Liquidity Risks Become More Priced In, but We Don’t See a Silicon Valley Bank in Our Coverage Yet

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank SIVB announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

SVB scores materially worse than any bank we cover on a number of liquidity and unrealized loss metrics. This makes us think that SVB could be facing a unique liquidity crunch that does not have to feed through the entire system. However, it does highlight that these risks are now more elevated, even if they do not ultimately occur for others. It also highlights that it can be very difficult to predict how funding pressure can change in any given quarter and when these risks can materialize.

We don’t currently see a bank under our coverage that we think will have to take similar measures as SVB. Truist TFC, U.S. Bancorp USB, and Bank of America BAC have the largest unrealized losses as a percentage of tangible equity among our coverage; however, their liquidity profiles seem much less stressed than SVB’s. As funding pressures increase, the primary effect we see is an increase in the pricing of funding, putting pressure on net interest income. We are already predicting this to an extent, although it remains a key risk to our forecasts going forward. We do not plan to make any changes to our fair value estimates based on today’s news, but liquidity issues are an evolving risk worth watching.