SVB Financial Group $SIVB, the parent of Silicon Valley Bank, has experienced a significant decline in its share price, which has triggered a massive selloff in the bank shares. Investors have been dumping their shares in the bank after it announced that it lost nearly $2 billion selling assets, following a larger-than-expected decline in deposits. The bank’s shares fell more than 60% after it disclosed the loss and sought to raise $2.25 billion in fresh capital by selling new shares.
The tech-focused lender is facing a full-blown run on the bank, and investors are spooked by its decision to sell a large chunk of its securities portfolio at a $1.8 billion loss as it deals with an outflow of deposits. The bad news is that this situation is likely to accelerate very quickly into a systemic crisis, but the good news is that the Federal Reserve will have no choice but to pivot imminently or risk imploding the entire financial system.
As per Bloomberg’s report, Founders Fund, the venture capital fund co-founded by Peter Thiel, has reportedly advised its portfolio companies to withdraw their funds from Silicon Valley Bank, citing concerns about the bank’s financial stability. The fund has communicated to its portfolio companies that there is no downside to removing their money from the bank. The information is not public, and the sources have requested anonymity.
SVB Financial Group, ranked as the 15th largest bank in the United States based on assets, has experienced a significant decline in its financial performance that could potentially trigger a much larger market impact. The stock symbol $SIVB has plummeted and is currently down by 66.5% compared to the financial sector benchmark, symbolized by $XLF, which has dropped by 18.5%.
The bank’s deposit base has been eroding, leading to the need to sell some of its “Hold-to-Maturity” portfolio to maintain regulatory capital ratios. This situation is not new and has been a growing concern throughout last year, indicating the underlying weakness of the tech industry.
Although the $SIVB story has been unfolding for a while, it has become more apparent in recent times. In light of this development, it is likely that the factors that contributed to this situation will be studied and documented in the future.
SVB Financial Group’s troubles have caused a significant decline in the KBW Nasdaq Bank Index, which has recorded its biggest decline since the pandemic roiled the markets nearly three years ago. The four biggest U.S. banks lost $52 billion in market value on Thursday, following SVB Financial Group’s announcement.
Y Combinator and Founder Fund, two prominent venture funds, have advised companies to limit their exposure to SVB Financial Group to $250K and withdraw funds from the bank, respectively. The move has further contributed to the selloff in the bank’s shares, which fell 17.6% after-hours to $87.36.
SVB Financial Group has also closed down its mobile and online banking systems, adding to the negative sentiment surrounding the bank. The company is seeking to raise $2.25 billion in equity after selling securities at a loss to shore up its balance sheet. The pricing is expected tonight, which could further impact the bank’s share price.
The situation facing SVB Financial Group is a stark reminder of the fragility of the financial system and the importance of risk management. Banks must be able to manage their risks effectively, particularly during times of crisis, to avoid catastrophic losses that could threaten their viability. SVB Financial Group’s current situation underscores the need for banks to have a robust risk management framework that enables them to identify and manage risks effectively.
SVB Financial Group’s current situation is a warning to other banks about the importance of risk management. The bank’s troubles have triggered a massive selloff in bank shares, which could further exacerbate the situation. However, the Federal Reserve’s intervention may help to stabilize the situation and prevent a systemic crisis. Nonetheless, banks must continue to prioritize risk management to avoid catastrophic losses that could threaten their viability.
One noteworthy aspect of SVB Financial Group ($SIVB) is the aggressive selling of stock by insiders over the past few months. A review of the Form 4 filings shows that the insiders were able to execute the sales using a 10b5-1 plan, which allows them to sell shares even if they possess material non-public information. This strategy can be an effective way to commit insider trading without being caught, making it a shrewd move to generate alpha.
In an intriguing development, a trader recently purchased $SIVB March 200 Puts for just $0.25 per contract. The total cost of the position was $7,500, a relatively small amount compared to the potential payoff. In fact, if one had invested just $100 in this put option yesterday, they would currently have over $11,490,000 in profit and still counting.
As it turns out, this trader’s gamble paid off handsomely. Today, SVB Financial’s shares plummeted by 60%, resulting in the value of the put option increasing significantly. The position is now worth a staggering $2.1 million, representing an impressive return on investment.
In the midst of the recent financial crisis, banks ran their books with much less capital, high loan-to-value ratios, and held extremely risky securities such as collateralized loan obligations (CLO) and asset-backed securities (ABS) in their portfolios. However, the current situation at SVB Financial Group is nothing like the banks of the Global Financial Crisis (GFC) as the regulators have transformed the banking landscape in the US over the last 15 years. Banks are now well-capitalized and risk-averse entities, making them ‘boring businesses’ compared to their high-leverage and risk-taking past.
SVB Financial Group, which suffered a $1.8 billion loss on their 3-year duration bond holding, seems small in comparison to its $200 billion asset portfolio or 15% capital. Additionally, the bank has lost 10% of its deposit base, amounting to $16 billion, over the last year, against liquid securities of $120 billion. Though not ideal, the loss and the subsequent capital raise of $2.25 billion to cover the marked loss have been necessary for the depositor’s perspective, which has ensured the process has worked well. The bank’s capital ratios have been kept up, though common equity holders have been hit with lower valuation, as they are most leveraged to the bank’s profit outcomes.
Currently, SVB Financial Group’s common equity value is back to its 2016 levels, and the bank still has a $6 billion market capitalization on $200 billion of assets. Even if the bank were no longer an ongoing concern, small business deposits would not be locked up as the Federal Deposit Insurance Corporation (FDIC) has a smooth resolution mechanism that closes failing banks and transfers assets (and deposits) elsewhere. There would still be significant value in the bank’s asset/liability mix to expect depositors to be made whole, even in the case of a significant deposit run, as most of the assets are publicly traded securities.
Despite the current picture, some of the world’s biggest venture institutions are emailing their clients, advising them to pull their money out of SVB Financial Group. The reasons for this are not clear, as SVB Financial Group’s loss and capital raise seem to have been well-managed and necessary, and the bank still holds significant value in its asset/liability mix.