% of the company’s cash and cash equivalent balance.
Xero Inc – the company disclosed it has about US$5 million of exposure to SVB as of 10th March, which is less than 1% of Xero’s cash and cash equivalents as at September 30 2022.
Life360 Inc – the company had $6.1 million deposits with SVB as of 10th March 2023. The company had cash and cash equivalents of $95.1 million in total as of 10 March 2023.
Conclusion
What occurred with SVB was primarily due to its exposure to interest rate risk on its longer-dated securities held on its balance sheet and its unique depositor base. The collapse of SVB and Signature Bank has undermined confidence in the US banking system and its regulation in recent days. However, any contagion to the global banking system appears unlikely. Australia’s banking system appears isolated from this and unlikely to suffer any meaningful impact as a result. The impact over the medium term for the cost of capital and ability of companies to raise both debt and equity needs close monitoring as does any impact on central bank policy but at this stage the impact appears isolated in nature.
We are closely monitoring the situation but at the time of writing the regulators have stabilised markets and we have also seen the expectations of further rate rises in both the US and Australia reduce.
Notes on Credit Suisse
Given the recent issues with Silicon Valley Bank, Signature Bank and Silvergate Capital investors have been looking for the next domino to fall and Credit Suisse has been under pressure as a result. Whilst it is a company that needs to earn back investor trust given its recent issues it is not exposed to the same issues that have led to the collapse of the above-mentioned banks.
Credit Suisse has been a long-term underperformer with the share price down ~70% in 2022 and was re-capitalised via an equity issue in November 2022. Whether this injection of capital is adequate will only be known in the future. In addition, the company is going through a restructuring which is envisaged to take 3 years.
Overnight (15th March) Credit Suisse’s largest shareholder Saudi National Bank said it would not provide Credit Suisse with further financial assistance which sent the shares plunging as much as 30% during the overnight trading session. However, the Swiss Financial Market Supervisory Authority and Swiss National Bank (SNB) said the company is adequately capitalised and SNB added it would provide additional liquidity if necessary that has helped to stabilise the share price.
Should any action need to be taken within your investment portfolio we will contact you and of course if you do have any further concerns pertaining to the collapse of SVB please contact Plus 7 Financial Management.
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