The Westpac Banking Corp (ASX: WBC) share price is down 1.2% in afternoon trading, having recovered from earlier intraday losses of more than 2.5%.

Shares in the S&P/ASX 200 Index (ASX: XJO) bank stock closed yesterday trading for $21.49 each. They are currently changing hands for $21.23 apiece.

Like the other ASX-listed banks, and indeed bank stocks the world over, the Westpac share price has been under selling pressure since Thursday's close.

Investors have been lightening their holdings of financial shares in the wake of last week's collapse of United States-based SVB Financial Group (NASDAQ: SIVB).

With Westpac shares now trading below $22, is the ASX bank 200 bank a buy?

Is the ASX 200 bank stock a buy?

Financial shares may remain under some short-term selling pressure as investors eye other potential global bank collapses.

But this week's retrace in the Westpac share price to $21.23 could well represent a good buying opportunity.

Indeed, Morgans' analysts are bullish on the stock.

"We view WBC as having the greatest potential for return on equity [ROE] improvement amongst the major banks if its business transformation initiatives prove successful," the analysts note.

Morgans said the sources of that ROE improvement include "improved loan origination and processing capability, cost reductions (including from divestments and cost-out), rapid leverage to higher rates environment, and reduced regulatory credit risk intensity of non-home loan book".

The broker has an add rating on Westpac shares with a $25.80 price target. That's almost 21% above the current share price.

Morgans also has high dividend expectations from the big bank. Its analysts forecast a fully franked FY23 dividend of $1.53 per share.

At the current Westpac share price, that works out to a heady yield of 7.2%.

Now, not everyone is equally bullish on Westpac.

CEO of Fat Prophets Angus Geddes has a hold recommendation on the bank's shares.

However, Geddes noted that Westpac could benefit from further Reserve Bank of Australia rate hikes (courtesy of The Bull):

The bank's mortgage portfolio is delivering higher yields from increasing interest rates. The company's total Australian mortgage portfolio marginally grew between September 2022 and December 2022. We expect the bank's net interest margin to benefit from any further increases in interest rates.

Westpac share price snapshot

As you can see in the chart below, with the past days' losses factored in, the Westpac share price is now down 9% in 2023.

The post Is the Westpac share price a buy below $22? appeared first on The Motley Fool Australia.

The S&P/ASX 200 Index (ASX: XJO) has had a sobering week thus far, to say the least. And it's only Tuesday. At the time of writing, the ASX 200 has shed a nasty 2% so far today. Together with yesterday's loss of 0.5% and Friday's loss of 2.3%, the ASX 200 has now lost around 5.6% of its value over the past week or so.

I guess we knew it couldn't last. The ASX 200 had an absolutely cracking start to 2023 over January and the first part of February. The ASX's flagship index closed out 2022 at 7,038.7 points.

But by early February, the ASX 200 had climbed as high as 7,558 points. That represented a 2023 gain of 7.8%. That's an extraordinary run, considering that is rather close to the average gain ASX 200 shares make in a year, not a month.

Most investors would have been shocked if the Index had continued on that trajectory for the rest of 2023.

Alas, this run seems to have come to a screeching halt over the past few trading days. This dramatic loss of value that we've seen over the past week pulls the ASX 200 back below where it started in 2023.

So all of those healthy gains that we saw over the first month or so of the calendar year have now been wiped out, and then some:

Consider the stubborn nature of the inflation that most economies, including Australia, have been enduring over the past year or so. And consider those rapid-fire interest rate rises we've all witnessed the Reserve Bank of Australia execute every single month for 10 months as well.

Putting these two factors together, it's arguable that investors were due a reality check.

But it has come swiftly and brutally.

Why are ASX 200 shares back to the start of 2023?

The losses investors have seen over the past week or so have clearly been sparked by one event though. That would be the collapse of the US tech-focused bank SVB Financial Group (Silicon Valley Bank). As we've covered extensively here at the Fool, the woes of SVB have set off fears of financial contagion.

These have rattled the markets severely, with most of the ASX 200's losses coming after SVB's woes were made public. ASX banks and tech stocks have been hit hard. As have many others. In fact, the only shares that seem to be benefitting from the current environment are ASX 200 gold stocks.

So until this ruckus with SVB dies down, we can probably expect the extreme volatility we are currently witnessing in the share market to continue. It might be time to put on the proverbial seatbelt.

