The fallout from SVB’s demise in the US will affect our smaller banks, say fund managers

Smaller local bank stocks will be caught up in negative sentiment in the near term, fund managers believe.

Australian financial institutions are being swept up in the fallout from the collapse of Silicon Valley Bank. Picture: AFP

Smaller local bank stocks will be caught up in volatility and negative sentiment in the near-term, as investors fret about the fallout from the collapse of three US banks, wholesale funding markets and any shift of deposits to larger institutions.

Fund managers and banking experts canvassed by The Australian expect jitters around smaller bank stocks to persist, in the wake of the dramatic demise of Silicon Valley Bank and two other US financial institutions.

Local bank stocks were sold down again on Tuesday, bar Commonwealth Bank, with the smaller end of the market leading the declines.

Virgin Money UK’s stock was pummelled 5.9 per cent, Bank of Queensland dropped almost 2.9 per cent, Macquarie Group fell 3.1 per cent, and Bendigo and Adelaide Bank shed 1.5 per cent. National Australia Bank was the worst performer among the big four declining more than 1.5 per cent, compared to a 1.4 per cent drop in the ASX 200.

“We’ll have some more volatility for the next few days at least because we saw a lot of the regional banks in the US pretty much nose dive,” said Mark Humphery-Jenner, an associate professor at UNSW’s School of Banking and Finance.

He highlighted that more stringent capital and risk management requirements in Australia for banks meant a collapse was unlikely, but regional banks here were being swept up in the panic. That’s despite US regulators moving to back all bank deposits in that market.

“That’s (US regulators and the Australian Prudential Regulation Authority’s statements) not very convincing to the general public, and hence why your seeing such fear driven (share price) moves,” he said.

Mr Humphery-Jenner’s analysis drew similarities between what was occurring in the US in the past week with the events of the 1930s, when the US Federal Reserve was raising rates and there were also bank collapses.

“The main parallel is the Federal Reserve is hiking rates into bank collapses …. To some extent the rate rises were a background cause of Silicon Valley Bank going under … they were a contributing factor in the broader environment, which means a bank with already shaky foundations was going to suffer under those higher rates,” he said.

The 1930s tightening cycle saw a US recession morph into the Great Depression.

Some analysts and strategists have already pared their expectations for further US and Reserve Bank rate hikes in coming months in light of the market ructions caused by SVB’s collapse.

An RBA spokeswoman on Tuesday said it was working with other Council of Financial Regulators agencies on SVB-related issues, but declined to comment further.

Atlas Funds Management investment chief Hugh Dive said volatility around listed local financials was a “purely emotional” reaction to SVB’s collapse, but it did not point to similar vulnerabilities in Australia.

“Australian banks, they’re funded a little bit differently,” he said.

“This is nothing like Lehman Brothers or Bear Stearns.”

Atlas Funds Management is overweight on Macquarie and has positions in CBA and ANZ, but doesn’t hold NAB or Virgin Money.

Mr Dive sees the market’s recent decline as a buying opportunity and said the loan books of Australia’s banks were in “better shape” today than 10-12 years ago.

Merlon Capital Partners principal Hamish Carlisle said local regional banks’ share price weakness was likely linked to moves in wholesale funding markets.

“It’s probably more jitters around wholesale funding markets and regional banks being more vulnerable,” he said.

Mr Carlisle also noted that while a run on a bank in Australia was a possibility, it could be offset by RBA actions to boost liquidity.

“The issue that emerges because of higher interest rates, is that if the assets need to be liquidated and they‘re not very short duration, there are losses. You can get into that cycle,” he said.

“It‘s a self-fulfilling prophecy the bank run. It’s entirely linked to confidence and trust.

“The policy response would be that the RBA can provide a lot of liquidity to banks in those types of circumstances. If they (banks) don‘t have to liquidate investments at a loss and they can access liquidity through the RBA’s various facilities, then it couldn’t happen.”

Mr Carlisle cited the global financial crisis when the RBA helped domestic banks navigate the contagion gripping funding markets.

“During the GFC the RBA moved to accept internal securitisation as security (by banks) and provided liquidity against that, which dramatically reduced the risk of forced liquidation of bond portfolios and so forth,” he said.

Pella Funds Management managing director Steven Glass said the firm couldn’t see “GFC-style” contagion risk across the broader banking sector, although cautioned against making specific investments in banks that were not diversified.

“To have an exposure to a rapidly growing bank in a niche in the US is really poor risk management,” he added.

“We would never consider it, you‘re taking such a big risk, not to mention the interest rate risk, the asset liability risk, this is investing 101.”

Mr Humphery-Jenner was adamant some blame for the collapse of SVB should be apportioned to the relaxation of capital regulations for smaller US banks in 2018.

“The Silicon Valley Bank debacle should have been avoidable,” he said. “I’m all for removing pointless regulation … however, some regulation does actually serve a purpose.

“The sneering way that some VC (venture capital) funds approach traditional finance really needs to be stopped and the Silicon Valley Bank collapse shows exactly why. Sometimes boring risk management is very appropriate.”