ETMarkets Smart Talk: Not a Lehman moment but SVB collapse a warning sign, says this Rs 500 cr fund manager

In an interview with ETMarkets, Arpit has 15 years of experience in Capital Markets. to CARE PMS which manages Rs 500 Cr of AUM through its 2 strategies, said: “During Lehman crisis, interbank lending had dried up as the assets they were holding had witnessed huge loss in value” Edited excerpts:

From a fund manager’s point of view – what led to the downfall of SVB Bank and Signature Bank in a matter of hours?
At this time, it looks like a self-inflicted error caused by poor decision-making as it is not in trouble due to bad lending practice but due to not properly managing the ALM mismatch thereby resulting in a short-term liquidity crunch.

Further, Communication is always the key around such events to avoid spooking the financial markets. With the benefit of hindsight, it is clear that this was inadequately handled.

How much AUM do you manage? What is the investment style you are following?
We have around Rs 500 Cr of funds under management. Our investing approach is a bottom-up, stock-specific approach whereby we focus more on the fundamentals of an individual company rather than the overall macro environment.

The selloff continues in the stock market across the globe – are we staring at another Lehman moment? Another global financial crisis in the offing? Is there a prolonged impact you see on stock markets?
Ever since the 2008 implosion of the US financial system, Wall Street has been on tenterhooks for the next “Lehman Moment,” With around $200 billion in assets, it’s the second-biggest bank collapse in history.We feel that SVB’s slide into the abyss isn’t quite a Lehman moment but a warning sign that we have trouble in the banking system, built up through the years of free-spending, i.e., money printing at the Federal Reserve.

As SVB heads for insolvency, its parent is scrambling to find a buyer. Like Lehman, it will be difficult and so a complete collapse is possible however, the situation is different vs 2008.

During Lehman crisis, interbank lending had dried up (unable to borrow even when interest rates were zero) as the assets they were holding had witnessed huge loss in value whereas currently though rate hikes have hurt mark to market value of these debt instruments, they are still money good.

Further, the current situation of SVB is depositor driven and limited to a few banks vs a systematic liquidity crunch.

Indian banking regulator took a lot of steps to avoid another Lehman-like moment by making it more robust. There could be a rub-off effect in the short term but do you see a prolonged impact on our banking systems as well?
First and foremost, I must acknowledge that RBI has been underappreciated in our system. and I take this opportunity to thank RBI and our governor for demonstrating the best of their skills, knowledge, and temperament during an unprecedented macro crisis.

From a domestic point of view, Indian banks have minimal exposure to the beleaguered US lender as households account for 60% of bank deposits. The Indian financial sector as a whole is on a strong footing with gross NPAs at 7-year low as of Sept 2022 at 5%.

Further, in its December 2022 Financial Stability Report (FSR), the Reserve Bank of India (RBI) said that the system-level capital-to-risk-weighted-assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9%, 14%and 13.1%, respectively.

While huge losses on bond holdings were the catalyst for the SVB to capsize, the Indian banking sector is much more resilient.

Indian banks are large holders of government bonds as lenders are mandated to park a certain portion (current requirement – 18%) of their deposits in liquid assets.

Though the domestic bond yields may have risen in the last year as RBI tightened policy, increase in 10 year yield has been less than policy rate (10-year bond rate increased from 6.45% at end of 2021 to a high of 7.62% in June 2022 and is currently quoting at 7.43%).

Further, Banks have sharply reduced the modified duration of their bond portfolios over the last six years. Modified duration refers to the change in the value of a bond when interest rates change.

The higher the duration of the bond portfolio, the more is the risk of incurring losses when bond yields rise.

Crisis always gives an opportunity – what is the opportunity which Indian investors can claim from the current downfall?
There is expected to be a negative impact on global stock markets because of the liquidity crisis in US with people losing money and smart money shifting to safer assets like Gold in the short term. This should provide opportunities in the form of attractive valuations in fundamentally sound companies.

However, one needs to be brave enough and have a strong conviction to add during the downturn, and as follow what Mr. Warren Buffett once said ‘Be fearful when others are greedy and be greedy when others are fearful.’

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)