Shares in UK banks fell sharply last week, as SVB Financial collapsed. The hardest hit was Barclays, which saw its share price decline by 10%.
Investors are clearly nervous around UK bank stocks at the moment. But is the fear justified, or is this the kind of opportunity that comes around once every 10 years?
Silicon Valley Bank
Let’s start off with what’s going on. SVB (or Silicon Valley Bank) catered to a lot of tech start-ups as part of its customer base.
With interest rates rising, these businesses started to find funding hard to come by. As a result, they increasingly wanted to withdraw their cash to fund their operations, which presented a problem.
SVB used deposits from its customers to buy bonds. There’s nothing intrinsically wrong with that, but the prices of those bonds have been falling as interest rates have gone up.
By itself, that isn’t a problem. If the bank held the bonds until they matured, it would likely have got its money back plus the return it was expecting.
The trouble, though, is that SVB’s customers increasingly wanted their cash immediately. As a result, the bank had to sell its bonds at a loss to meet withdrawal requests – and ultimately, it came up short.
UK banks
The fear is that something similar could happen elsewhere in the banking sector. Shares in UK banks have been falling as a result.
In general, the closer banks are to the disaster zone, the more their share prices have been affected. That’s why Barclays, with its greater US exposure, is down more than Lloyds Banking Group (which is still 3% higher than it was 12 months ago).
The risk for UK bank stocks is definitely real. But I also think it’s limited, for two reasons.
First, SVB had a heavy reliance on institutional deposits from tech start-ups. This meant a lot of its customers needed cash at the same time and weren’t protected by deposit insurance schemes.
As far as I’m aware, this isn’t the case with the UK banks. They have a more diversified base of customers and more of their cash comes from retail customers, who are protected by things like the Financial Services Compensation Scheme (FSCS).
Second, research from JPMorgan Chase indicates that SVB’s bond profile was unusually risky. Compared to its competitors, the bank bought more of its assets when bond prices were at their highest.
That means that SVB didn’t just have a riskier customer base. It also had more exposure to the falling bond prices that caused the shortfall in its liquidity
Both of these reasons cause me to think that the situation is different for UK banks. There’s less reason for a customer panic and I think the banks are better-equipped to handle it if there is.
A golden opportunity?
As Warren Buffett says, fear in financial markets is contagious. So I think there’s an increased risk of a run on the banks that investors should think seriously about.
On balance, though, Silicon Valley Bank looks to me like a distinctive case both in terms of its assets and its deposit base. That’s why I see the current sell-off as a buying opportunity in both UK and US bank shares.
The post A once-in-a-decade opportunity to buy UK bank shares? appeared first on The Motley Fool UK.
Don’t miss this top growth pick for the ‘cost of living crisis’
While the media raves about Google and Amazon, this lesser-known stock has quietly grown 880% – with a:
Greater than 20X increase in margins
Nearly 60% compounded revenue growth over 5 years – more than Apple, Amazon and Google!
A 3,000% earnings explosion
Of course, past performance is no guarantee of future results. However, we think it’s stronger now than ever before. Amazingly, you may never have heard of this company.
Yet there’s a 1-in-3 chance you’ve used one of its 250 brands. Many are household names with millions of monthly website visitors, and that often help consumers compare items, shop around and save.
Now, as the ‘cost of living crisis’ bites, we believe its influence could soar. And that might bring imminent new gains to investors who’re in position today. So please, don’t leave without your FREE report, ‘One Top Growth Stock from The Motley Fool’.
Claim your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#FFFFFF’);
})()
More reading
Is the Avacta share price about to rocket in 2023?
How might I profit from stock market volatility?
2 deep-value stocks I’d buy right now!
2 stocks ready to bounce back
Down 30% in a week, is the Atlantic Lithium share price now a bargain?
SVB Financial provides credit and banking services to The Motley Fool. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.