As banking stocks in the UK continue to reel from events in the US, Shore Capital's banking analyst Gary Greenwood has given a read across to the UK.
He noted US bank shares fell sharply yesterday for two reasons. Firstly, Silicon Valley Bank (SVB) got into difficulty due to mark downs on its security investments raising contagion fears and secondly, market fears increased that net interest margins are going to be squeezed by higher deposit betas (i.e. having to pass more of the recent rate rises to savers) along with a potential turn in the rate cycle.
He said the sharp rise in interest rates and bond yields that we have seen over the past year was always going to expose some issues in financial services.
He stressed for the most part, banks are well regulated and managed these days, but "clearly not all of them."
SVB clearly was in the latter camp he said and, while there may be more examples like this to come, Greenwood said he doesn't "see this as a ‘Lehman’s moment’ for the industry" and doesn't expect any of the big UK banks getting themselves into this kind of trouble.
"Where I am much more fearful is for the shadow banking industry which has taken on a lot of the risk that banks have eschewed since the Financial Crisis and are also a lot less well regulated," he explained.
Greenwood also noted concerns have been increasing around the degree to which interest rates increases are being passed through to depositors.
"To date, banks have benefited by withholding interest rate increases thus allowing deposit spreads to widen," he noted.
But now depositors are starting to wise up and are beginning to shop around more for better rates with this happening more in the US than the UK, he suggested.
However, Greenwood said ultimately he does deposit beta to increase in the UK and this is reflected in guidance and forecasts, but it should also be remembered that the domestic UK banks retain a big tailwind from their structural hedges, which will reprice upwards over a number of years.
"Consequently, while NIM may have peaked on a sequential quarterly basis in the UK, I see this now stabilising rather than collapsing," he added.
Nonethless, shares in all major banking stock remain firmly in the red. HSBC fell 4.9%, Barclays fell 3.6%, and Lloyds slipped 3.4%.