The US Banking Crisis: Are investors overreacting or is there more of a bloodbath to come?

The US banking crisis has shaken markets for the past couple of months. 4 banks have collapsed in just 2 months and there are inevitable fears that more could be to come. But is it really a big deal for financial markets?

 

 

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What is the US Banking Crisis?

The US Banking Crisis has involved the collapse of 4 major banks:

• Silicon Valley Bank
• Signature Bank
• Silvergate Bank; and
• First Republic Bank

Additionally, after teetering on the edge of collapse, Credit Suisse was acquired by UBS. All of the other aforementioned banks collapsed due to bank runs – is where depositors ‘run’ to cash out all their money and the bank runs out of money as a consequence. Silicon Valley Bank was the first of these to collapse and it was largest failure of a US bank since Washington Mutual in 2008.

 

 

That is, until First Republic Bank collapsed earlier this month. Silicon Valley Bank was notable because it served the tech sector. Wide-spread financial losses have been avoided because US regulators guaranteed all Silicon Valley Bank deposits – and it is their policy to guarantee all funds above US$250,000. A handful of ASX tech companies happened to have cash on deposit at Silicon Valley Bank including Nitro Software (ASX:NTO), Life360 (ASX:360) and SiteMinder (ASX:SDR), but all this was guaranteed.

 

So why is this a big deal?

The crisis has been sort of a domino effect whereby the collapse of one bank has led to ‘bank runs’ at other major banks. And they have occurred co-currently with the sharp rise in interest rates. Obviously investors fear more collapses are to come. But some fear that banks may have to comply with tougher rules that would crimp their ability to lend. Even in the absence of more regulations, it may be more difficult for smaller banks to obtain finance. This would cause a so-called ‘credit crunch’ and it is a prospect that the US Federal Reserve has warned about.

‘A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity,’ it warned in its biannual stability report that was released earlier this month.

 

Is this another GFC?

We don’t think this is. Keep in mind that the GFC was caused by a totally different thing – large loans made to buyers with subprime credit ratings. As well as this, there are stronger regulatory requirements now than there were in 2008. Granted, it is scary for Australian investors to hear about banks worth hundreds of billions of dollars going out of business when the only bank >$100bn is CBA (ASX:CBA). But keep in mind that there are 4,000 banks in the US – more than any other country (even the whole of the EU combined). The regional banks actually are small by American standards on an individual basis. The largest US bank is JP Morgan which is capitalised at A$588.2bn.

Nonetheless, they account for a higher proportion of commercial landing compared to Australia. It is not unreasonable to assume that a few more are at risk of collapsing, but we still don’t think this would be ‘another GFC’.

 

But won’t ASX stocks be affected somehow?

The companies with money in regional banks won’t be given their deposits are guaranteed. Nor will Australia’s Big Four – if history is any guide, the banks that survive crises emerge even stronger.

One company we think investors are concerned about is Judo Capital (ASX:JDO), which is Australia’s largest lender to SMEs. To be fair, one of the reasons for the concern is the company’s lack of specific comment on the issue. But it has been business as usual for the bank. Many of the reasons we like Judo Capital should insulate it from the worst of any crises – in other words macroeconomic shocks and any drying up of lending from bank to bank. Namely, its profitability, higher NIM compared to the majors and its high-end clientele. Only 15 out of every 3,000 customers are in >90 day arrears.

We believe the current share price weakness for JDO, that has resulted from the US reginal banking crisis, could actually present a very good entry point for investors.

So, investors shouldn’t be worried about any stock as a consequence of the US banking crisis, in our view, except potentially US regional banks.

 

 

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