Below is an update from Polar Capital’s Global Financials Team on the US bank crisis and the changes they have made to the portfolio since Silicon Valley Bank’s (SVB) collapse on 10 March and the takeover of New York-based US regional bank, Signature Bank, by US authorities on 12 March 2023.
Though a very different bank to SVB Financial, Signature Bank’s links to the cryptocurrency industry appear to have undermined confidence, even though at its core it remained a very successful New York commercial real estate lender. More reassuringly, US authorities have announced support measures which should provide emergency liquidity to banks. A new facility, the Bank Term Funding Program (BTFP) will make loans of up to one year to banks pledging US Treasuries, mortgage-backed securities (MBS) and other qualifying assets as collateral. Crucially, these assets will be valued at par and thus banks should be able to access liquidity without having to sell the securities they hold at a loss. Further changes were also made to the discount window, which allows banks to borrow from the Federal Reserve on a short-term basis to help with liquidity, which similarly result in higher lendable values against securities eligible for BTFP.
In such a febrile environment, the issues we are focusing on in assessing our holdings are:
Liquidity of the balance sheet: Though we take the view that recent government measures should ease worries about liquidity, ultimately cash is the best access to quick liquidity and, as the table below highlights, of our holdings JPMorgan Chase and Cullen Frost are well placed in this regard, although it should be noted this data refers to the end of December 2022. It was not that long ago where some investors were complaining that JPMorgan Chase was not generating enough of a yield by holding too much cash. We have added to our holding.
What percentage of securities are in Treasuries and MBS? The data below should also be reassuring since it essentially says most securities portfolios can be used to access emergency liquidity from the authorities. Large banks have the majority of their securities in Treasuries and MBS with Bank of America and Citizens at the high end.
Capital strength: In the context that banks can now borrow from the government using their securities books, any adjustments to capital are purely hypothetical (i.e. they do not need to sell their securities at a loss to fund deposit outflows) but if all supports failed, the table below shows the capital ratios of our bank holdings. Again, JPMorgan Chase looks well positioned while Bank of America, US Bancorp, Regions and Cullen/Frost all look less strong in terms of capital. We have reduced our exposures to US Bancorp and Regions (Cullen/Frost has a very liquid balance sheet so should weather the pressures while we had already been reducing our Bank of America exposure prior to this crisis).
Commercial real estate (CRE) lending as percentage of assets: Though this is not an immediate concern, worries about this issue have been rumbling on for a while – not too dissimilar to worries about unrealised losses on securities books. This is primarily because not only is this segment of loans a traditional source of losses but more importantly because they are usually fixed-rate loans and the worry is they will not only reprice sharply upwards once the fixed-rate period ends but this will happen at a time when some areas of commercial real estate (such as offices and retail parks) have seen reduced demand (not unlike mortgage loans on the consumer side although these have been supported by strong employment date). Generally, as can be seen below, large banks have more diversified loan books; CRE is more of a concern for EastWest Bancorp and Enterprise Financial, which explains why we have reduced our holdings in EastWest.
More broadly, small and mid-cap US banks are likely to see greater regulatory oversight in view of current events. They had much less onerous regulations than systemically important banks; they will see added pressures on their margins due to rising deposit costs and have few alternative levels of revenue, unlike major banks with large market-sensitive operations. Consequently, our exposures have been reduced to very low levels (<2%).
CET1 incl AFS and HTM losses
Cash as % of Deposits
Treasuries and MBS as % of Securities
CRE as % of Assets
Bank of America
East West Bancorp
Bank of Butterfield
Source: Polar Capital, FY22 company reports
Implications for FinTech
Given SVB’s leading role in banking for the technology sector, there are implications for FinTech companies, particularly earlier-stage businesses reliant on funding. Our FinTech exposure (5.5%) is primarily made up of payment companies (>80%) and focused on mature, profitable businesses (Mastercard; Visa; Adyen; PayPal; Wise), where we do not see any significant impact. The remainder of our holdings in other FinTech subsectors have confirmed either zero or minimal exposure to SVB (one unlisted holding has a small proportion of customer deposits at SVB UK, which are fully protected by the Financial Services Compensation Scheme). As with the banking sector, this crisis will reinforce the competitive position of the larger FinTech players that are not reliant on external financing and will benefit from a flight to quality.
Portfolio exposures as at 13 March 2023.
1. CET: Common equity tier – the highest quality of regulatory capital; AFS – Available for Sale: a security portfolio SVB sold to meet increased deposit outflows; HTM – a Held to Maturity security.
John joined Polar Capital in September 2010 and was Manager of the Polar Capital Asian Financials Fund and co-manager of the Polar Capital Global Financial Trust and Polar Capital Financial Opportunities Fund before stepping back into an advisory role in July 2023.
John had previously worked for HSBC as a banker based in Hong Kong and was the head of Asian research at Fox-Pitt, Kelton before moving to Hiscox Investment Management which later became HIM Capital.
Nick joined Polar Capital in September 2010 following the acquisition of HIM Capital, and is manager of the Polar Capital Income Opportunities Fund and co-manager of the Polar Capital Global Financials Trust Plc.
Prior to joining HIM Capital, Nick worked at New Star Asset Management. While there he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies, which outperformed its benchmark index in all six years that Nick managed it. Previously, Nick worked at Exeter Asset Management and Capel-Cure Myers.
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Financial Opportunities Fund, and the Polar Capital Global Financials Trust, with Nick Brind.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.