Why buy Lloyds shares after the SVB fiasco?

Lloyds (LSE:LLOY) shares have fallen victim to the fall of Silicon Valley Bank. The stock is down 8% in a month. That’s obviously not a positive, but it’s cheaper than other UK banks, in particular Barclays and HSBC.

So why do I think Lloyds is buying? Let’s take a closer look.

interest rate

Rising interest rates are good for banks until they are not. What do I mean by this?

Well, higher Bank of England rates allowed Lloyds to increase its net interest margin (NIM). Higher NIM means higher net interest income (NII). Now, it’s one giant tailwind and we’re seeing a huge increase in bank profits.

But these higher rates also mean borrowers are struggling. Good debt turns bad and disability costs rise. There is an interest rate sweet spot for banks. It is around 2%-3%.

Thankfully, the medium-term forecast sees central bank rates somewhere close to this sweet spot.

But something else is now worrying investors as interest rates hit their highest level since 2008: unrealized bond losses. This is because bond prices and bond yields are correlated.

If it weren’t for SVB, probably no one would be talking about the unreal collateral losses. But after the tech financier ran into trouble, and had to sell bonds at a loss, investors began to worry about the health of other bank holdings.

Lloyds is not SVB

Lloyds shares have fallen, but not unfairly. There are several reasons for this.

First, European banks have about 6% of their assets invested in “available for sale“average portfolio, accordingly ABN Amro. Total investments make up 18% of the total balance sheet.

Meanwhile, the fiasco at SVB started when the company had to raise its finances. SVB’s $21bn bond portfolio yields 1.79% and has a duration of 3.6 years – currently the 3-year US Treasury note yields 3.4%.

SVB has about 14% invested in “available for sale“district investment. Investment as part of assets is 57%.

It is also worth noting that unrealized bond losses do not need to be included in bank results – not until they are sold anyway. Most of them will not be sold, because the big banks do not need them, and will be held until maturity.

Lloyds is a fairly middling European bank in some respects. It is generally less exposed to risk than its large US counterparts and has a strong liquidity coverage ratio of 141.8%, up from 135% at the end of 2021.

In reiterating why Lloyds looks like a solid institution today, we can also see comments. One European banking chief dismissed concerns about the sector last week, telling At FT,”We have between five and eight times our liquidity (…) There is no disease in the sector that was the problem of US subprime mortgages in 2008″.

Buy more

I bought more Lloyds shares as a dips stock after the SVB fiasco. I appreciate that the current macroeconomic climate is not ideal because very high interest rates mean more debt and disability costs. But I’m not worried about bonds.

In addition, the NII is rising, and I buy on the forecast of more attractive interest rates. Right now, I believe that the bank is very undervalued.