It's been a rocky past week for bank stocks with the fall of Silicon Valley Bank, or SVB Financial (SVIB). Undoubtedly, Silicon Valley Bank's failure happened very quickly, with the collapse occurring in a time span of around two days. The pace of the bank's demise was startling to market participants, many of whom may have been too quick to rid their portfolios of banks.
Indeed, it's not an easy time to be a bank investor. It never is in the face of economic contractions, given banks tend to feel all the pains that come with a waning economy. With Silicon Valley Bank being seized by Federal Deposit Insurance Corporation (FDIC), it's easy to view it as one of the first dominoes to fall. Bank runs often tend to be driven by fear. With rapidly-rising interest rates and fears of a looming recession, there is no shortage of investor worry these days.
Even as the Silicon Valley Bank scare sparks a flight for safety, recent jitters seem less likely to cause a repeat of what happened during the Great Financial Crisis, in my view. For those who lived and invested through 2008, it's a nervous time to be in bank stocks. However, the fall of Silicon Valley Bank seems largely company-specific.
Silicon Valley Bank was without a chief risk officer for quite some time. As the bank took on more risk in an attempt to score more yield, it put itself in the blast zone of the rapid-fire rate hikes by acquiring the vast majority of its Treasury bonds at near-zero interest rates. In essence, Silicon Valley Bank seemed to have been picking up a few dimes scattered in front of a freight train moving in at full speed. The results were devastating.
Silicon Valley Bank gets a quick backstop, but investors are still rattled
Thankfully for startups, the U.S. government backstopped Silicon Valley Bank's deposits, and the bank is back to "business as usual," as newly-appointed top boss Tim Mayopoulos said. That was very swift action taken by the federal government, and it's likely to help put many banking customers, including those without Silicon Valley Bank deposits, at ease, albeit only slightly.
Bank investors still have a bad taste in their mouths. And there's some concern that reliance on backstops can incentivize risky behavior. In any case, U.S. (and even Canadian) bank stocks remained under pressure in a turbulent session of trade on Monday.
Though contagion jitters are less intense than they were on Friday, many investors seem to be in no rush to get back into the big bank stocks, even those with impressive capital reserves. Indeed, brave investors looking for value may have a shot now that big U.S. bank stocks are down considerably in just a week.
Goldman Sachs: A great bank worth another look after a week of volatility
Goldman Sachs (GS, Financial) is just one of many big, established banks that got caught up in the past few days of selling. At the time of writing, the stock is down nearly 12% in the past week and off around 25% from its 2021 all-time high of nearly $420. The past week of selling seems excessive, especially given the likelihood that Silicon Valley Bank's fall seems unlikely to spark some sort of financial crisis. At this juncture, pundits like UBS chief investment officer Mark Hackett do not see the stage set for any sort of contagion.
For large, well-run banks with diversified client bases, the relative isolation of Silicon Valley Bank's fall could mean last week's bank flop is more of a buying opportunity than a sign to run for the hills. After the latest slide, Goldman Sachs stock boasts a price-earnings ratio of 10.96 alongside a 2.92% dividend yield. While the plunge may have yet to conclude, the value proposition has gotten a whole lot sweeter in recent months.
Even if Silicon Valley Bank is less of an issue than many think, Goldman isn't without its own issues. The company's latest quarter was dragged down by the overly-conservative climate, with less in the way of investment banking activity. Looking ahead, macro headwinds could continue to weigh down the capital markets division, all while the company looks to take its foot off the gas of its consumer banking division. Indeed, its consumer banking venture didn't get off to the start management wanted.
Goldman Sachs' Investor Day highlights
Another few quarters of pain could be in the cards for the investment banking behemoth. Still, management recently set some goalposts in its latest Investor Day presentation. Most notably, Goldman seeks returns on tangible common equity of 15-17% — well above the initial 13%. The company also sees asset and wealth management as one of its key areas to focus on.
Sure, it would have been nice to see Goldman thrive in its consumer-facing push. However, it doesn't need Marcus to land the perfect mix of efficiencies and growth in a post-recession economy.
Final thoughts
Silicon Valley Bank has sunk nearly everything in banking over the last few tradomg sessions. Goldman Sachs is one of many large banking plays that probably didn't deserve to be punished so harshly last week in my opinion. Though the company has its own challenges, I see the valuation as very enticing.
