A once-in-a-decade opportunity to buy UK bank shares?

Shares in UK banks fell sharply last week, as SVB Financial collapsed. The heaviest is Barclayswhich reduces the share price by 10%.

Investors are clearly nervous about UK bank stocks these days. But are the fears justified, or is this the kind of opportunity that happens every 10 years?

Silicon Valley Bank

Let’s start with what happened. SVB (or Silicon Valley Bank) caters to many technology start-ups as part of its customer base.

With interest rates rising, these businesses are starting to find financing more difficult. As a result, they increasingly want to withdraw money to finance operations, which presents a problem.

SVB uses deposits from customers to buy bonds. There’s nothing wrong with that, but the price of these bonds has fallen because interest rates have gone up.

By itself, it’s not a problem. If the bank holds the bond to maturity, it will likely get the money back and the expected return.

The problem is that my SVB customers want money right away. As a result, banks have to sell bonds at a loss to meet withdrawal requests – and eventually, come up short.

UK bank

The fear is that something similar could happen elsewhere in the banking sector. Shares in UK banks have fallen as a result.

In general, the closer the banks are to the disaster zone, the more their stock prices are affected. That’s why Barclays, with its greater US exposure, fell more than Lloyds Banking Group (which is still 3% higher than 12 months ago).

The risks to UK bank stocks are certainly real. But I also think this is limited, for two reasons.

First, SVB has a heavy reliance on institutional deposits from tech startups. This means that many customers need cash at the same time and are not covered by the deposit insurance scheme.

As far as I know, this is not the case with UK banks. They have a more diverse customer base and more cash from retail customers, protected by things like the Financial Services Compensation Scheme (FSCS).

Second, research from JPMorgan Chase shows that SVB’s bond profile is exceptionally risky. Compared to competitors, banks buy more assets when bond prices are at their highest.

That means SVB doesn’t just have a cleaner customer base. It also has more to do with falling bond prices that lead to a lack of liquidity

Both of these reasons lead me to think that the situation is different for UK banks. There is less reason for customer panic and I think the banks are better equipped to handle it if there is.

A golden opportunity?

As Warren Buffett said, fear in the financial market is contagious. So I think there is an increased risk from opening in banks that investors have to think about a lot.

However, on balance, Silicon Valley Bank looks like a typical case in terms of assets and deposit base. That’s why I see the current selloff as a buying opportunity in UK and US bank stocks.