What happened
SVB Financial Group (SIVB.Q 36.36%), the holding company behind the fast-growing Silicon Valley Bank, is taking a beating today. As of 10:50 a.m. EDT on Monday, the stock is down more than 10% on the day, after hitting a fresh 52-week low earlier in the day.
So what
To be sure, much of the decline is due to the overall stock market sell-off. But it's worth noting that SVB Financial is underperforming the S&P 500 as well as its sector, as gauged by the Financial Select Sector SPDR ETF (XLF -0.31%). While SVB is down more than 10%, those two benchmarks are "only" down by 6% and 9%, respectively.
Image source: Getty Images.
First, it's important to note that bank stocks as a whole are underperforming the S&P 500 mainly due to the rapidly falling interest rates we've seen over the past few weeks. While banks certainly make money in a variety of ways, the core method is by simply lending money out for a profit. Without getting too technical, the basic concept you should know is that when rates go down, bank profit margins tend to follow.
In SVB's specific case, there are a couple of reasons the decline is even worse. For one thing, the bank has a large venture capital arm that invests in early stage companies. Economic weakness, such as a recession, could wreak havoc on the bank's investment portfolio. Furthermore, the bank has been growing rapidly, with 17% growth in its loan portfolio in 2019 alone, and this would be very likely to slow if the recent turbulence and volatility persist.
Now what
With the market correction less than two weeks old at this point, it's far too early to judge just how long the ultra-low-rate environment could last, or how the COVID-19 coronavirus and oil-related market action could affect the private equity market and SVB's lending business. But the recent news could potentially have negative effects on the banking industry for some time to come.
