Silicon Valley Bank Crisis explained (Image: Twitter)
SVB Financial Group, which trades as Silicon Valley Bank, is in a tough position after a capital raise caused its stock to collapse by 60%
SVB Financial Group (SVB), which does business as Silicon Valley Bank (SVB), is in a difficult position after a capital raise plunged stock value by 60 percent, wiping out more than $80 billion worth of bank shares. This came as Silicon Valley Bank launched a $1.75 billion share sale on Wednesday to bolster its balance sheet and deal with falling deposits from startups scrambling for cash amid higher spending.
Silicon Valley Bank is a commercial bank and one of the largest in the United States. SVB has relationships with more than 50 percent of all venture-backed companies in the US and countless Venture Capital (VC) firms.
SVB’s financial profile benefits from an abundance of client funds, including on-balance sheet deposits and off-balance sheet investments from clients. Average client funds were at a high of $348 billion in the fourth quarter of 2022. Last year, the lender increased its Federal Home Loan bank lending in the second half of 2022, resulting in a ratio of market funds to tangible bank assets of 9.1 percent as of December 31, 2022, while this ratio was historically very low. The bank’s net interest margin (NIM) fell to 2.0 percent for the fourth quarter of 2022 and a related quarterly decline of 13 percent in net interest income.
The SVB crisis
In 2021, the SVB saw a massive influx of deposits, rising from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021.
As deposits grew, the SVB was unable to grow its loan portfolio fast enough to generate the desired return on this capital.
Therefore, the bank purchased a large amount (more than $80 billion) of mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Nearly 97 percent of these MBS had a term of more than 10 years, with a weighted average yield of 1.56 percent.
However, with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now buy long-term “risk-free” bonds from the Fed at a 2.5x higher yield. Precisely because of the rising interest rates of the US Fed, the value of existing bonds with lower payouts fell in value.
What led to the SVB Stock Crash?
Santa Clara-based SVB Financial Group has announced that it has sold $21 billion worth of securities from its portfolio. SVB Financial Group also said it held a $2.25 billion share sale to support finances. The move was prompted by high deposit outflows at the bank due to a broader downturn in the startup industry, analysts say. It also predicted a sharper decline in its net interest income (NII).
The move shocked many prominent venture capitalists, including Peter Thiel’s Founders Fund, Coatue Management and Union Square Ventures, which have instructed portfolio companies to limit exposure and take their money out of the bank. While some other VC firms have asked portfolio companies to shift away at least some of their money.
Following this share sale by SVB Financial Group, the bank’s shares suffered their biggest fall in more than three decades on Thursday.
The Domino Effect
According to media reports, shares of SVB took a huge hit after the bank launched a $1.75 billion share sale on Wednesday to strengthen its balance sheet after a significant loss on its portfolio. Shares in banks have fallen globally – with the four largest US banks, including JP Morgan and Wells Fargo, losing more than $50 billion in market value.
What does SFB say?
Greg Becker, Chief Executive Officer of the SVB Financial Group, held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “keep calm” amid concerns about the bank’s financial position, according to a person who is familiar with the case.
Becker delivered the approximately 10-minute talk with investors asking the bank’s clients, including venture capital investors, to support the bank as it has supported its clients for the past 40 years.
What’s next?
Uday Kotak, CEO of Kotak Mahindra Bank, wrote, “Overnight developments in US banking: Markets, analysts and investors underestimate the importance of financial stability to a bank’s balance sheet. If interest rates rise 500 basis points from zero in a year, there was a misfortune waiting somewhere.”
After the dramatic turn of events, Moody’s immediately downgraded the bank’s credit rating from A3 to Baa1 with a negative outlook.
Read all the latest business news here
