Silicon Valley bank crash: Stocks are a ‘wobble, but with plenty of big-money homebuyers they’re not in trouble yet’
BlackRock Chief Executive Larry Fink should know a thing or two about bank shakes.
The Wall Street investor runs a firm that manages $8.6 trillion in assets. What happens to banks, credit, real estate and money markets is not so much his bread and butter as his caviar and cream.
Fink’s response to the Silicon Valley Bank (SVB) collapse and the sector’s other volatility in the US was to warn of a “slow crisis”.
Not so much a 2008 rehash on the cliff, but more of a slow-motion car crash that could take a toll on other US regional banks.
The world has changed so much since the last crash, and yet some of the basics remain the same.
This time, instead of the liquidity problem, there is a problem with the consequences of rising interest rates.
Fink’s assessment is that higher interest rates were the first domino. The demise of a bank like SVB was the second. Third, he sees the impact of higher interest rates on asset values in the US.
Funds invested in illiquid assets like private equity, real estate and personal loans “could be a third falling domino,” especially if they used borrowed money to boost returns, he wrote.
Credit Suisse scared everyone, but scared some investors well before this week.
Its problems are well known. Given the size of the bank, the Swiss authorities would always intervene if necessary.
After years of incredibly cheap money, the cycle has clearly turned and some will struggle to gauge the fallout, let alone deal with it.
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Fink believes that higher interest rates were the first domino. The demise of a bank like SVB was the second. Third, he sees the impact of higher interest rates on asset values in the US. Photo: Getty Images
What was most surprising was the market’s perception that interest rate hikes in the US or Europe would end prematurely because of these banking volatility.
An investor can make 12 times his money if ECB interest rates fall below 1 percent next year. It’s an interesting bet, but I doubt they’ll take it.
Inflation is still a problem. Rate hikes were the fastest since the 1980s.
This is because the central banks, especially in Frankfurt, initially overslept the reality of inflation.
In Ireland, the dynamic is somewhat different. We no longer have heavily indebted Irish property companies. A large part of the money that has flowed into real estate development here in recent years comes from abroad.
Public REITs don’t appear to be heavily indebted either. Drops in commercial real estate prices, particularly offices, will occur but should not cause a financial earthquake.
When it comes to the housing market, we have ready, big money buyers stepping in at every opportunity.
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Credit Suisse scared everyone this week. But the Swiss authorities will always intervene with a bank of this size. Photo: Getty Images
I’m not talking about young couples under pressure, I’m talking about the state, local authorities and other taxpayer-supported entities trying to buy up as much housing as possible.
Larger so-called cuckoo funds still like to buy houses here because of the high demand and the relatively low supply.
Non-household buyers account for 42 percent of new homes purchased.
When real estate prices come under pressure in other countries, these facilities will support the market here. Real estate price growth is slowing down and house values will most likely fall. But the extent of the decline should be limited by these purchasing powers.
Price hikes add to Glanbia’s pay premiums
Glanbia CEO Siobhán Talbot has enjoyed a huge 73 percent increase in her total compensation over the past year to nearly €6 million.
Most of the compensation was performance-related and came from the long-term and short-term incentive plans, which supplemented a salary of €1.1m.
This was the first year that senior management was able to take advantage of a new incentive scheme, which meant they could earn a higher multiple of salary if certain performance metrics were met.
Glanbia scores very well on all standard criteria. His earnings have increased. His earnings have increased. The stock price is up 20.6 percent over the past 12 months and 12.9 percent since January.
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Glanbia Managing Director Siobhán Talbot
Like other companies, Glanbia has managed to navigate the more expensive inflationary environment of 2022 by raising its prices.
Higher costs provide excellent coverage for price increases across a range of products, whether consumer or industrial.
The top performer in the group was Glanbia Performance Nutrition (GPN), which posted a 13.9 percent increase in sales and a 10.5 percent increase in EBITDA.
However, on a comparable basis, ie excluding currency effects, volume sales in this division actually fell by 2.1 percent.
This was more than offset by a price increase of 16.7 percent.
The ingredients business headlines showed a 13 percent increase in EBITDA. On a like-for-like basis, volumes declined by 3.5 percent.
Price increases of 16.1 percent more than offset lower product sales.
The trick to running a competitive food company like Glanbia’s Optimum Nutrition is making sure you have the right product, the right marketing, and the right market position to drive price increases.
After all, dietary supplements are a very tough business, especially in the US. Glanbia increased its profit margin in two of its three major businesses.
This could only be achieved through strict control of operating costs and increasing prices.
Talbot and Glanbia executives appear to have struck a difficult balance.
And they were richly rewarded for it.
The downside to relying on price increases in an inflationary environment is that you can’t do it all that often. This year will not be easy.
Bank apprenticeship from Anglo to SVB
The loss of Silicon Valley Bank (SVB) to the international tech finance world is quite significant.
So many growing tech companies in the US and Ireland have benefited from his presence and what some call a “helping hand”.
Maybe that was part of the problem. Tech leaders loved SVB, in part because they saw it as a bank similar to their own company — entrepreneurial, high-growth, listening, and highly innovative.
But are these the qualities a bank should strive for? Most of its employees were still working from home when it collapsed.
As a former banker put it FT During the week, “some people would work out of Miami, others would move to Las Vegas or a cabin in the woods and do the digital nomad thing.”
As one banker put it, SVB wasn’t “slit its throat like Goldman Sachs.” But Goldman is still in business
A bank that “understands” its customers to copy what these entrepreneurs do sounds a bit like the Anglo Irish Bank of yesteryear.
Wasn’t Anglo fast growing, entrepreneurial, innovative, flexible (which often means quick credit decisions) and in touch with its customer base? Well, it imploded too.
SVB’s governance, strategy and culture are now under scrutiny, particularly by regulators. Locks and barn doors come to mind, also a bit like Anglo.
As one banker said last week, SVB is not “slit its throat like Goldman Sachs.” But Goldman is still in business.
https://www.independent.ie/opinion/comment/silicon-valley-bank-crash-stocks-are-a-wobbling-but-with-big-bucks-house-buyers-aplenty-theyre-not-in-trouble-just-yet-42393526.html Silicon Valley bank crash: Stocks are a ‘wobble, but with plenty of big-money homebuyers they’re not in trouble yet’