Indian banks have seen a sell-off for the past few sessions with the Nifty Bank index down over 4 percent since Thursday, March 9, on the back of a massive fall in US lenders due to the emergence of a liquidity crisis in the US-based Silicon Valley Bank (SVB).
Silicon Valley Bank Crisis: Will it impact Indian market? Here's what experts say
- On Thursday, the four biggest USA banks lost nearly $52 billion in market value. The KBW Nasdaq Bank Index nosedived, seeing its biggest decline since the pandemic. The main culprit behind this massive crash in banking stocks was the 60 percent fall in the shares of Silicon Valley Bank (SVB) parent SVB Financial Group.
On Thursday, the four biggest USA banks lost nearly $52 billion in market value. The KBW Nasdaq Bank Index nosedived, seeing its biggest decline since the pandemic. The main culprit behind this massive crash in banking stocks was the 60 percent fall in the shares of Silicon Valley Bank (SVB) parent SVB Financial Group.
Why did the SVB Group nosedive 60% on Thursday?
The main reason behind this crash was SVB's sale of its $21 billion AFS bond portfolio for a big loss of $1.8 billion. To put the loss into perspective, the bank’s net profit in the entire year 2021 came in at $1.5 billion. The bank further plans to sell $2.3 billion worth of shares to shore up its liquidity, the lender stated in a press release.
This announcement sent the stock crashing 60.4 percent just in a single session (Thursday). The lender has not been trading since then.
The Silicon Valley Bank collapse has been termed as the biggest retail banking failure since the global financial crisis in 2008. SVB was a key lender to budding startups and had major venture capitalists (VCs).
Post the announcement, the Federal Deposit Insurance Corporation (FDIC) has now taken control of the $175 billion worth of customer deposits in SVB. The FDIC created a new bank called the National Bank of Santa Clara and assured depositors that they will be soon able to access their funds.
The key reasons behind the bank selling its bond portfolio for a loss:
"The sell-off in US markets last week was triggered by a crash of 60 percent in SVB Financials- a bank that mainly funds start-ups. This impacted sentiments and banking stocks took a beating on concerns that rising interest rates might trigger loan repayment defaults," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Sunil Damania, Chief Investment Officer, MarketsMojo, meanwhile, noted that one of the primary reasons why SVB ran into trouble was that they believed US interest rates would remain low and hence invested in long-term US government bonds. In 2022, however, the Fed raised rates by 425 basis points. Moody's threat to downgrade SVB as a result of unrealized losses compelled the bank to find a way to either raise equity or sell some bonds at a loss to create liquidity. This induced concern in the market and a rush on deposits, increasing liquidity scare at the bank, he explained.
The selling of its bonds in losses indicates a major liquidity crisis in the lender due to 2 key reasons - high interest rates and declining deposits, noted Samco Securities in a note.
High interest rates: During the pandemic in order to uplift the economy, the Fed increased the liquidity in the US market significantly, which led to people and businesses having more money at their disposal. This resulted in a huge spike in bank deposits, noted Samco. The banks not sure what to do with this excess liquidity invested huge sums in US treasuries and other government debt securities, it pointed out. Silicon Valley Bank was no different. It had a $21 billion bond portfolio with a yield of 1.79 percent for a duration of 3 years. But soon the central bank began rising the interest rates. The 3-year US treasury yield currently stands at 4.7 percent, it mentioned. As rates rose the Silicon Valley Bank’s bond fell drastically and resulted in huge unrealized losses, noted the brokerage.
Declining deposits: Secondly, the brokerage pointed out that Silicon Valley Bank is primarily known to be a lender for technology companies, therefore, most of its deposits come in from technology firms. As on 2022, 89 percent of the company’s liability are deposits.
"In simple words, the company depends upon the deposits from technology companies for its liquidity. The tech market has been struggling in the past year, and we all have been hearing about the massive tech layoffs happening across major companies. The weak tech IPO and capital market means tech companies have fewer funds and thus less money to deposit. This resulted in a drag on the company’s liquidity. Further, sighting these liquidity issues the companies are withdrawing their deposits from the bank to safeguard their funds causing more pain," explained Samco.
Will the SVB fiasco impact Indian banks?
VK Vijayakumar of Geojit Financial Services, believes that the SVB issue is unlikely to rattle markets for long.
"The quick joint statement by the US Treasury, the Fed, and the Federal Deposit Insurance Corporation that all the depositors' money will be safe is enough to calm the markets. The ‘Lehman’ comparison is totally inappropriate. However, investors have to be careful since there can be a sentimental impact on banking stocks. Since this crisis has near zero impact on Indian banking, investors with a higher risk appetite can use the weakness in the market to buy high-quality bank stocks. A possible positive impact of the SVB crisis is that it may nudge the Fed to go less hawkish since the aggressive rate hike by the Fed lies at the root of the SVB crisis. If the US CPI inflation data tomorrow indicates a declining trend in inflation, the Fed is unlikely to raise rates by 50 bp in the March 22 meeting. That will be positive from the market perspective. This is a US-specific issue and will not have an impact on Indian banking stocks. But the sentiment impact can be negative," said Vijaykumar.
Dnyanada Vaidya, Research Analyst, Axis Securities, meanwhile, expects the SVB crisis to have a negative sentiment rub-off on the markets in the near term. However, from an Indian banking perspective, Vaidya said that he does not see any negative impact on the operational performance of the banks. He believes Indian banks, currently, remain well positioned with RBI's stringent regulatory framework in place.
Commenting on the SVB crisis' impact on Indian banks, Damania of MarketsMojo noted that we must examine the impact on the financial sector from two angles: 1. Objective and 2. Sentimental.
"Despite the facts available in the public domain at this point in time, we don’t see any material impact on the Indian banking system. Yet, it would affect investor sentiment, as investors would be wary while purchasing Bank and NBFC stocks. Due to this, we anticipate Bank Nifty underperforming in the foreseeable future," he forecasted.