Portfolio Update on Bank Stocks


Following the regulators’ response to the Silicon Valley Bank (SVB) crisis, Portfolio Managers Dave Ellison and Ryan Kelley provided their thoughts on the Financial sector. 

Top Takeaways:

•    Liquidity issues have been building in the Financial sector for over a year now. Rising rates driven by the Federal Reserve’s desire to fight inflation have reduced prices of securities and loans across the whole industry. These price declines reduced functional liquidity as any sale of securities to fund new loan demand required taking losses, thus diminishing capital ratios. Mark-to-market accounting rules implemented in the 1990s have worked in favor of the industry as rates have generally been falling since the early 1980s. Now, as rates have risen rapidly, this accounting rule is working against bank liquidity and capital ratios. 

•    Another development over the past decade has been the rapid expansion of electronic banking, allowing customers to move money from one bank to another very rapidly. This combined with the buildup of uninsured deposits in the system was a major tipping point for SIVB and SBNY failures. The loss of confidence of these uninsured customers caused the bank run that turned fatal. Growing fear among the uninsured has spread and the Fed has responded with liquidity facilities to alleviate concerns. So far, Fed actions appear to be working.

•    We believe recent events will require regulatory action. It will most likely impact those with high uninsured balances and large investment portfolios. 

•    Our historical investment process in both Hennessy Financial funds is to focus on traditional bank models. These models have diversified loan books, core deposits predominantly insured, ample capital, and historical records producing profits through entire business cycles.

Current and future holdings are subject to risk.  To view the top 10 holdings of a Fund, please click the Fund name: Large Cap Financial, Small Cap Financial