13 March 2023 

Markets react to Silicon Valley Bank news

We aim to keep you updated on financial news and events impacting global investment markets.  There are many headlines today about Silicon Valley Bank and therefore you may have some questions. We have summarised the position to date and spoken to our Investment partners to get their input. 

Who are Silicon Valley Bank (SVB)?

SVB is a US-based bank that specialises in providing financial services to technology and life science companies. It has a presence in several countries, including the UK, where it provides banking and financing services to startups and other high-growth businesses.

In recent years, SVB has been expanding its international presence and investing in various fintech startups and other innovative companies. In 2021, SVB announced plans to expand its operations in the UK by opening a new office in London and hiring additional staff.

SVB's stock price has been performing well in recent years, reflecting the bank's growth and strong financial performance. As of September 2021, SVB's stock was trading near all-time highs, with a market capitalisation of over USD45 billion.

In September 2021, SVB announced it had acquired Boston Private, a wealth management and private banking firm, in a deal valued at approximately USD900 million. The acquisition was expected to strengthen SVB's wealth management capabilities and expand its customer base.

SVB has also been active in the cryptocurrency and blockchain space, providing banking and financing services to various crypto-related companies. In February 2021, SVB was reportedly one of the banks involved in the USD500 million fundraising round for crypto exchange Kraken.

Overall, SVB has been expanding its operations and investing in various innovative companies, while also pursuing strategic acquisitions to strengthen its capabilities.

What happened last week

During afternoon trading in the US on Thursday, equity markets came under pressure as SVB announced that additional financing was required due to issues they were having with capital within their businesses.
The sell-off driven by investments in the US financial sector spread to Asia and Europe on Friday morning. Even though the underlying cause of this sell-off was from one small US financial, short-term investors sold down all financials across the board.

What our investment partners are saying

We spoke with our investment partners this morning to gauge their views on whether the sell-off is a knee jerk reaction to the news out of the US or whether there are systemic risks to the banking sector, especially if more institutions come under pressure.

Below are two extracts taken from calls with the fund managers which we think help to show that the current volatility should be short term in nature and the volatility is providing opportunities for managers to top up their positions in names which they are positive on for the future.

Even though UK and European banks have opened down this morning, there is little direct read across from SVB. The UK banks have excess deposits relative to loans as well as very strong capital ratios which provide additional layers of comfort. The unravelling of crypto and early stage/loss making tech is causing much of the pain in the US as interest rates move back to a normalised level. 

The problems in the US banking sector do not apply to Europe today, but sentiment may be impacted. The reason why Europe is less impacted is because the interest rate cycle is less mature in Europe and the competition for deposits is lower. European banks are also helped by a systemwide loan-to-deposit ratio that is below 100%. Our own holdings have retail-based deposits, often associated with checking accounts, which are sticky. European banks are valued 30% cheaper than US banks, and they also have higher dividends and buybacks. Many banks are set to return 20-30% of their market cap back to shareholders over the coming few years.

The sell off in financials has led to losses in global equity markets across all sectors and geographies over the past few days. This type of reaction is not surprising with markets on tenterhooks from upcoming central bank decisions, inflation data releases and other upcoming economic data releases.

What happened over the weekend

US regulators shut down SVB and took control of its customer deposits. This was the largest failure of a US bank since 2008, and came after the bank failed to raise new capital to strengthen its balance sheet.
US financial regulators rolled out emergency measures on Sunday night to stem potential contagion from the collapse of SVB, ensuring depositors would have access to all their money and the wider market remained calm.

SVB’s UK arm was acquired by HSBC for £1, which will potentially save thousands of British tech start-ups and investors from big losses if they couldn’t access deposits.

Future expectations

Two areas where the increase in volatility has helped are in short term debt and alternative assets. Within fixed income, short term yields have decreased with prices rising as investors have flooded to safe haven assets. This has benefited shorter duration credit holdings which we utilise along with having a weighting to gold within alternative allocations. As gold provides a degree of protection in volatile markets, this has provided some stabilisation over the past couple of days.

We will continue to monitor the situation as it evolves very quickly and update you as and when we feel the time is right.

In the meantime, if you have any questions, please do not hesitate to get in touch.