By Alun John, Marc Jones and John O’Donnell
LONDON/FRANKFURT (Reuters) – Shares of SVB Financial Group were halted on Friday after tumbling 66% in premarket trading, as investors balked at the company’s efforts to raise capital, underpinning a broad selloff that wiped out billions in market value from lenders around the world.
The brutal rout in the lender’s stock spilled over into other U.S. and European banks as the episode spread concern about hidden risks in the sector and its vulnerability to the rising cost of money.
The S&P 500 banks index dropped 6.6% on Thursday and was set to open lower again on Friday.
Europe’s STOXX banking index fell more than 4%, set for its biggest one-day slide since early June, with declines for most major lenders, including HSBC, down 4.5%, and Deutsche Bank, down 7.9%.
The crisis at SVG was feeding growing investor concerns that banks will be vulnerable to the rising cost of money.
In an unusual step, Commerzbank, one of Germany’s largest banks, issued a statement, playing down any threat from SVB, saying it did not see “a corresponding risk for us”.
The bank focuses on export-oriented German companies and is partly owned by the German government after a bailout during the financial crisis more than a decade ago.
It said it has stable customer deposits, sound liquidity and that the interest-rate risk of its bonds is “hedged and therefore largely immunized from interest rate movements.”
SVB, a major banking partner for the U.S. tech sector, was forced to raise fresh capital after selling a package of bonds at a loss to meet depositor demands for cash.
“The knee-jerk reaction in the market to this risk event looks overdone. But rising costs of deposits and possible deposit withdrawals are likely to pressure sector earnings,” Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, wrote in a note.
Graphic: SVB stock performance month-to-date https://www.reuters.com/graphics/SVB%20FINANCIAL%20GROUP-STOCK%20OFFERING/znvnbxrnrvl/chart.png
SVB’s stock had plummeted to $35.60 before the bell, when trading in the stock was halted.
Its shares had already slumped 60% on Thursday, their worst day ever, after disclosing plans to raise over $2 billion from investors.
Graphic: Europe’s battered banks https://www.reuters.com/graphics/EUROPE-BANKS/myvmoaejrvr/chart.png
“The market is treating this as a potential contagion risk,” said Antoine Bouvet, senior rates strategist at ING in London.
“It makes sense to me that a remote probability of a U.S. banking system-wide crisis should also come with a small probability of contagion to Europe,” he said.
LEVERAGE PROBLEM
SVB’s problems underscored the risks to banks from the end of easy money. Banks typically invest heavily in government bonds, in particular those of their home country. A spike in interest rates has led to a sell-off in bonds, leaving banks exposed to potential losses on the securities they hold.
John Cronin, an analyst at Goodbody, said investors were worried about the falling value of banks’ investments and how that could hit the capital underpinning their business, as well as savers switching banks for a better deal.
Offering higher deposits to attract customers could also eat into bank profits.
Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted U.S. rates by 450 basis points from near zero, while the European Central Bank hiked the euro zone’s by 300 bps.
Other parts of Europe and many developing economies have done even more. There are concerns, however, that price inflation is staying high, something that would drive further rate hikes.
Neil Wilson, Chief Market Analyst at Markets.com, said that the SVB episode could be the “straw that breaks the camel’s back” for banks after worries about ever higher interest rates and a fragile U.S. economy.
“It is leverage in the system that is the problem,” said James Athey, investment director at Abrdn. “Monetary policy way too easy for way too long.”
Graphic: The race to raise rates https://www.reuters.com/graphics/GLOBAL-MARKETS/klvygnlbyvg/chart.png
(Writing By John O’Donnell and Noor Zainab Hussain; Additional reporting by Niket Nishant, Jo Mason, Marc Jones, Iain Withers and Yoruk Bahceli; Editing by Elisa Martinuzzi and Toby Chopra)
