You may have seen a steady stream of negative news flow relating to the banking industry over the past two weeks, with Silicon Valley Bank (SVB) and Credit Suisse being at the epicentre.
We wanted to reassure you that having checked the underlying positions, we have negligible exposure to SVB or Credit Suisse within our portfolios.
Below, we take a look at each of these situations in a bit more detail.
SVB
On the 9th March news broke that SVB, a US bank based in California, was in trouble. In short, they had sustained a stream of withdrawals which began to accelerate leading up to the 9th March. SVB attempted to fulfil the withdrawals by selling down their investments in US Treasuries, which had a tough 2022 and had therefore suffered large losses. However, they then had to raise more capital to replace the losses. Due to the higher interest rate environment, this was expensive and they were forced to close by the regulators due to balance sheet issues. Depositors were able to access their funds again a few days later thanks to the regulatory intervention.
The bank had become a darling of the Tech industry in California and had amassed deposits of around $175bn by the end of 2022. Its failure means it is the largest deposit-taking bank to fail since the Financial Crisis in 2008.
We are pleased to say the Carrington portfolios had no exposure to SVB.
Credit Suisse
Post the SVB event, rumours were brewing that Credit Suisse was also in trouble. They had little to do with the US banking issue but had been under pressure for many years with low levels of profitability and plenty of litigation issues, amongst other things. The result was the takeover by rival Swiss bank UBS over the weekend, aided by the Swiss National Bank. In a shock move, some of the debt (AT1s) on the Credit Suisse balance sheet was written down to zero. Such an outcome is generally unheard of because holders of bonds usually take priority over equity holders.
Carrington Portfolio exposure – in terms of equity, the Sustainable Growth portfolio has an exposure of 0.06% to Credit Suisse shares. For the core portfolios, this exposure is a fraction of a percent due to our exposure to the MSCI World Index. Our exposure is therefore negligible.
In terms of bonds, we have identified two funds that had exposure to Credit Suisse AT1s in the Income and Cautious portfolios. This exposure makes up 0.02% of the Income portfolio, and in the Cautious portfolio, 0.04%. Therefore, again, our exposure is negligible.
Outlook
In both cases, the regulatory authorities have been quick to step in and decisively deal with the fallouts. Furthermore, we saw a co-ordinated response from five major Central Banks on Sunday night to provide liquidity to the banking system and help avoid any further liquidity issues.
Other regional US banks have come under pressure, but the US authorities are providing them with support. The Credit Suisse incident appears to be isolated to them and there does not appear to be any contagion risk. We believe the markets have agreed with this narrative, with a very weak start for the European banks and broader markets on Monday, quickly turning into a positive day.
We have opted to remain as agnostic as possible over the past year or so and have avoided taking specific exposures due to the difficult market backdrop. The banking sector was an attractive investment case because a higher interest rate environment is usually positive for their profitability. However, we decided against taking any direct exposure because of such issues as we are seeing today; the SVB collapse was difficult to predict, and few saw it coming. With this in mind, we will continue to take an agnostic approach until the macro environment improves.
If you have any queries or would like to chat through anything mentioned above, please do not hesitate to contact us.
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