Stock Analysis & Ideas

Silicon Valley Bank Shocker: Risk Disclosures Hinted At It

Story Highlights

The Silicon Valley Bank collapse shook the investor community. Its risk disclosures hinted at this peril.

The collapse of the California-based SVB Financial Group (NASDAQ:SIVB) came as a rude shock. After all, it was the largest bank failure since 2008. While the abrupt end of SVB Financial (regulators stepped in and closed the bank completely) shook investors and the banking community in particular, close scrutiny of its risk disclosures shows that the company revealed in advance that its business is susceptible to rising interest rates and macro headwinds.

Let’s leverage TipRanks’ Risk Factors tool to zoom in on those risk disclosures that pointed to this outcome, ahead of the collapse.

Risk Factors That Hinted At SIVB’s Downfall

SIVB, in its risk disclosures, stated that it earned a significant portion of its net income through the interest rate spread (the difference between the interest it received on income-bearing assets and the interest paid on interest-bearing liabilities). 

Thus, an increase in interest rates was positive for the bank as it expanded the spread. However, continued increases in market interest rates weren’t a good sign for SIVB, as it would lead to an increase in NPAs (non-performing assets) and a decline in deposit levels due to the rise in delinquencies, bankruptcies, or defaults.

This might sound generic and common for all banks, but what rings the alarm bell is the credit profile of its loan portfolio. 

SIVB said in its risk disclosures that its credit profile is different from that of most other banking companies. Most of its loans were made to early-stage and mid-stage privately held companies in the tech, life science, and healthcare spaces. 

These companies had modest or negative cash flows and no established record of profitable operations. Thus, the economy’s deterioration led its startup clients to withdraw deposits to remain afloat amid challenges. Further, it led to a drop in the valuations of these companies, adversely impacting their ability to repay loans. Also, the macro weakness resulted in a prolonged decline in VC investments and deposits.

In addition, a significant portion of SIVB’s loan portfolio is comprised of larger loans (loans equal to or greater than $20 million to a single client). As of December 31, 2022, these large loans totaled $46.8 billion and represented 63% of its portfolio. Thus, any default by a single borrower was likely to significantly impact its financial situation.

Why Is It Important to Consider Risk Factors?

The SIVB incident once again highlights why it is critical to identify and analyze risk factors before investing in stocks. The scrutiny of risk profiles significantly reduces the odds of future disappointments. However, as the risk environment for enterprises continues to evolve, it becomes tough for investors to keep a check on it.

Thanks to TipRanks’ comprehensive and dynamic Risk Factors tool, investors can now assess the risk associated with a particular stock and keep up with the changing risk scenario.

Meanwhile, learn more about the companies affected by SVB’s collapse here.

How can investors see the warning signs of a company at risk? Join TipRanks’ webinar to learn more.


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