Markets edgy after SVB collapse, HSBC buys SVB’s UK operations for £1, Direct Line has big problems to fix

“Despite the best efforts of governments and regulators, the market was still very edgy on Monday as investors considered the fallout from SVB’s collapse,” says AJ Bell Investment Director Russ Mould.

“There’s plenty to worry about whether it be the conflict in Ukraine, inflation, rising interest rates and now a potential banking crisis has been added to the mix. Little surprise people are feeling a bit spooked.

“For now, the panic which set in late last week appears to have been contained but whether the market can regain the confidence which saw the FTSE 100 hit a record high earlier this year remains to be seen.

“The funding environment for technology and start-up companies is certainly looking a lot less healthy and focus may start to turn to the asset managers and private equity funds which are invested in these firms.”

SVB/HSBC

“The frenzied announcements from UK small caps which emerged first thing this morning look like they can be put on hold for now as HSBC emerges as a white knight to buy up the UK arm of tech and start-up lender SVB for £1 and take on all its deposits and liabilities.

“Hopefully the swift action and HSBC’s ample liquidity means companies will be able to get the cash they need to meet payroll requirements.

“Failures in the financial sector are often revealing of sensitivities to which investors had previously not given a huge amount of thought. SVB’s sudden collapse was a reminder that many banks are sitting on large unrealised losses in their bond portfolios.

“The difference for SVB is it had to realise these losses to shore up its balance sheet and when it announced plans for a rescue share issue a run on the bank ensued.

“The company saw a surge in deposits in the run up to and during the pandemic and arguably didn’t have the necessary systems and financial controls in place to handle the growth it was seeing. It put lots of money into long-dated bonds just before interest rates went up and these assets were particularly sensitive to rate hikes.

“Most big banks don’t have the liquidity problems SVB does – though the enforced closure of crypto-focused Signature Bank of New York over the weekend shows there are some others out there – so this does not look like anything on a par with the credit crunch in 2007.

“Another key difference from 15 years ago is there has been no state-backed rescue for SVB shareholders and bondholders – they will have to take their licks. Only depositors are being protected.

“Speculation is likely to turn next to how the Federal Reserve responds – will it be confident this is a bit of a one-off and continue on its ‘higher for longer’ rates path or will it dial back for fear of creating more cracks in the wider financial system?”

Direct Line

“After one of its worst years in living memory, Direct Line was forced into the pits a few months ago and is now hoping to get back on the road, albeit likely stuck in the slow lane for a while.

“There is a lot to do – it needs to improve its capital strength, rebuild margins and get the business in a shape where it can start paying dividends to shareholders again.

“Its recent problems have been well-documented. A rise in inflation made it more expensive to fix vehicles and homes when someone claimed on their insurance policy. Unfavourable weather conditions also caused a spike in claims, making matters worse.

“The company realised its capital ratios were on the danger of slipping outside its comfort zone, so half of a share buyback programme and the final dividend for 2022 both went in the bin.

“The financial results for the year are as ugly as can be, with all the key metrics worse than a year earlier. Profits have been wiped out and the company said the value of claims from weather events were more than twice as big as forecast, illustrating the severity of the situation.

“The plan now is to push up motor insurance prices in a similar way to what others including Admiral are doing, as well as improve its solvency position.

“Shareholders will have to wait until the half-year results in August to see when the dividend might be restored.

“Despite clearly laying out its problems and what needs to be done, the market is still doubtful that Direct Line will bounce back quickly, given how the shares have taken another tumble on the results.”

These articles are for information purposes only and are not a personal recommendation or advice.