JENNISON ASSOCIATES MARKET VOLATILITY VIEWS
Mar 16, 2023
Jennison Associates shares their view on the implications of the SVB collapse on the banking sector from an equity valuation perspective.
After announcing the closure of Signature Bank on Sunday morning, U.S. regulators moved expeditiously to guarantee all deposits of both Signature Bank and Silicon Valley Bank on Sunday evening. This step is intended to ensure confidence in the U.S. financial system and mitigate the risk of other failures. There are implications for regulators as there were other regional banks that were down significantly on the news and may, over time, result in tighter underwriting standards, thus higher capital requirements going forward. The Fed actions (discount window and facility) meaningfully de-risk medium term bank run risk. However, regional bank stocks are moving out of fear in a reflexive cycle.
We believe that the majority of regional banks should be fine, but this will result in a significant impact to earnings as margins are likely to compress with increased cash sorting, deposit beta and net interest margin down from weaker lending. As a result, banks will likely conserve cash going forward.
The situation will likely call for increased scrutiny and regulation, i.e., include Accumulated Other Comprehensive Income (AOCI) in capital ratios similar to Globally Systemically Important Banks (GSIB), which will have negative impact on multiples for the bank stocks on a medium to long term basis.
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