A thorough look-back analysis of the past month in the financial sector reveals that the main reason Silicon Valley Bank failed is because of poor asset-liability management and the inability to manage interest rate risk.
Management loaded up on lower-yielding, longer-duration government-backed bonds too early in the interest rate cycle. As interest rates soared, those bonds fell massively underwater. Then, when SVB's more flighty deposit customers, composed of early-stage companies and venture capital and private-equity companies, began to spend their money or move it elsewhere in search of yield, liquidity came under pressure. Once investors and depositors became worried that SVB would have to sell bonds while trading at huge losses to cover deposit outflows, they got spooked, and the bank soon experienced a deposit run.
The look back also shows that the downfall of the bank -- and its parent company, SVB Financial -- could have easily been avoided were it not for a lot of poor decisions made by management. Thankfully, most of the super-regional banks that SVB is measured against have done a much better job of managing their own balance sheets. Let's take a look.
Fewer bond losses and more diverse deposits
One of the big things the super-regional banks did a lot better job with is not getting too deep on bond losses. When banks buy bonds such as U.S. Treasury bills or mortgage-backed securities, they can choose to classify them as available-for-sale (AFS) or held-to-maturity (HTM).
AFS bonds are intended to be sold before they mature. Their values are mark-to-market, and their current values are accounted for in a bank's equity calculation each quarter.
But HTM bonds are not mark-to-market, and therefore would be fresh hits to equity if they ever had to be sold while they traded at a loss. Here's a look at how each of the super-regional banks stacks up to SVB in terms of HTM losses at the end of 2022.
| Bank | TCE | HTM Unrealized Losses as of Dec. 31, 2022 |
|---|---|---|
| SVB Financial (SIVB.Q -50.00%) |
$11.8 billion | $15.1 billion |
| US Bancorp (USB -0.20%) | $29.7 billion | $10.9 billion |
| PNC Financial (PNC 1.08%) | $28.9 billion | $5 billion |
| Truist Financial (TFC 2.05%) | $23.9 billion | $9.9 billion |
| Citizens Financial Group (CFG 1.22%) | $14.1 billion | $792 million |
| Fifth Third Bancorp (FITB 1.40%) | $12 billion | NM |
| M&T Bank (MTB 0.81%) | $14.2 billion | $1.2 billion |
| KeyCorp (KEY 0.55%) | $9.8 billion | $603 million |
| Regions Financial (RF 0.89%) | $7.9 billion | NM |
Source: Bank regulatory filings. TCE = Tangible Common Equity. NM: Not material.
As you can see, none of these super-regional banks were in nearly as bad shape as SVB. In fact, banks like Fifth Third, Citizens, Regions, M&T, and KeyCorp had very minimal HTM losses at the end of 2022 or practically none at all. Some lenders, like US Bancorp and Truist, are sitting on large unrealized losses.
However, these super regionals have a much more diverse deposit base than the likes of SVB. They serve many consumers, as well as many businesses in a variety of industries and states, which makes their deposit base much less flighty than the likes of SVB.
Is there an opportunity?
I do think the landscape for super-regional banks is going to be more difficult moving forward due to what has happened. They are likely looking at earnings challenges and heightened regulation that could be burdensome to long-term returns.
That said, all of these stocks are down significantly since the chaos with SVB started, and as such are also now paying big annual dividend yields -- most of these regional banks had strong dividends to begin with.
The environment is going to be challenging in the near term, but I do see good long-term opportunity among the super regionals, which have fewer unrealized HTM bond losses and much more diverse deposit bases than some of the smaller, more niche regional banks that have recently come under pressure.
