The sovereign investor universe is being pummeled by the turmoil in the trade of banking stocks on global markets, revealing yet again doubts over strategy that had previously been highlighted in crypto-related investments.
Western state-owned investors were exposed to the demise of the Silicon Valley Bank (SVB) and the Signature Bank, which represented biggest US bank collapses since the 2008 financial crisis. SVB’s implosion came after the collapse in the value of its investments in long-dated Treasury bonds, while Signature Bank had significant weight in crypto which represented a quarter of its deposits and had prompted an investigation into money laundering.
Norway's Norges Bank (NBIM) held over US$263 million in Signature Bank and SVB Financial Group and CalPERS had US$78 million exposure. Dutch civil service fund ABP’s investment in SVB of US$490 million slumped to US$184 million by end-September 2022 and US$138 million by the beginning of March due to the slump in share prices, reported IPE. Fortunately for ABP, it had sold a large part of its investments in SVB earlier in 2022. It is also exposed to troubled lender First Republic Bank (FRB), which has seen its share price battered in the aftermath of the SVB bankruptcy and despite a recent recovery, the fund’s stake is still a fraction of the US$210 million reported at end-September.
In neighbouring Sweden, however, the country’s biggest pension fund, Alecta, is preparing to write off an eye-watering US$1.1 billion in holdings in SVB and Signature Bank. It also invested US$915 million in FPB, bringing its exposure to these troubled banks to over US$2 billion – a level that CEO Magnus Billing represents “a big failure” in strategy. Alecta has launched an investigation into whether the “current investment strategy, risk allocation and mandate for asset management are optimal.”
Indeed, the issue of due diligence already arose in relation to the collapse of Celsius Network and FTX in the crypto sector. These disasters caused reputational embarrassment for Singapore’s Temasek and Canadian public pension funds CDPQ and OTPP last year, given the red flags over governance and risk. Arguably, the risks associated with SVB and Signature Bank were also not fully appreciated, particularly the quality of their loan books and a heavy exposure to a relatively narrow range of clients.
The latest turmoil over Credit Suisse is also casting a pall over sovereign investor exposure to the financial sector, particularly decisions made by Gulf funds. Saudi National Bank (SNB) – whose ownership dominated by Saudi Arabia’s Public Investment Fund (PIF) and Hassana Investment Company, a subsidiary of the General Organization of Social Insurance (GOSI) – became an anchor investor in the bank’s US$4.3 billion capital raise which began in October to fund the bank's revamp and restructuring, with a stake of almost 10%. The Qatar Investment Authority (QIA) hiked its stake in Credit Suisse from 5.6% to 6.9% in Q4 2022, becoming the second-biggest shareholder, while NBIM is also a holder of a 1.5% stake.
Investments were made despite the tarnishing of the bank's reputation by a series of scandals, including a prosecution in Switzerland relating to alleged money laundering for a criminal gang. Its risk management has also come into question. In 2021, the bank reported a US$5.5 billion loss due to the impact of the fall of US investment firm Archegos and had to freeze US$10 billion worth of supply chain finance funds linked to insolvent British financier Greensill.
The sell-off in recent weeks came after SNB ruled out any further investment and turbulent trade in banking stocks in the wake of SVB’s collapse. At end-2022, with market capitalization at US$12.04 billion, QIA’s shareholding was worth US$831 million. Having started 2023 with a stock price of more than US$3, the bank’s value nose-dived to under US$2 yesterday, wiping around US$400 million of the value of SNB’s holding, US$280 million off QIA’s stock, and losing NBIM US$60 million.
Credit Suisse shares rebounded sharply on Thursday following the Swiss National Bank’s decision to lend it CHF50 billion (US$54 billion). The Swiss National Bank had said on Wednesday it was willing to provide a liquidity backstop, which helped calm the market and halt the decline in share price – although sovereign investors have not managed to claw back the losses of the past year or so.
The causes of the recent banking collapses - interest rate risk and liquidity risk – have not gone away and the rapid decline of SVB and Signature have heightened concerns of a 2008-style contagion. Such a doomsday scenario means there will be few hiding places for sovereign investors exposed to the banking sector’s turbulence.