15 March 2023
Over the weekend there were two important developments in the situation around bank deposits and unrealised losses on bond portfolios.
What happened?
- The Federal Reserve launched a Bank Term Funding Program 'to provide liquidity to US depository institutions'. Very generous terms are attached, with just a 10 basis points (bps) spread over the one-year overnight index swap (OIS) and 100% margin on collateral. Collateral will be valued at par (i.e. the bond books won't be forced to recognise losses - which was the problem with the Silicon Valley Bank (SVB)). This should shore up concern about US bank solvency and liquidity. The fact that some US regional banks' equity has fallen substantially in value is not in our view an indicator of systemic stress. Under the program Equity and Preferred Debt holders will not be made good, so will take any losses, therefore it is natural that bank equity should fall in value.
- HSBC's UK entity bought SVB's UK entity for £1. To give an idea of scale, SVB UK's total assets (90% of which were deposit funded) are £8.8 billion. HSBC's total assets are $2,967 billion (£2,460 billion). So, what they are acquiring will be 0.4% of their total assets of the combined entity, maybe 0.8% of the ring-fenced UK bank's assets. It's arguably a positive that the Bank of England/His Majesty’s Government did not see the need to set up a bank lending programme, but have guaranteed uninsured deposits for the start-up vehicles that are affected.
Market impact
Government bonds have rallied very sharply, with the 10-year gilt yield falling from 3.82% at the close on Wednesday 8 March, the day before SVB failed, to 3.32% at the time of writing (15 March 2023).
The MSCI World Index fell 4% over the same period. The S&P Regional Banks Index fell 25% and there were notable fallers among the European banks with some falling 20%. Credit Suisse fell 38%. (Bloomberg, 15 March 2023)
CCLA exposures
- CCLA has no direct exposure to SVB.
- We do hold JPMorgan and Bank of America in the equity and multi asset portfolios (combined they are 1.5% and 1% weights respectively in the CCLA Better World Global Equity Fund and the COIF Charities Investment Fund). However, relative to each funds comparator benchmark, we are underweight the banking sector generally.
- Our fixed interest funds (sub-advised by Federated Hermes) have exposure to Credit Suisse bonds, but the exposures are 0.20% in the COIF Charities Fixed Interest Fund and 0.13% in the CBF Fixed Interest Securities Fund (15 March 2023). Through their 2% holdings in these funds our Investment Funds in turn have 0.4bps exposure to Credit Suisse.
- In alternatives, we are invested in two private equity funds whose underlying companies have deposits or loans with SVB UK. However, post the sale to HSBC the deposits are safe and both funds tell us they have sufficient capital to support their portfolio companies' short-term liquidity needs. The funds in question are the Clean Growth Fund (0.14% of COIF Charities Investment Fund) and Cambridge Innovation Capital Fund II (0.04% of COIF Charities Investment Fund). Both are young funds that have not drawn down their capital allocations yet, hence the current small weights in our funds.
Other secondary exposures may emerge over time. For example, Alexandria Real Estate (0.94% of the CCLA Better World Global Equity Fund) has security deposits from its tenants in the form of letters of credit from SVB representing 4% of the annual rent roll, which it announced only this morning.
The CCLA cash team has made the following comment on the deposit funds: 'CCLA’s cash and money market funds have never made a deposit with or purchased securities issued by SVB or its UK subsidiary'. CCLA’s cash funds do not have any exposure to the US mid-sized/regional banking sector and the only US banking exposure is to Citibank. We can also confirm that the CCLA deposit and money market funds have never had any exposure to investments in the name of Credit Suisse.
Conclusion
We continue to monitor exposures across our funds, but we are comfortable that our banking sector exposures are small. It is a fast moving and fluid situation but for now we remain sanguine that the monetary and banking authorities can contain the fallout.
Important information
This document is issued for information purposes only. It does not constitute the provision of financial, investment, or other professional advice. CCLA strongly recommend you seek independent professional advice prior to investing. The market review and analysis contained in this document represent CCLA’s house view and should not be relied upon to form the basis of any investment decisions Any forward-looking statements are based upon current opinions, expectations and projections. Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may fall as well as rise. Investors may not get back the amount originally invested and may lose money. Actual results could differ materially from those anticipated.
