Global bank stocks sell off on fears over California lender

Shares of some of the world’s largest banks fell on Friday as fears over the future of a small California lender reverberated to financial institutions in the US and Europe.

Big US banks were lower for a second day after sharp losses on Thursday. Bank of America opened down nearly 5 per cent but bounced back to 1.5 per cent lower, while Citigroup and Wells Fargo each fell about 2 per cent.

In Europe, Deutsche Bank stock fell 6 per cent and Société Générale and HSBC each dropped between 3 and 4 per cent. Credit Suisse shares reached a fresh inter-day low of SFr2.50, having dropped 3 per cent.

Jitters in financial stocks came after Silicon Valley Bank, a small, technology-focused lender, earlier this week revealed a $1.8bn loss on the sale of a portfolio of securities. SVB fell 60 per cent on Thursday and dropped another 65 per cent in pre-market activity on Friday before its was halted.

Trading in Pacific West, Western Alliance and First Republic — all of which are seen to have similar depositor profiles — was also stopped for volatility after they all initially fell 40 to 50 per cent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 per cent.

Analysts have attributed the sell off to investors’ fears over the value of banks’ bond portfolios and falling deposits. Banks have been telling investors that they expect deposits to drop between 2 and 5 per cent this year, according to research house Autonomous, and there are concerns that banks will either have to sell bonds at a loss to cover outflows or pay higher interest rates to retain customers.

“This will accelerate a growing war for deposits and crimp bank earnings as they pay up for funding,” said Huw van Steenis, vice chair of Oliver Wyman., which advises banks.

The S&P US regional banks index was down 3 per cent on Friday morning after falling nearly 7 per cent on Thursday. Utah-based Zions saw the biggest drop among the larger banks, but its initial drop of 10 per cent had moderated to 5 per cent by mid-morning. The KBW US banks index, which includes the larger lenders, was down 2 per cent.

Barclays said in a note that it thought the wider sell off in US banks was unwarranted. “We think there is very little direct read-through for regionals from [Silicon Valley] and therefore view the underperformance as unwarranted.”

The Stoxx Europe 600 Banks index fell as much as 4.5 per cent on Friday, hitting its lowest point for more than a month. The broader Stoxx 600 index was down 1.22 per cent while the bank-heavy FTSE 100 slipped 19 per cent.

Banks have been one of the strongest-performing sectors in Europe, with shares up 20 per cent over the past six months. Lenders have reaped the rewards from rising interest rates, as their profits increase from the difference between what they pay out in deposit rates and what they earn from lending.

Robert Alster, chief investment officer at Close Brothers Asset Management, described the situation as “a storm in a teacup” and said a direct read across from SVB to large European banks was “unwarranted”.

But Alster said the fact that short-term interest rates were higher than long-term interest rates would “put pressure on margins” at big banks and “higher interest rates tend to lead to tougher lending standards which can slow down the economy”