Investors dump US bank shares amid fears over value of bond portfolios

Investors wiped $52.4bn off the market value of the four largest US banks by assets on Thursday amid a widespread sell-off of financial stocks that analysts linked to investor fears over the value of lenders’ bond portfolios.

The sell-off in JPMorgan Chase, Bank of America, Citigroup and Wells Fargo appeared to have been sparked by difficulties at Silicon Valley Bank, a small, technology-focused lender.

Late on Wednesday, SVB revealed it had lost roughly $1.8bn following the sale of a portfolio of securities valued at $21bn, which it offloaded in response to a decline in customer deposits. The losses prompted the bank to announce a share sale to shore up its capital position.

The steep losses on the sale of the SVB securities shifted investor attention to the risks that might be lurking in the huge bond portfolios held by other US banks, many of which invested an influx of deposits amid the coronavirus pandemic into long-dated securities such as Treasuries.

The value of those holdings has fallen sharply in price over the past year as interest rates have risen rapidly.

The KBW Bank index was down by more than 7 per cent, its steepest drop since June 2020, when investors dumped shares of banks due to fears of a financial shock during the early months of the Covid-19 pandemic.

San Francisco-based First Republic Bank, a bank for wealthy clients and a member of the bank index, was down by more than 16 per cent.

Wells Fargo analyst Mike Mayo described the sell-off as the banking industry’s “SIVB Moment”, referring to SVB’s ticker on Nasdaq. He said the tech-focused lender’s weakness was not illustrative of a sector-wide problem but was affecting investor sentiment nonetheless.

The sell-off on Thursday came just days after data from the Federal Deposit Insurance Corporation, a banking regulator, showed US lenders were sitting on roughly $620bn of combined unrealised losses in their securities portfolios.

That is far less than the industry’s overall equity of $2.2tn at the end of 2022. Total realised losses last year were $31bn.

However, the rising paper losses have coincided with a drop in deposits at banks, as savers search for higher yields at time when the Federal Reserve keeps on raising interest rates.

The worst-case scenario for banks would be that they might have to follow SVB by selling some of their securities at a loss to cover deposit withdrawals.

Christopher Whalen of Whalen Global Advisors said that SVB’s moves had focused attention on the issue of bond portfolios and unrealised losses. However, he added that if banks did have to realise the losses it would not affect the solvency of most lenders.

“The banks with the big Treasury books have the most problem. They fell asleep. No one was expecting this continued inflation,” he said.

“Rates aren’t moving up today. But they don’t have to. All they have to do is stay where they are — banks are going to have to recognise huge losses. Everyone’s looking at this losses and marking them to market.”