Bankinter : US banks celebrate the purchase of Silicon Valley Bank/SVB by First Citizens (FC) with a +2.5% rise in yesterday’s session. Positive highlights: First Citizens (+53.7%), First Republic (+11.8%), Bank of America (+4.9%) and Citigroup (+3.8%).
Analysis team’s view: This is an interesting deal for First Citizens and good news for US banking and the global financial sector. Our reasoning is as follows: (1) FC acquires SVB’s assets (loans & deposits) without compromising its cost structure – it buys the portfolio/business at a discount & an option/free on the retail network. In addition, it obtains guarantees against credit losses/EPA (50.0% at 5 A) and the maximum price to be paid amounts to $500m (vs. SVB’s equity ~$17bn). FC’s maximum investment is equivalent to a PVC multiple ~0.03 x (vs. 0.06 at Credit Suisse by UBS), (2) The acquisition of SVB confirms the importance of avoiding irrational fear and discriminating between institutions, irrespective of their size (volume is independent of management quality).
In short, the key to investing in banks is asset quality (low NPLs), a solid capital base and a sound funding structure (diversified deposit base). We reiterate that SVB & Signature Bank NY’s interventions are explained by poor balance sheet management/interest rate risk and excessive concentration/dependence on deposits with large technology companies. In fact, First Citizens is buying the bulk of SVB’s assets except for the bond portfolio.
