M&A possibilites in the Banking sector following SVB's collapse

The collapse of SVB, the 16th largest bank in the U.S. with over $209 billion in assets and $174 billion in deposits for startups and VC firms, has created somewhat of a ripple effect of exposure of other banks that currently have major risk management and decision-making issues. With more banks being on the verge of collapse and need restructuring and financial liquidity to remain active, opportunities are being indirectly created for secure banks to acquire them through various M&A ventures. These ventures could be potential mergers, acquisitions and restructuring.

Following SVB's initial collapse, Signature Bank, based out of NYC, collapsed days later due to a bank run on their deposits. Their clients were cryptocurrency businesses who had similar fears as the startup customers at SVB. Even though Signature bank didn't have the exact same risk management and investment issues, other financial and money management risks were significant enough for a collapse and subsequent intervention from the FDIC.

While it's still early to predict the future of the banking sector, there is current M&A potential, and in some cases, reported M&A deals, for the following reasons:

• acquisition of banks with high uninsured deposits and lack of diversity with individuals & business as customers

• acquisition of banks with a history of risk management and financial issues

• acquisition of banks with a loan+long term securities- to-deposit ratio (LDR) above 90%

The greater the issues and risks these banks pose, the more likely they will be a potential acquisition target for more secure bank to stabilize the global economy.

1. Acquisition of banks with very high uninsured deposits and lack of diversity with individuals & business as customers

As reported, over 90% of the deposits in SVB were uninsured. The FDIC has an insurance limit of $250k per owner of an account, meaning that in the case of a bank collapse, only up to $250k can be given to each depositor. SVB's collapse increased public awareness of this FDIC limit and that not all banks might be FDIC insured. What made SVB collapse was that over 90% of their customer base are startups, VC firms, small business and PE firm. The remaining customer base are likely those business owners and high network individuals. Any bank having a majority of their customer base this limited is at greater risk for collapse. Additionally, Signature Bank had over 89% of their deposit being uninsured, with a majority of their clients being cryptocurrency firms and startups.

Secure banks with low to medium uninsured deposits have a diverse customer base, ranging from everyday retail customers to business to high network individuals. Banks with a high insured deposit rates and little diversity in customer are more likely to face risks with liquidity. Secure banks may see an opportunity to acquire these banks to further diversify their portfolio, gain an advantage with a new customer base, and help these customers feel more secure with their banking. HSBC has already acquired SVB's UK branch for $1 in a quick transaction. The FDIC has requested interested banks to submit bids for SVB and Signature Bank by Friday, March 24. First Citizens Bank, based out of Raleigh, NC, is considering buying SVB with the goal of expanding their presence in the tech sector in Silicon Valley.

2. Acquisition of banks with a history of Risk Management and Financial Issues

The current global and financial climate has crept up on many financial institutions around the world. Some has survived many issues over the years, but with the recent ripple effects of SVB's collapse, banks like Credit Suisse are facing a tough time in the market.

Following SVB's collapse, the stock price of Credit Suisse plunged and further plummeted when the bank announced they had found "material weakness" in their financial reporting documents. Their top investor, Saudi National Bank, emphasized that they could not provide any more funding to Credit Suisse, which forced the Swiss National Bank to announce a loan of $54.2 billion to them. Even though this loan was enough to prevent an ultimate collapse, investors didn't feel as confident in the bank anymore, which made the Swiss authorities pursue a $3 billion sale of the bank to UBS.

This accelerated lack of confidence was the breaking point for many who invested in and do business with Credit Suisse. Over the years, confidence dwindled slowly after many reveals of risk management issues, money laundering, wire frauds, secret loan scandals, schemes, forex manipulation, tax avoidance, bad investment practices to name a few with the banks across the globe. These consistent and ongoing issues created an atmosphere of little to no global confidence in business.

Credit Suisse is considered a Global Systemically Important Banks(GSIB) and the international financial stability depends heavily on their operations and liquidity. A collapse would be a major and potential irreversible blow to the global economy, hence the reason why the Swiss National Bank and UBS had to step in to prevent their ultimate demise.

Any bank that is crucial to a country/global economy and has a history of financial issues & controversies where confidence in the bank is slipping, would be at great risk for a collapse. These banks would open the door for their potential and strategic acquisition by secure banks to prevent an economic downturn. These secure banks benefit not only from gaining a diversified portfolio, but the ability to operate in a sustainable financial environment and prevent negative ripple effects to their own business in that country or the world.

3. Acquisition of banks with a loan+bonds-to-deposit ratio (LDR) >90%

A loan-to-deposit ratio is used to assess a bank's liquidity, their ability to cover unforeseen circumstances i.e. bank withdrawals. If the banks provide more loans than they have/receiving in deposits above the standard ratio (90%), they are at a very high risk of running into financial issues. With current interest rates and long term assets being a major factor in banks collapse, it's important to consider the ratio of total bonds and loans together to a bank's deposit. As of December 2022, SVB had a ratio of 94% and Signature Bank had a ratio of 93%. First Republic Bank, who got assistance to prevent their collapse, had a ratio of 110%.

If the ripple effects of SVB's collapse continues, banks with LDR above 90% are at greater risk of mismanaging and not meeting their withdrawals that could lead to a collapse. These risk would create yet another potential for more secure banks to step in and acquire them with the indirect goal of lowering their risks and rebuilding trust in their operations.

Overall, it's not easy to predict how much more SVB & Signature Bank's collapse and the interest rates will affect global financial economy. Financial institutions in the banking sector with a plethora of risk management and liquidity issues have greater risk of financial trouble and being potentially acquired to save them and the economies in which they operate.