In the past 10 days, two U.S. banks have been closed and another rescued by a group of 11 banks that injected $30 billion. Since regulators shut down Silicon Valley Bank and Signature Bank last week, the regional banking system has been under tight scrutiny while depositors withdrawal funds in a “new fashioned” online bank run.
Silicon Valley Bank (SVB), a top 20 sized bank with over $200 billion of assets, was the first regional bank to falter. As rumors of weakness spread, more than $45 billion was withdrawn forcing SVB to sell bond investments at a loss. Regulators shut down the bank and guaranteed all deposits, even those above the current $250,000 FDIC limit.
This highlighted a crack in the banking armor and all hell seems to have broken loose since. In short, some banks invested in longer-term government bonds when yields were low. Without interest rates hedges, these bonds lost a lot of value as interest rates were hiked eight times by the Fed in the last 12 months. When people or companies wanted their money (bank run), these bonds needed to be sold at a significant loss. Depositors will be made whole, but owners of the bank’s stock will lose everything.
The table below shows what has happened in the market in the last 7 days of trading. Regional bank index is down 21% while the whole financial sector is down 11.5%.
There was a flight to safety as the largest 50 companies in the stock market had positive returns during this time → notice the NASDAQ up 3.3%. Small companies that rely on regional banks for capital is down 8.2% (Russell 2000). Clean energy ETF was down almost as much as the financial sector at 10.7% negative.
Why is the bank collapse of SVB (and others) throwing a wet towel on the clean energy sector?
SVB was the bank for venture capitalists and start-ups. Many of the climate tech and clean energy companies are in the early days of their life cycle and therefore require access to capital more than established industries and sectors. And some of these companies had a portion of their working capital tied up at SVB (even though we now know those funds will be safe). The stock market is penalizing companies due to the unknown future of the capital markets and the expectation of tighter lending.
Our clean energy Top Picks portfolio had performed well in 2023. At the peak on February 2nd, it was up more than 28%. Even with a challenging February, Top Picks was still up 19% on the close of Wednesday, March 8th before the SVB news. Since then, the portfolio has dropped 14% and is now up only 2% year-to-date.
We will continue to watch this developing story as it is not over yet. However, it felt like getting a quick edition out to subscribers made sense due to the impacts on our portfolios. Is this a buying opportunity? Too early to tell, so I’d wait it out (although dollar cost averaging is always good).
Efficiently Yours,
DT