Any guess who said this?
“It’s important to note we have a high-quality very liquid balance sheet, which I know there will be lots of questions about; strong capital levels; a seasoned management team, which we experienced navigating challenging markets and adding a lot of new people with deep experience as well; and a consistent focus on our long-term business strategy. So when you put all that together, we feel clearly better about the outlook than we did last quarter, where there was more uncertainty.”
No?
It was Greg Becker, the President and CEO of Silicon Valley Bank at their results on 20 Jan 2023,
Less than two months later, it’s game over
But look at the words he used, “high-quality”, “strong”, “seasoned”, “deep experience”, “consistent”, “and long-term”
Maybe “SVB” stood for “Silly Verbal BS”…
That’s why we at Ranmore focus on #numbersnotnarrative and don’t waste time meeting management
The only relief is he didn’t use the many other nauseating phrases we often hear and tell us that, “Our team leaned in, to do a deep dive, and has circled back, after reaching out, to close the loop”
But let’s look at his claim of “strong capital levels”
The $16bn of Shareholder Equity supported assets of $212bn
Except that $91bn (43%) of those assets were in “Held to Maturity” Securities
Now during and after COVID when Venture Capital (VC) was all the rage because of all the “pulled forward growth” (oh dear), their clients raised $ billions and placed these on deposit with SVB, meaning deposits grew from $62bn to $173bn
And despite their VC clients “burning cash” and therefore regularly drawing down on their deposits, this “seasoned management team” with “deep experience” thought it was a good idea to invest $91bn of those deposits into a portfolio of long-term “Held to Maturity” investments where $86bn of the $91bn had a maturity beyond 10 years..
In things like Fixed rate Agency issued Mortgage Backed Securities with an average yield of only 1.63%!
Now even if they did fall for the “transitory inflation” nonsense, how could they seriously think a 1.63% was an attractive NOMINAL return in a volatile world, with their “hands” tied up beyond 10 years?
Maybe the “very liquid balance sheet” referred to all the liquid Kool-aid the management team had been drinking…
But here’s the issue, under US GAAP, classifying securities as “Held to Maturity” means they can record them at amortized cost, regardless of their market value!
The conditions under which European banks can use amortized cost under IFRS 9 seem more restrictive, meaning the vast majority of assets seem to be recorded at Fair Value with adjustments taken through the Income Statement and Comprehensive Income thereby ensuring Book Value reflects Fair Value and this is one reason why we far prefer European banks to US banks
So what does this mean?
Well, if in December 2022 you could receive a yield to maturity of 3.8% on “risk-free” 10-year US Treasuries, please tell me who would prefer to receive 1.63% from risky 10-year Mortgage Backed Securities?
You got it in one – No one
Meaning the “Fair Value of those HTMS was far lower than $91bn
Like $15bn lower – $76bn (I didn’t even have to look in the notes, it’s right there on the face of the Balance Sheet!)
Meaning there was an unrealised loss of $15bn at 31 December 2022 which under US GAAP didn’t have to be booked…simply disclosed
Isn’t that crazy?
I know – it’s bad enough worrying about all the Non-GAAP adjustments and now we have to worry about US GAAP
Now that’s a problem because Equity was only $16bn so if these securities were written down to Fair Value, Shareholders’ Equity would only have been a paltry $1bn
Supporting assets of $212bn
I challenge you to find another banker on this planet who would agree to this being considered “strong capital levels”
Should I say a banker without any share options riding on the statement…
And do you want to know what’s really scary?
Shareholders’ Equity adjusted for Fair Value was NEGATIVE in September ’22 – a technically insolvent bank with over $200bn of assets limping along for six months – don’t people study Balance Sheets?
So that’s the story
Phew, well now that rate rises are off the table, at least we can go back to buying tech stocks…
Well before you do, since SVB was plugged into VC tech and saw those “cash burn” rates up close, do you want to know what they had to say about business conditions in techland?
Yes, please!
“Advertising spends have been coming down over the last several months and so that’s been a big thing that we’re seeing here”
Oh!
“What kind of tech recovery is contemplated in the guide for 2023?” asked one analyst
“Very little” replied the CEO
Well, let’s all hope that prediction is as wrong as their outlook statement..
Somehow, I fear it won’t be