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Should You Buy the Dip in Big Bank ETFs Amid SVB Crisis?
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Wall Street went into a tailspin last week due to the bank stock meltdown. U.S. bank stocks suffered the sharpest decline in nearly three years, with the KBW Nasdaq Bank Index tumbling as much as 8.7% on Mar 9, its biggest one-day drop since June 2020. The contagion has spread entirely in the global stock market.
The four largest U.S. banks lost a combined market cap of more than $50 billion. JP Morgan (JPM - Free Report) , Citigroup (C - Free Report) , Bank of America (BAC - Free Report) and Goldman Sachs (GS - Free Report) lost the most on a relative basis. The SPDR S&P Regional bank ETF (KRE - Free Report) saw its second-worst daily loss since 2011.
Inside the Latest Banking Meltdown
On Wednesday evening, Silicon Valley Bank announced it was planning to raise $2 billion to solidify its financial position. It also indicated that it had seen an increase in startup clients drawing down their deposits. On Thursday, Silicon Valley Bank crashed by 60%, sending ripple effects across the banking industry.
Silicon Valley Bank caters to risky zones like start-ups, venture capital, and early-stage tech. On Friday morning, CNBC reported that SVB failed to raise the cash. By noon Friday, US regulators shut the bank down. According to the FDIC, this is the second-largest bank failure in U.S. history.
Then, earlier this month,Silvergate Capital , a crypto-centric bank, started to plunge from already deeply discounted levels for obvious reasons as cryptocurrency is no longer in favor due to rising rates. Finally, on Wednesday, the company announced it would be conducting a voluntary liquidation and shutting down its doors. The firm had transactions with Sam Bankman Fried’s doomed crypto exchange FTX.
Why the Latest Banking Crash Should Not be Feared
The collapse of both banks can be seen as isolated incidents. Silvergate was associated with the hyper-speculative crypto space and Silicon Valley Bank was involved with the struggling tech space, that too, newbie tech companies, not the mature ones.
In a note to clients on Friday, TD Cowen analyst Jaret Seiberg wrote that the banks’ failures do not pose the risk of contamination through the industry, as both the failed banks crashed due to flaws in their business model, as quoted on Yahoo Finance.
Why Big Banks Are Better Bets Than Regional Banks
The financial sector, which accounts for around one-fifth of the S&P 500 Index, had a mixed Q4. Three out of six big U.S. banks were able to beat overall. Several banks are on a cost-cutting mode. Citigroup Inc. (C - Free Report) indicated job cuts that make up less than 1% of its total workforce. Big banks have been involved in share repurchases too. So, these companies have the leeway to stop capital deployment toward shareholder value maximization and keep the capital cushion in decent shape, if needed.
After the financial crisis in 2008, the banking sector had faced stringent regulatory norms. The norms included stringent capital requirements, which meant banks must keep a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be.
But Silicon Valley Bank and other regional banks did not have the same regulatory scrutiny. In 2018, President Donald J. Trump signed a bill that lessened the oversight for many regional banks, per a New York Times article. Hence, unlike big banks, regional banks are in greater danger.
Bottom Line
Though the financial earnings of big banks does not spark hope among investors, the decent valuation of the sector and chances of higher net interest rate margins in the days to come may prove to be helpful for the funds.
Invesco KBW Bank ETF (KBWB - Free Report) , iShares U.S. Financial Services ETF (IYG - Free Report) , Financial Select Sector SPDR Fund (XLF - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) are some of the ETFs that investors can be bought on the dip. However, one should stay away from SPDR S&P Regional Banking ETF (KRE - Free Report) .
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Should You Buy the Dip in Big Bank ETFs Amid SVB Crisis?
Wall Street went into a tailspin last week due to the bank stock meltdown. U.S. bank stocks suffered the sharpest decline in nearly three years, with the KBW Nasdaq Bank Index tumbling as much as 8.7% on Mar 9, its biggest one-day drop since June 2020. The contagion has spread entirely in the global stock market.
The four largest U.S. banks lost a combined market cap of more than $50 billion. JP Morgan (JPM - Free Report) , Citigroup (C - Free Report) , Bank of America (BAC - Free Report) and Goldman Sachs (GS - Free Report) lost the most on a relative basis. The SPDR S&P Regional bank ETF (KRE - Free Report) saw its second-worst daily loss since 2011.
Inside the Latest Banking Meltdown
On Wednesday evening, Silicon Valley Bank announced it was planning to raise $2 billion to solidify its financial position. It also indicated that it had seen an increase in startup clients drawing down their deposits. On Thursday, Silicon Valley Bank crashed by 60%, sending ripple effects across the banking industry.
Silicon Valley Bank caters to risky zones like start-ups, venture capital, and early-stage tech. On Friday morning, CNBC reported that SVB failed to raise the cash. By noon Friday, US regulators shut the bank down. According to the FDIC, this is the second-largest bank failure in U.S. history.
Then, earlier this month,Silvergate Capital , a crypto-centric bank, started to plunge from already deeply discounted levels for obvious reasons as cryptocurrency is no longer in favor due to rising rates. Finally, on Wednesday, the company announced it would be conducting a voluntary liquidation and shutting down its doors. The firm had transactions with Sam Bankman Fried’s doomed crypto exchange FTX.
Why the Latest Banking Crash Should Not be Feared
The collapse of both banks can be seen as isolated incidents. Silvergate was associated with the hyper-speculative crypto space and Silicon Valley Bank was involved with the struggling tech space, that too, newbie tech companies, not the mature ones.
In a note to clients on Friday, TD Cowen analyst Jaret Seiberg wrote that the banks’ failures do not pose the risk of contamination through the industry, as both the failed banks crashed due to flaws in their business model, as quoted on Yahoo Finance.
Why Big Banks Are Better Bets Than Regional Banks
The financial sector, which accounts for around one-fifth of the S&P 500 Index, had a mixed Q4. Three out of six big U.S. banks were able to beat overall. Several banks are on a cost-cutting mode. Citigroup Inc. (C - Free Report) indicated job cuts that make up less than 1% of its total workforce. Big banks have been involved in share repurchases too. So, these companies have the leeway to stop capital deployment toward shareholder value maximization and keep the capital cushion in decent shape, if needed.
After the financial crisis in 2008, the banking sector had faced stringent regulatory norms. The norms included stringent capital requirements, which meant banks must keep a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be.
But Silicon Valley Bank and other regional banks did not have the same regulatory scrutiny. In 2018, President Donald J. Trump signed a bill that lessened the oversight for many regional banks, per a New York Times article. Hence, unlike big banks, regional banks are in greater danger.
Bottom Line
Though the financial earnings of big banks does not spark hope among investors, the decent valuation of the sector and chances of higher net interest rate margins in the days to come may prove to be helpful for the funds.
Invesco KBW Bank ETF (KBWB - Free Report) , iShares U.S. Financial Services ETF (IYG - Free Report) , Financial Select Sector SPDR Fund (XLF - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) are some of the ETFs that investors can be bought on the dip. However, one should stay away from SPDR S&P Regional Banking ETF (KRE - Free Report) .