European banking stocks slid for the third straight session on Monday as investors weigh the fallout from the implosion of Silicon Valley Bank (SVB), which prompted to US authorities to step in over the weekend to back the lender’s deposits and led to an emergency sale of its UK unit to banking giant HSBC.
The Stoxx Europe 600 banks index, which tracks 42 European banks, was down almost 7 per cent at lunchtime, with Dublin’s Iseq Financial, dominated by the three Irish banks, falling 6.6 per cent.
AIB, Bank of Ireland and Permanent TSB have seen a combined €3.66 billion – or 15 per cent – wiped off their value since early trading lats Thursday, when a run started on California-based SVB, the specialist lender to tech start-ups. SVB’s sale of a $21 billion (€19.7 billion) bond investment portfolio on Wednesday to meet fund deposit redemptions had spooked investors.
The $1.8 billion loss SVB made on the disposal – as the average market interest rate, or yield, on the portfolio was less than half the prevailing 3.9 per cent rate on 10-year US bonds – underscored how banks’ balance sheets have been exposed to soaring interest rates in the past year.
While analysts highlighted European banks have higher levels of cash or cash equivalents on their balance sheets than US peers and can avoid having to suddenly raise deposit rates to compete for savings, the fallout is likely to push lenders to pass on more of ongoing central bank rate hikes to depositors over the coming months.
[ Investors cut Fed rate rise bets on fallout from Silicon Valley Bank collapse ]
Irish banks, because they have higher deposit levels relative to loans than European peers, have been among the laggards across the continent in raising deposit rates.
“We believe strong liquidity in Europe and bank’s balance sheet structure would avoid any forced unwinding or selling of bonds or swap [derivative] portfolios,” said Morgan Stanley analysts including Alvaro Serreno in a report, adding that “increased deposit competition should be gradual”.
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Euro zone banks have €86 on loan for every €100 they hold on deposit, according to the analysts. AIB had a loan-to-deposit ratio of 58 per cent at the end of December, forcing it to place €37.6 billion of excess cash with central banks. Bank of Ireland had a ratio of 73 per cent and €36.4 billion of surplus cash stored with central banks.
Morgan Stanley estimates Irish banks have only passed on 6 per cent of recent central bank rate hikes to depositors, compared to the European average of 14 per cent and US rate of 23 per cent. This has allowed Irish banks to profit more from rising official deposit rates as they also lag behind peers in passing on increases to mortgage holders.
[ Deposits protected as HSBC acquires UK arm of Silicon Valley Bank ]
“With recent evolving events at US banks, investors may train their focus on European banks to look at the competitive pressures on deposits,” Morgan Stanley said.
“We expect deposit betas to gradually increase this year, more so in corporate versus retail.” Deposit betas refer the proportion of central bank rate hikes that are passed on to customers.
DBRS Morningstar, the debt ratings agency, said that it expects some banks will now move to “reposition” their bond securities investment portfolios by selling lower-yielding bonds and reinvesting into higher-yielding assets, resulting in capital losses.
New York-based Signature Bank, a lender with a big property lending business that had also recently become a major bank to the cryptocurrency industry, also collapsed over the weekend. The US Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation said in a joint statement Sunday evening that all depositors in SVB and Signature will be made whole.
[ Silicon Valley Bank collapse prompts concerns over banking sector ]
While there is growing speculation that the Federal Reserve will rethink a previously widely-expected 0.5 of a percentage point US rate hike next week, financial markets largely expect the European Central Bank to push through a half-point rate increase on Thursday.
Altaf Kassam, State Street Global Advisors’s head of investment strategy and research for Europe, the Middle East and Africa said the strength of underlying inflation and fact that the euro zone is behind the US on the rate hikes front will keep pressure the ECB to move again.
He also warned that a more “dovish” 0.25 per cent rate increase by the ECB this week “might actually spook the market into thinking there was a risk of a systemic failure in the EU banking system with the possibility of contagion from the US, neither of which appear to be the case”.
