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Banking Turmoil as Buying Opportunity for Utbytte

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Stockholm (HedgeNordic) – On Friday March 10, Silicon Valley Bank failed and was taken over by federal regulators after a run on deposits, as higher interest rates eroded the value of SVB’s massive portfolio of Treasuries and mortgage-backed securities. On the heels of Silicon Valley Bank’s failure, crypto-friendly Signature Bank was shut down by regulators on Sunday, with depositors at both banks made whole by the US Treasury, Federal Reserve, and Financial Deposit Insurance Corporation. Despite the U.S. government’s announced plan on Sunday to shore up the banking industry, bank stocks fell heavily on Monday on worries about what comes next following the second- and third-largest bank failures in U.S. history.

“In my view, the moves taken on Sunday solved the initial problem, the fear of bank runs, given the availability to access loans with mortgage-backed securities and U.S. Treasuries posted as collateral (at par),” reckons Magnus Vie Sundal, the portfolio manager of Norwegian banking sector-focused equity fund Borea Utbytte. He was surprised by the market moves on Monday. “I read Monday’s moves as a reflection of investors thinking ‘what other unknown unknowns are there?’” Vie Sundal tells HedgeNordic.

“I read Monday’s moves as a reflection of investors thinking ‘what other unknown unknowns are there?’”

The failures of both Silicon Valley Bank and Signature Bank made Vie Sundal think of Warren Buffet’s quote: “A rising tide floats all boats…..only when the tide goes out do you discover who’s been swimming naked.” According to Borea Asset Management’s portfolio manager, “a rising rate environment is the tide going out and I believe there is more volatility to come over the next year.” However, interest rates had been on the rise before last week, and “markets didn’t mind too much,” says Vie Sundal. ‘In the short term, I believe it is difficult to say if we should see a prolonged period of volatility or just a quick return to where we were two weeks ago.”

“Nordic banks have seen contagion in terms of falling share prices. Other than that, I am not worried about the underlying fundamentals for Nordic banks.”

The failure of Silicon Valley Bank also triggered concerns about a real risk of systematic – even trans-Atlantic – contagion. While fears of possible contagion have eased, “Nordic banks have seen contagion in terms of falling share prices,” says Magnus Vie Sundal. “Other than that, I am not worried about the underlying fundamentals for Nordic banks,” he emphasizes. There are talks of some corporates moving deposits from Europe to the United States following the U.S. government’s actions on Sunday, says Vie Sundal. “Should this become a trend, and/or people and corporates become more aware of the security and alternative costs of their holdings, banks could be forced to pay up more to hold on to deposits. In other words, it could hurt margins somewhat.”

With bank stocks falling across the board, Vie Sundal and his team at Borea Asset Management used this brief downturn as a buying opportunity for Borea Utbytte, which solely focuses on investing within the Norwegian banking sector. “Based on Tuesday’s market moves, it seems other investors agree,” says Vie Sundal. “Nevertheless, we should be aware of any second-hand effects of volatility. It is never easy to say which consequences we get from a market that is shaken up.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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