The post ASX 200 dives 2%, wiping out last of 2023 gains appeared first on The Motley Fool Australia.

S&P/ASX 200 Index (ASX: XJO) bank shares are taking another beating today.

Here's how the big four bank stocks are tracking in midday trading on Tuesday:

Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares are down 2.2%.

National Australia Bank Ltd (ASX: NAB) shares are down 2.4%.

The Westpac Banking Corp (ASX: WBC) share price is down 1.8%.

And Commonwealth Bank of Australia (ASX: CBA) shares are down 1.6%.

Today's losses now see all of the big four ASX 200 bank shares down more than 5% since last Thursday's close.

Why are ASX 200 bank shares falling again today?

The reason, as you're likely aware, is investor angst over financial shares following last week's collapse of United States-based SVB Financial Group (NASDAQ: SIVB), or Silicon Valley Bank if you prefer.

I won't rehash all of the details here.

In short, it came down to a good old-fashioned (or bad old-fashioned) run on what was the 18th largest bank in the US. SVB was heavily dependent on its business with tech companies. And fast-rising interest rates over the past year have seen many of those indebted companies scrambling for cash.

As ever more customers began to withdraw money from SVB, and word got out that the bank was suffering a liquidity crisis, the whole business snowballed towards insolvency.

That's resulted in heavy losses over the past three trading days, not just for ASX 200 bank shares, but for banks the world over.

Regional banks in the US have taken a particular bruising. Yesterday (overnight Aussie time) saw shares in First Republic Bank (NYSE: FRC) crater by 62%.

While the US government is guaranteeing that all of SVB's depositors will see their money back, there are no such guarantees for shareholders.

"The thought process is that the government agencies are willing to protect the depositors, but that seems to be it," said RJ Grant, trading manager at KBW (quoted by Bloomberg). "Based on their actions, it signals that they don't care about the equity of these banks."

The post ASX 200 bank shares punished again on US bank fallout appeared first on The Motley Fool Australia.

The second-largest bank collapse in United States history has been making waves these past few days. As the situation develops, the attention of Australian investors could be turning to our own bank shares within the S&P/ASX 200 Index (ASX: XJO).

Suffering a 'bank run', Silicon Valley Bank — listed as SVB Financial Group (NASDAQ: SIVB) — found itself in the hands of regulators at the end of last week. Today, the Federal Reserve has provided reassurance that all depositors will be made whole through a measure to contain the fallout.

So, could a similar event unfold within our own major banks, or are Aussie banks in a better position?

Why liquidity matters

Firstly, the Silicon Valley Bank debacle, at its core, is a liquidity problem.

When depositors want their money back (e.g. withdraw it and move the money elsewhere), the bank needs to be able to fulfill that request.

Most of the time this isn't an issue as few people are looking to withdraw their money at any given moment. This means the bank can lend your money out in the meantime — earning you and the bank a return in doing so.

However, when everyone wants their money at once, that is when issues can arise. The problem is compounded when that money is tied up in illiquid assets.

It is for this reason that regulation exists, requiring banks to have sufficient capital buffers, especially when under the most challenging plausible conditions. Hence, banks must conduct regular 'stress tests' to evaluate whether they can operate under these theoretical conditions.

The regulations are a little different in the US, but they also require all large 'systemically important' banks to abide by strict regulations including minimum liquidity coverage ratio (LCR), net stable funding ratio (NSFR), etc.

Based on the information available, it seems Silicon Valley Bank may have escaped some requirements due to an increase in the threshold of what is classed as systemically important during the Trump administration.

To gain a greater understanding of the Silicon Valley Bank collapse, you can read more here.

How are ASX 200 bank shares placed?

As we now know, banks need liquid funds at the ready if customers withdraw their money. For Silicon Valley Bank, US$26 billion in available-for-sale securities wasn't enough to cover the outflows.

The continued withdrawals nudged the US bank to start selling its 'held-to-maturity' securities. Those securities were bonds that were estimated to be worth US$15 billion less than cost due to rising interest rates, as noted in the tweet below. As a result, the sale meant Silicon Valley Bank was now realising billions in previously unexpected losses.

