Small things can lead to big reactions, and that seems to be the case with bank stocks on Thursday, asa huge loss at SVB Financial has caused stocks like JPMorgan Chase, Bank of America, and Wells Fargo to get pummeled.
Here’s what happened. Silicon Valley Bank’s parent, SVB Financial (ticker: SIVB), said Wednesday night that it had sold securities from its portfolio for a $1.8 billion loss, while also announcing plans to raise capital via an offering of common and preferred stock. SVB Financial stock tumbled 60% to $106.04 on Thursday, its largest drop ever. Then it tumbled another 15% in after-hours trading.
The selling didn’t stop there. The entire banking sector got hammered with the SPDR S&P Bank ETF (KBE) finishing off 7.3% and the SPDR S&P Regional Banking ETF (KRE) closing down 8.2%.
No one has been immune. JPMorgan stock (JPM) fell 5.4%, while Bank of America (BAC) dropped 6.2%, and Wells Fargo (WFC) declined 6.2%. “There is a run on banks today with some of the majors getting hit hard,” writes NatAlliance Securities’ Andrew Brenner.
Smaller banks, though, got hit even harder, with Zions Bancorporation (ZION) down 11%, Comerica (CMA) off 8%, and KeyCorp. (KEY) off 7.2%. EvenCharles Schwab (SCHW) has tumbled 13%.
Two issues appear to be at play. The first is the losses that SVB had to take on its bond portfolio, calling into question just how much the securities banks own are worth if they are forced to sell. Most of the time, though, banks don’t have to sell.
But with yields rising, holding on to deposits has gotten much harder, and that could force other banks to sell their securities or raise interest rates for depositors, hurting net interest margins. For SVB, problems in Silicon Valley, have also led to companies burning through their cash and causing deposits to dwindle. Now, investors are extrapolating to the rest of the industry.
Some observers are calling the moves an overreaction. Wells Fargo analyst Mike Mayon, for one, says that the issue isn’t one of deposits but the diversity of deposits. SVB’s customers were primarily venture-capital firms, and venture capital has been under pressure recently, forcing companies to draw down their deposits as they burn through cash. That’s likely not the case for bigger banks with more diversified sources of funding. “To us, the larger the bank, the more diversified the funding,” Mayo writes. “To us, this is part of the test that the largest banks, i.e., the ones that caused the Global Financial Crisis, are today the more resilient portion of both the banking and financial systems.”
Seaport Global analyst Jim Mitchell agrees, but worries that the concerns could hang over the sector for a while. “In terms of the stocks, while we believe today’s news doesn’t change the outlook for the large global banks under coverage (and
today’s sell-off seems unwarranted), with company quiet periods approaching and earnings results a month away, this general unease could certainly continue to weigh on sentiment,” he writes.
Sometimes, it takes just one snowflake to start an avalanche.
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