While the impact of the Silicon Valley Bank collapse on tech companies was the biggest worry earlier in the week, it is investors in the bank itself who have ended up taking a haircut - including KiwiSaver funds which owned shares in the company or invested in its bonds.
On Monday, US Federal regulators stepped in to back all SVB deposits, giving access to the more than US$175 billion tied up in the bank, by using fees that banks pay into the Deposit Insurance Fund. But US President Joe Biden was very clear that SVB investors would bear the brunt of the failure.
“Investors in these banks will not be protected. They knowingly took a risk and when the risk didn’t pay off investors lose their money. That’s how capitalism works,” he said in a speech overnight Monday NZ time.
Silicon Valley Bank was part of the S&P500, meaning most KiwiSaver funds would have had exposure to it. Sam Stubbs, managing director of fund manager Simplicity, said most passive funds - those which track indices like the S&P500 - including Simplicity’s funds, had a small investment in SVB. Many actively managed funds would likely have had an investment in it too.
But Stubbs said the loss was minimal, saying that on a $100,000 investment in Simplicity’s growth fund, the loss would have been less than $19. In its balanced fund it was around $15 and under $10 in its conservative fund.
That’s because SVB made up only a tiny portion of the index. Stubbs said the 1 per cent move in the market due to nervousness over the collapsed bank would have hit investors harder. “The 1 per cent move in markets would have had 50 times more impact.
“I would be surprised if most KiwiSaver funds didn’t have some exposure, but collectively the impact would be very small.” Stubbs said the most important thing was confidence in the banking system.
SVB was the 16th largest bank in the US and the largest to fail since the global financial crisis. Its failure has sent ripples across the markets this week, amid fears that it will spark another crisis in the sector. The US government has moved quickly to limit that with its move to back deposits, but investors are nervous about whether other banks could be dragged down as well.
Fisher Funds CEO Bruce McLachlan said there would be quite a number of KiwiSaver funds with exposure to SVB.
Kiwi Wealth (which it now owns) had a very small exposure to SVB while Fisher Funds didn’t, but it did have an exposure to Signature Bank, which also collapsed last Friday.
“In my mind, the real thing is if you look at the weighting of banks in overall indices and value destruction that has happened over the course of recent weeks, it’s very easy to focus on SVB and Signature. But actually, the real story is banks generally have lost a lot of value and that sector represents some chunky weightings. From our investors’ perspective, the real issue is the loss in value from that sector.”
McLachlan said the banking fallout was continuing the challenges of the last year, when investors had already taken a hit. He said SVB and Signature banks were the startling end of it. “How could supposedly perfectly good banks, rated well with good credit ratings, how can they suddenly fail? But the real story is the sector.”
In New Zealand, the failures have created a dramatic juxtaposition. Last week politicians were calling for a banking inquiry because they were making too much money and this week there is concern that international banks will fail.
Mark Riggall, portfolio manager at Milford Asset Management, said banks were clearly an exposure in KiwiSaver funds because they formed a part of global industry indices and were a pretty big sector to invest in. They made up about 6 per cent of the MSCI World Index and in Australia they made up some 20 per cent of the ASX200.
“They are likely to be a reasonable part of KiwiSaver funds.” He said the situation raised questions about whether the problem was contained in the banking system or was a broader issue.
Riggall said people were thinking back to the GFC and wondering if this was the same thing. “Effectively, what you had in the US was a bank run which is where depositors lose confidence in the bank and want their money back.”
But looking beneath the surface at what caused the loss in confidence, it was a very different situation to what happened during the GFC, he said. “To a certain extent, it was idiosyncratic to SVB.”
The changes to the banking system since the GFC had aimed to make it safer and were focused on the asset side - to stop deposits being lent out on risky ventures, those failing and deposits being lost.
“That’s not what has happened in this situation. SVB has gone out and bought Treasuries, government securities with its deposits. Those government securities are pristine, they are not going to default so we are not worried about the asset quality of the bank.”
But when tech companies needed more money, the bank had dwindling deposits so it needed to reduce some of its assets. So when they sold some of their bonds, that crystallised a loss of US$1.8 billion. Then they had a hole in their capital base and went to raise capital, and that was the catalyst for the failure.
“It was almost the complete opposite of what we saw in the GFC in that the lack of confidence was created by the outflows itself which then spiralled into more outflows.” But Riggall said the US response had contained the crisis by covering the depositors.
“That implicitly gives a backstop to all banks in the US.” A bank term funding programme had also been set up to allow banks to pledge their bonds as collateral to meet their outflows if they needed to.
