Collapse of SVB, Credit Suisse sale not seen as spreading broad contagion

The collapse of Silicon Valley Bank, along with the ongoing saga of First Republic Bank and Swiss banking giant Credit Suisse Group, has raised fears about the health of the global banking sector and the possibility of contagion.

While Credit Suisse is set to be acquired by rival UBS Group and First Republic Bank received an injection of $30 billion from 11 U.S. banks, experts that Pensions & Investments spoke to generally do not think these issues will spread into the broader banking sector.

Austin Graff, Boca Raton, Fla.-based chief investment officer of Opal Capital, said by email that the situation surrounding SVB says more about the state of unprofitable tech companies than diversified banks.

"SVB's business (was) concentrated in unprofitable technology companies," he said. "As funding options for these companies dried up they had to resort to previously deposited funds to keep the lights on — forcing them to sell securities that were supposed to be held to maturity at a loss."

SVB was a significant lender to venture capital firms, he noted, and with SVB now out of business, financing will "likely dry up even more for non-profitable technology. This is exactly what you would expect to happen with higher interest rates."

Opal has $80 million in AUM.

Peter Cecchini, New York-based director of research at Axonic Capital, an investment firm focused on the structured credit sector, said he does not expect a broad contagion in the banking sector — beyond weaker regional banks — due to the coordinated efforts of the regulators and U.S. Treasury. "Large banks remain well-capitalized," he said. "We think it's likely that more of the weakest of regional banks with low-quality loan books will require assistance, but the system will endure."

Axonic has $4.1 billion in AUM.

Mark Giambrone, Dallas-based head of U.S. equities and portfolio manager at Barrow Hanley Global Investors, also thinks the banking sector is strong enough to withstand the current shock.

"This is not 2008, this is not systematic, this is not an asset problem," he said. "This is a perception problem, which has led to some liquidity problems."

The weaker banks, Mr. Giambrone noted, especially the now defunct SVB, are relatively new with unique business models and poorly constructed risk management. "This is not true across the broad banking sector," he added. "The largest, most capitalized, systematically important banks will experience little to no impact — they may even stand to benefit as people spread out their accounts among multiple banks, as we're seeing happen now."

Mr. Giambrone also praised the Federal Reserve's move to insure all deposits and the decision by the bigger banks to deposit $30 billion into First Republic. "By stemming that fear, we should see this quell altogether," he added.

Mr. Giambrone further pointed out that SVB's woes shouldn't be conflated with Credit Suisse's struggles. "These are all separate scenarios that shouldn't be adjoined," he stated.

Barrow Hanley has about $44 billion in assets under management.

But banking stocks have tanked since the crisis at SVB exploded.

Between March 8 (the day before the SVB crisis was first revealed) and March 23, the S&P Regional Banks Select Industry index has returned -26.2%, while the S&P Banks Select Industry index returned -23.1%.

Institutional investors should not avoid the banking sector as a whole, Mr. Giambrone opined.

"We absolutely see opportunity in this sell-off," he said. "You have to be selective and pick stocks individually based on their own merits, not as a blanket approach. SVB is not the same as J.P. Morgan, or USB. And this is where there is a good opportunity for the market, for value investing and for active stock selection."

Mr. Giambrone indicated his firm is currently adding to banking names that are down in sympathy, whether it is a specific bank, like U.S. Bancorp or Wells Fargo, or an ancillary business to the financial community, like Fidelity National Information Systems.

"We feel that the market is currently throwing the proverbial "baby out with the bathwater" and we, as individual stock pickers, are finding the ones that we are confident will withstand this current situation," he added.

However, Zhiwei Ren, Horsham, Pa.-based portfolio manager who leads quantitative research and derivative hedging at Penn Mutual Asset Management, is somewhat more cautious on the banking sector as a whole.

"The loan books on bank balance sheets will face further pressure if we get into a recession," he said. "With such uncertainty, it is probably too early to buy (banks) at this point."

Penn Mutual has $30 billion in AUM.