Analysts are confident there’s not an SVB Financial Group lurking among European banks. That didn’t stop investors from selling.
(Bloomberg) — Analysts are confident there’s not an SVB Financial Group lurking among European banks. That didn’t stop investors from selling.
European lenders slumped the most in more than a year Monday, wiping out a large chunk of a five-month rally, as markets weighed whether the rapid increases in interest rates that have fueled profitability could come back to haunt the industry.
While analysts at most major banks played down any parallels between the Silicon Valley lender and European firms, JPMorgan Chase & Co. said the industry will be subject to more scrutiny by both investors and regulators.
SVB isn’t “a ‘canary in the coal mine’ read for European banks, given the unique nature of its business,” analysts at Jefferies Financial Group Inc. wrote. “Nor is it a ‘tempest in a teapot’, in our view, as the situation does shine a light on prospective unrealized losses” in banks’ bond portfolios.
European bank stocks had benefited over the past months as rising interest rates boost revenue from bread-and-butter banking, allowing lenders to pay fatter dividends and repurchase stock. But the fate of SVB underscored how higher rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. The firm was put into receivership Friday after those losses sent fickle depositors fleeing.
The Bloomberg Europe Banks and Financial Services Index fell 4.6% as of 12:19 p.m. in Frankfurt, after dropping as much as 5.7% earlier. Credit Suisse Group AG and Banco de Sabadell SA led the declines, which also reflected expectations that central banks could slow the pace of rate increases.
For analysts at Deutsche Bank AG and Citigroup Inc., however, there are few parallels with European lenders, because the latter have more diverse sources of liquid funding, are able to win and retain deposits and they have stronger financial reserves than the US lender.
The Citi analysts said they’re “not aware” of any European banks that rely as heavily on a small group of large depositors as SVB did, with its focus on commercial clients such as early-stage technology and life science or health care companies.
There’s also less risk to capital if banks have to take losses on the sale of securities, the Citi analysts wrote in a note to clients late Sunday. European lenders being required to hold more high-quality liquid assets than they would expect to see flow out over 30 days of stress.
Only the largest US banks are held to similar rules and SVB was deemed to small, according to Citi analysts including Andrew Coombs. European banks also mainly hold such assets in cash and government bonds, with securities portfolios typically a smaller component, Citi said.
Most bond portfolios at European lenders are held to maturity “and hence are not exposed to interest rate risk,” Deutsche Bank analyst Benjamin Goy wrote in a note.
Still, paper losses on bonds can turn into real losses of capital if they’re forced to sell, German regulator BaFin said in January after warning of losses for small banks. Last week, the country’s cooperative banks disclosed €5.8 billion ($6.2 billion) of accounting writedowns on securities, saying that they expect to make up for that with gains in years to come.
“Our concern in Europe is that market expectations are already optimistic” on deposit flows and related earnings, the JPMorgan analysts wrote in a note. Investors’ “focus will shift toward refinancing costs for corporates and potential asset quality issues, mark-to-market of bond portfolios and cost inflation.”
–With assistance from Jan-Patrick Barnert and Steven Arons.
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