This may suggest the bank's true LCR was below the traditionally expected 100% (at least in hindsight). In contrast, all major ASX 200 bank shares touted LCRs far above the required 100% level at the end of December 2022, as shown in the table below.

Furthermore, it is believed that Australian banks hold a far smaller portion of their high-quality liquid assets in tradeable securities than other countries. This might also mean a lower risk of accessing funds with unrealised gains.

Where Aussie major banks differ from Silicon Valley Bank

Another point of difference between Silicon Valley Bank and ASX 200 bank shares are their depositors.

The troubled US bank's customers were predominantly tech companies, some of which were burning through cash to fund operations. A disproportional reliance on a single sector meant the bank's deposits were crippled by the tech pain in 2022.

Major Australian banks are aware of this type of risk. Fortunately, ASX 200 bank shares hold deposits with a diversified base of customers. This should, in theory, drastically reduce the risk of a bank run getting underway in the first place.

The post ASX 200 bank shares: Are they better prepared than Silicon Valley Bank? appeared first on The Motley Fool Australia.

But I'll do my best to let you know what we know about Silicon Valley Bank's collapse.

(And for the record, we're publishing it at 9.50am on Monday morning. So it's what we know, right now!)

Here goes:

So, a US bank collapsed over the weekend.

The bank – Silicon Valley Bank – was reportedly the 18th largest bank in the United States.

And the details, it should be said, remain somewhat sketchy.

The general consensus seems to be that SVB managed to mess up in a way similar to what happened to some non-bank lenders in Australia during the GFC.

That's important, because – at least at the moment – it seems the issue is more like what happened in Australia, than what happened in the US, in the GFC.

And there's a world of difference between those two experiences.

But before we get into that, a few things.

First, there is a lot we don't know about what happened to SVB. It's messy and the future is uncertain. Some of what we think we know might turn out to be completely wrong.

Second, the range of 'what might come next' outcomes is very wide. To be sure, some possible outcomes are more likely than others. But there's no hard and fast way to rule things in or out. Because it's not just SVB, but the impact on the system. More on that in a bit.

And last, some disclosures: SVB was a Motley Fool recommendation, some of our staff owned shares (they probably technically still own the shares, but they're very probably worth nothing), and SVB was one of The Motley Fool's banks.

Right… let's get back to it.

The GFC was caused by a few things happening in succession, but the starting point was that banks made terrible loans to people who should never have received them. Those loans were packaged and sold to others as 'assets'. They were, we can say with certainty, (very) low quality assets.

And when the assets were worth less (and often worthless!) you have a problem.

Here in Australia, we had two non-bank lenders that got themselves into a modicum of difficulty – Wizard and Aussie Home Loans. Their loans were cheaper because they made 30 year loans, funded with rolling short term debt facilities (think: 30, 60 or 90 day funding agreements that rolled over each time they fell due).

If you can roll these over (and over and over) for the length of the mortgage you've issued, you're sweet.

And they made money because those short term borrowings were cheaper than the long term mortgages – and the difference was their margin.

If that's already going over your head, here's an example. These aren't the actual numbers, but here's how to think about it:

If you can borrow money at 2% and lend it out at 3%, you make a 1% margin. If you can't roll over that 2% funding, you need to pay it back, immediately, in full. But the money had been used to offer 30 year mortgages… meaning you can't pay back those loans quickly.

And you have a very big problem.

Not with the quality of the loans, like in the US, but a mismatch on your cash flows.

Now, that's a very simplified example of what happened during the GFC. There were more wrinkles, but it suffices for our purposes.

It seems – again, we don't know for sure – that SVB had a similar problem, but rather than being caught out on the availability of funding, like in the GFC, it was rising rates that may have been responsible.

Rising rates (yields) pushes down the value of long term, low-rate bonds. (If you bought a 10-year US Treasury at 2% in the past, no-one is going to buy it off you at face value because they can buy a newer bond at, say, 3% or 3.5%. That means your bonds are worth less.

You can still hold them until maturity and get your money back, but the accountants require you to recognise the current value of the bond… which is less than it used to be.

And that creates a hole. It's an accounting hole, to be fair, but if SVB wanted to – or had to – sell those bonds sooner rather than later, that accounting hole becomes very real.

Now, one more time: those numbers above are illustrative, not SVB's actual numbers. But hopefully you can see why it might have got itself in trouble.