But that hasn’t stopped the negative impact flowing to other banks. “There’s a lot of muscle memory there and confidence is hard-won and easily lost. And once confidence is lost, it does take some time to realise actually this is not a problem.”
Riggall said part of the reason for the problem was the rapid rise in interest rates, which reduced the value of existing bonds. SVB didn’t hedge against this issue, and investors were now looking around to see whether other banks may also have this issue.
He said investors had to have faith that authorities would get things under control. That had happened quickly in the US. “Is there a problem at Credit Suisse and whether there is a problem or not is kind of irrelevant. If people take their money out because they think there might be a problem, then that’s an issue in itself.”
Riggall said the authorities were walking a tightrope because they didn’t want to bail people out willy-nilly and create a moral hazard by encouraging banks to undertake risky lending, knowing their deposits were going to be paid out. “But at the same time, they don’t want confidence to fall so that banks fall over just because people have lost confidence in the banks. That’s why it feels quite nervous at the moment.”
In the GFC there was a credit problem, while today’s issues were liquidity related, he said. “That can be solved more easily than the credit problem because central banks can, as they have shown in the US, provide liquidity to institutions when it’s needed.”
Fisher Funds CEO Bruce Mclachlan says it will take about 18 months from its November 30 acquisition of Kiwi Wealth before the restructuring of the business is complete.
Around 200 people worked for Kiwi Wealth, spread across sites in Wellington and Auckland, when Fisher Funds bought the business for $310 million. The restructure has been split into four groups, with an initial 70 workers told their jobs are safe and a second group, including senior management and the investment team, where only 40 per cent of about 50 workers are being kept on.
Kiwi Wealth CEO Rhiannon McKinnon finishes up today (Friday), although her official last day is May 15. Those let go include executive assistants to the senior management, contractors and senior investment team members where there were obvious double-ups. McLachlan said it had kept about eight people from Kiwi Wealth’s investment management team.
A third group of about 80 roles is going through a consultation period, although it is proposed that the vast majority of these roles will be kept. This group includes IT support, risk and compliance staff and business change and internal communications.
A fourth group made of roles in investment operations would not go through consultation until the end of the year, McLachlan said.
“We have got a lot to do, particularly on the investment product side which determines the outcome for that group.”
McLachlan said it had tried to be as transparent as possible with the workers and provide as much certainty as it could.
The takeover of Pushpay looks to be a done deal after the bidders offered a higher amount. BGH Capital and Sixth Street – under Pegasus Bidco - upped their offer to $1.42 per share following the knockback of their previous offer of $1.34.
Given that seven institutional shareholders equating to 18.6 per cent of the capital on issue have now agreed to vote in favour of the offer, it looks likely to get over the 75 per cent voter threshold.
A date has not been set for the vote, but is likely to be next month. If the deal gets the seal of approval, it will mean another listing lost to the NZX, although investors will be looking to reinvest the capital.
One silver lining of the current share market turmoil is that they could find some bargains if they can stomach the ongoing volatility.
KMD Brands - the owner of outdoor gear retailer Kathmandu - is expected to report a strong first-half result next Wednesday but analysts are already looking ahead to see if signs of consumer spending weakness are starting to show.
The retailer has released guidance indicating total revenue of $546 million and underlying EBITDA of $45m. Forsyth Barr analysts Margaret Bei and Andy Bowley said the guidance had surprised them, and the wider consensus, on the upside.
“This was partially supported by tourism and travel tailwinds. We look for signs of these trends abating in recent trading and an update on consumer demand, including the forward wholesale order book.”
The analysts expect operating expenditure to exceed $500m for the first time at the retailer for the full financial year, driven by inflationary pressure and a return to full operations post-Covid.
A build-up in inventory was a key theme across the retail sector, with KMD already flagging higher group inventory levels - although this had reduced compared to 2022 financial year levels.
“We look for an update on inventory expectations over 2H23 and whether above-average discounting will be required to manage stock levels.”
The retailer’s debt levels are also of interest to the analysts, with net debt rising to $40m in the 2022 financial year from a net cash position of $37m the year before, due to working capital investments through the period because of supply chain constraints and Covid-driven store closures.
“With all regions now returning to full operations, we expect a recovery in operating cashflows supporting a reduction in net debt.”
Forsyth Barr has an outperform rating on the stock with a target price of $1.25. KMD Brands shares closed on $1.05 on Wednesday and are down 19 per cent over the past year.
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