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Hewison Insights

Could an Australian Bank follow in SVB’s footsteps?

Andrew Hewison
Managing Director and Partner
22 Mar 2023

The events of the last two weeks are a sobering, yet timely reminder that investing is not all smooth sailing. While many longer standing Hewison Private Wealth (HPW) clients have experienced volatile markets before, it’s an experience more recent clients may not have had. 

What exactly occurred?

Two banks in the United States have become insolvent, SVB and Signature bank. This means that they did not have enough cash reserves to pay out their customers who wanted to withdraw their funds. 

To be fair, no bank, including those in Australia, ever have sufficient cash available for every deposit holder to withdraw their funds because the chances of this being a reality is next to zero. 

So then, what happened to SVB?

In simple terms, SVB took the deposits from their customers and invested a significant portion in US Govt bonds. Essentially, they lent money to the US Government via the bonds at fixed interest rates, which would be repaid in 5-10 years. As rates went up, the value of these instruments fell as other bonds became more attractive due to higher interest rates.

Eventually the bonds would be repaid at face value, but in the case of SVB, their highly concentrated customer base, mainly Silicon Valley companies, decided they are all wanted their money back at the same time, which forced SVB to begin selling their bond investments at large losses. 

Investment lesson number one – never become a forced seller!

Could this happen to an Australian bank?
  • Highly unlikely. Australian banks operate their businesses by using customer deposits to fund customer loans. Therefore, the interest received on the loans covers the interest payable to deposit holders. This means that their investment, portfolio, in bonds etc, is much smaller than say SVP in the United States. In Australia, their exposure is around about 10%. Where is it with the case of SVB it was closer to 50%. Of total assets. 
  • Another key difference between SVB and the Australian banks is the concentration of their deposit holders. In Australia customer deposits make up 40 to 50% of bank deposits, which tends to be much stickier. SVB was about 5%.  
  • Because Australian banks have so many customers, it makes it much less likely for that amount of people to line up at the bank, and withdraw their money, as opposed to a smaller number of much larger customers, such as those business clients of SVB. 
  • Regulatory oversight in Australia plays a big role in minimising the risk of the Australian banks, having insufficient capital in liquidity to pay out deposit holders. 
As a long-term investor, market volatility must be accepted a fact of life

It’s a reality that every 7-10 years a macro economic shock will occur and send asset values into a tailspin. That said, it doesn’t always impact every asset class the same way, At the same time. Therefore; avoiding such volatility is not a simple case of going to cash and waiting for the storm to clear. Many have tried this approach and almost all have failed. Why? 

  • Often markets will move differently to what we might expect them to. 
  • Even after a market correction, they will often recover much quicker than we think they will. 
  • No one ever rings a bell at the bottom or top of the market, and those trying to pick them very often get left on the side lines thinking they could pick the perfect time to re-enter the market. 
How does Hewison Private Wealth navigate such volatility within client portfolios?

1.We help clients understand that their strategy is designed to cope with volatility, through ownership of quality assets that will fluctuate in value, but typically pay consistent and reliable cash flow to see them through in the short-term. 

2.By accepting that timing the market is not an optimal approach, we maintain the established asset allocation, and rebalance back to it. That means, if one asset class falls in value, we invest back into it and attractive levels, while taking profit from another that holds steady, or outperforms. 

3.We ensure our clients are in control of their investments, hence why on average clients own at least 75% of their investments directly, and not through third party managers. 

4.As an extension of the above point, clients can seize buying opportunities.  

5.Finally, once you understand all points above, it’s critical to turn down the volume of the ‘noise’. It comes thick and fast during times of uncertainty, from the TV, radio and social media. Fear and negativity are designed to keep you tuned in. Learn to ignore it. 

The HPW team understand that no matter how many market corrections we may have experienced with our clients, they can be no less nerve wracking. Psychologically, humans are predisposed to fear portfolio losses more so than feel satisfaction from investment gains.  As always, we are committed to constant communication throughout the good times, and the bad. If you have questions or wish to discuss any aspect of your portfolio strategy, our advice team are here to answer your call.