European banking stocks sold off sharply Friday as jitters surrounding U.S. bank SVB Financial — which plunged 60% Thursday — spread around the world.
It followed an announcement by the tech-focused lender of a capital raise to help offset bond sale losses.
The Euro Stoxx Banks index was on pace for its worst day since June, down almost 4% at 2 p.m. London time, led by a decline of around 7% for Deutsche Bank. Societe Generale dropped 5%, HSBC shed 4.7% and Santander fell 4.3%.
Silicon Valley Bank is heavily focused on startup firms, particularly venture-backed tech and life sciences companies in the U.S. The 40-year-old company was forced into a fire sale of its securities on Wednesday, dumping $21 billion worth of holdings at a $1.8 billion loss while raising $500 million from venture firm General Atlantic, according to a financial update.
The company said in a letter from CEO Greg Becker on Wednesday that it had sold “substantially all” of its available-for-sale securities and was aiming to raise $2.25 billion through common equity and convertible preferred shares.
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Over the past year, the U.S. Federal Reserve has aggressively increased interest rates, causing the value of long-dated bonds to decline. As a result, Silicon Valley Bank (SVB) plans to invest the proceeds from its sales into shorter-term assets.
Billionaire investor and Pershing Square CEO Bill Ackman expressed concerns in a tweet on Thursday, stating that if SVB were to fail, it could have a devastating impact on the economy as VC-backed companies rely on SVB for loans and holding their operating cash.
Ackman suggested that if private capital cannot provide a solution, a highly dilutive government-preferred bailout should be considered.
According to Russ Mould, Investment Director at British investment platform AJ Bell, SVB’s announcement should not have been a surprise given the recent decline in appetite from lenders and investors in this sector.
However, in a highly interconnected banking industry, it is difficult to isolate such events, which may indicate vulnerabilities in the broader system. Mould noted via email that the fire sale of SVB’s bond portfolio accompanying its share placing raises concerns.
He added that many banks hold substantial bond portfolios, and rising interest rates can reduce their value. The SVB situation serves as a reminder that several institutions may be sitting on significant unrealized losses on their fixed-income holdings.
Bank of America has highlighted that the decline in US bank stocks overnight may have been due to concerns over deposit outflows, which could result in lenders selling bonds at a loss.
Despite this, BofA strategists have noted that European bond deposits remain stable but stagnant, while cash deposits have grown.
The Wall Street giant stated in a note on Friday that European banks did not anticipate rapid deposit inflows to remain stable indefinitely, and thus did not invest them out of the curve.
The bank further emphasized that HSBC, for example, experienced significant drawdowns in the capital during the first half of 2022 due to bond marks.
However, the bank is now enjoying strong net interest income growth and the pull to a par of those bonds. B of A believes that if one’s bank remains stable, higher rates can be a good thing.
Overall, this situation serves as a reminder of the importance of maintaining financial stability, as it can have a significant impact on a bank’s ability to manage potential losses and risks associated with changing market conditions.