Investors are clearly nervous around UK bank stocks at the moment. But is the fear justified, or is this the kind of opportunity that comes around once every 10 years?

Silicon Valley Bank

Let’s start off with what’s going on. SVB (or Silicon Valley Bank) catered to a lot of tech start-ups as part of its customer base.

With interest rates rising, these businesses started to find funding hard to come by. As a result, they increasingly wanted to withdraw their cash to fund their operations, which presented a problem.

SVB used deposits from its customers to buy bonds. There’s nothing intrinsically wrong with that, but the prices of those bonds have been falling as interest rates have gone up.

By itself, that isn’t a problem. If the bank held the bonds until they matured, it would likely have got its money back plus the return it was expecting.

The trouble, though, is that SVB’s customers increasingly wanted their cash immediately. As a result, the bank had to sell its bonds at a loss to meet withdrawal requests – and ultimately, it came up short.

UK banks

The fear is that something similar could happen elsewhere in the banking sector. Shares in UK banks have been falling as a result.

In general, the closer banks are to the disaster zone, the more their share prices have been affected. That’s why Barclays, with its greater US exposure, is down more than Lloyds Banking Group (which is still 3% higher than it was 12 months ago).

The risk for UK bank stocks is definitely real. But I also think it’s limited, for two reasons.

First, SVB had a heavy reliance on institutional deposits from tech start-ups. This meant a lot of its customers needed cash at the same time and weren’t protected by deposit insurance schemes.

As far as I’m aware, this isn’t the case with the UK banks. They have a more diversified base of customers and more of their cash comes from retail customers, who are protected by things like the Financial Services Compensation Scheme (FSCS).

Second, research from JPMorgan Chase indicates that SVB’s bond profile was unusually risky. Compared to its competitors, the bank bought more of its assets when bond prices were at their highest.

That means that SVB didn’t just have a riskier customer base. It also had more exposure to the falling bond prices that caused the shortfall in its liquidity

Both of these reasons cause me to think that the situation is different for UK banks. There’s less reason for a customer panic and I think the banks are better-equipped to handle it if there is.

A golden opportunity?

As Warren Buffett says, fear in financial markets is contagious. So I think there’s an increased risk of a run on the banks that investors should think seriously about.

On balance, though, Silicon Valley Bank looks to me like a distinctive case both in terms of its assets and its deposit base. That’s why I see the current sell-off as a buying opportunity in both UK and US bank shares.

The post A once-in-a-decade opportunity to buy UK bank shares? appeared first on The Twelfth Magpie.