The good news? The loans themselves seem not to be poor quality loans. And matching the assets and liabilities likely wasn't a problem over time.

But in the short term, they had a problem. A big problem.

And here's where things get ugly.

If, as a depositor, you get a sense that maybe, possibly, your bank might be in trouble, you'd yank out your money.

Remember, banks don't hold liquid cash to repay every depositor straight away – they've lent that money to others, who will repay over a number of years.

So the first depositor gets her money back. So does the second. But, at some point, if every depositor wants their money back at the same time, the bank's vaults run dry.

It doesn't mean the money wouldn't have been there, in time – as loans were repaid, the vaults would slowly refill – but the mismatch is the problem.

And depositors know that. So, once they sniff a problem, they all rush for the exits, not wanting to be the one next in line after the bank's vaults are emptied.

Yes, that's a good old-fashioned 'bank run'.

And the reality – and likelihood of a continuation – of that is what seems to have been SVB's death knell.

And that's why the responsible US government entity – the FDIC – stepped in on Friday.

Now, if the loan book turns out to be a high quality one, depositors may get most of their money back (because if the assets and liabilities can be matched, it's only a question of the timing of cash flows, and other banks will likely be able to take over that function).

And, while editing this piece, the US Fed, FDIC and US Treasury announced that all depositors will get all of their money! I mentioned things are moving quickly!

So, that could be where this ends.

Or not.

Maybe the loans aren't as high-quality as they seem? Or maybe panic takes over anyway.

See, the risk is that, having seen SVB's troubles, depositors at other banks get nervous. "What if it happens to my bank?" they might ask.

And if you think that there might be a bank run at your bank, you might try to take your money out first… causing precisely the thing you're worried about.

You can see how panic can spread, right?

Do I think it'll happen? No.

Could it? Yes.

And that's why financial markets are worried.

We know, from the GFC, what financial contagion can look like. It's… not good.

And the antidote to contagious panic is… confidence.

That's exactly what regulators will be trying to instill, through words and deeds (and is why the FDIC took over SVB, and why they made their announcement this morning).

Phew… are you still with me?

Good. That was a long (and necessarily simplistic) explanation. But I think it gets to the heart of the problem, and its potential causes and solutions.

And again, we're working with imperfect information, so don't take it to the, ahem, bank.

But where to from here?

Well, the ASX will open this morning.

Bank shareholders will be a little nervous, worried about what could happen if panic was to spread.

It could dent confidence across the board, too. Financial contagion would have impacts across the economy, not just the banks.

Yes, I have used a lot of conditional language in this piece. Probably more than ever before.

And that's deliberate. I'm not sitting on the fence, but there's a lot we don't know about what's gone down. And no-one knows what the future holds.

So, I'm giving it to you straight.

What I will do, though, is tell you what I'm doing as a result.

Nothing.

Just as I've done during the dozens and dozens of potential panics, downturns, and crashes, over the last two decades.

Here's the thing, though: Some have actually come to pass.

I didn't sell before the GFC. I didn't sell before the COVID crash.

If I had, I could have saved money.

But if I'd also sold before all of the other things that could have gone wrong – but didn't – I would have lost even more by missing out on the long term gains that the market has enjoyed despite those fears.

Now, I could always change my mind as new evidence comes to pass. I doubt it, but it's possible. Signing blank cheque guarantees for any course of action is silly.

It's very, very unlikely, though.

Because the most likely outcome, historically speaking, is that there's no long term damage for Australian investors.

There mightn't even be any short-term damage either.

So, if you have a good long-term track record of guessing which potential crises come to pass, and which don't (hint: if you've forecast 10 of the last 2 market crashes, your track record isn't good), then be my guest to take a punt this time around, too.

Now, if your portfolio is chock full of financial companies, I reckon you've been taking too much risk for a long time, not just in the shadow of the SVB collapse. You really should think about diversifying anyway, and now might be a good time to think about your portfolio.

Not because of this event, per se, but because it's a good reminder that concentration in a single sector is not a good risk management strategy!

Me? I don't own any banks. I'm not selling anything. And I'm not losing any sleep.

I'm trusting in the long term compounding power of a quality diversified portfolio (and the market itself).

Over the long term, that's been a very good strategy.

Fool on!

The post Understanding the collapse of Silicon Valley Bank appeared first on The Motley Fool Australia.