European banking stocks sold off sharply Friday as jitters surrounding U.S. bank SVB Financial — which plunged 60% Thursday — spread around the world.
It followed an announcement by the tech-focused lender of a capital raise to help offset bond sale losses.
The Euro Stoxx Banks index was on pace for its worst day since June, down almost 4% at 1 p.m. London time, led by a decline of over 7% for Deutsche Bank. Societe Generale, HSBC, and Santander all fell more than 5%.
Silicon Valley Bank is heavily focused on startup firms, particularly venture-backed tech and life sciences companies in the U.S. The 40-year-old company was forced into a fire sale of its securities on Wednesday, dumping $21 billion worth of holdings at a $1.8 billion loss while raising $500 million from venture firm General Atlantic, according to a financial update.
The company said in a letter from CEO Greg Becker on Wednesday that it had sold “substantially all” of its available-for-sale securities and was aiming to raise $2.25 billion through common equity and convertible preferred shares.
The U.S. Federal Reserve has hiked interest rates aggressively over the past year, which can cause long-dated bond values to fall, and SVB plans to reinvest proceeds from its sales into shorter-term assets.
Billionaire investor and Pershing Square CEO Bill Ackman said in a tweet late Thursday that should SVB fail, it could “destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash.”
“If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered,” he added.
Russ Mould, investment director at British investment platform AJ Bell, said SVB’s announcement should not have come as a “major surprise” after a period in which “appetite from lenders and investors towards this part of the market has dried up.”
“However, in a heavily interconnected banking industry it’s not so easy to compartmentalise these sorts of events which often hint at vulnerabilities in the wider system. The fact SVB’s share placing has been accompanied by a fire sale of its bond portfolio raises concerns,” Mould said via email.
“Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable — the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income holdings.”
Bank of America noted that the declines in U.S. bank stocks overnight reflected concerns that deposit outflow may lead lenders to sell bonds at losses. However, in contrast to specialist California-based banks, which have seen major withdrawals, BofA strategists said European bond deposits are stable but stagnant, while cash deposits have grown.
“European banks did not assume rapid deposits inflows to remain stable permanently, and therefore did not invest them out the curve,” the Wall Street giant said in a note Friday.
“There is nothing new in banking. We note that HSBC for example saw meaningful drawdowns in capital during 1H 22 from bond marks. It is now enjoying strong, net interest income growth and the pull to par of those bonds. If one’s bank remains stable, higher rates remain very much a good thing, we think.”