Net Interest Margin (NIM) - What Happened At Silicon Valley Bank And SVB ETF Exposure

Net interest margin (NIM) is a measure of profitability used to evaluate how much money a financial institution makes from the difference between the interest income it earns on its assets and the interest it pays out to its lenders (such as depositors and bondholders) for its liabilities. In other words, it represents the difference between the interest income earned by a bank or other financial institution and the interest paid out to depositors and other lenders as a percentage of its earning assets, such as loans and securities. A higher net interest margin indicates that the bank or financial institution is earning more income from its assets relative to the interest paid out on its liabilities and is generally considered a positive indicator of financial health and profitability.

Reasons for the demise of Silicon Valley Bank Net Interest Margin Decreased - SVB was invested in long terms bonds at lower interest rates, much of that money was invested when bond yields were 4%+ lower. On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss.

Deposit Outflows - With Interest Rates rising quickly, SVB could not pay competitive interest rates on depository accounts. With current bond yields at near 5% for short term bonds, deposits flowed out of the bank and into short term treasuries.

IPO Market Dead - Silicon Valley Bank provides financial services to a variety of clients, but it primarily focuses on technology and life science companies, venture capitalists, and private equity firms. The IPO market has been dead for the past 16-18 Months and Silicon Valley usually participates in these IPO's with warrants and deposits.

Tight Knit Family - SVB customers were a tight knit family many were connected via the startup world, when word spread within Silicon Valley that the bank was having troubles, a run on the bank occurred and deposits flowed out at an alarming rate. VCs such as Peter Thiel and Union Square Ventures reportedly started to tell their companies to pull their money out of the bank while they could.

ETF Exposure of Silicon Valley Bank - With SVB included in as many as 200 ETF's there have been a host of redemptions in bank ETFs like the XLF over the past month. What is an ETF Redemption or Creation?

An ETF redemption or creation refers to the process by which new shares of an ETF are issued or redeemed in response to demand from investors.

In the creation process, an authorized participant (AP), typically a large financial institution, delivers a basket of underlying securities to the ETF issuer in exchange for newly created ETF shares. The AP then sells these shares to individual investors on a stock exchange.

In the redemption process, an AP returns a basket of underlying securities to the ETF issuer in exchange for ETF shares. The AP can then sell these securities in the market, thereby realizing a profit.

This process helps to ensure that the price of an ETF remains closely tied to the value of the underlying assets. When there is high demand for an ETF, the ETF issuer can create new shares to meet that demand, and when demand is low, the ETF issuer can redeem shares to reduce the supply. This helps to keep the ETF price in line with the value of the underlying assets.

SPDR S&P Regional Banking (KRE) is an ETF that tracks the performance of the S&P Regional Banks Select Industry Index, which includes regional banks from the United States. As of the latest available data, Silicon Valley Bank (SVB) was listed as the second largest holding of KRE, making up 2.34% of the ETF's portfolio. Other top holdings in KRE include Western Alliance Bancorp and East West Bancorp.

The year-to-date performance of KRE as of March 11, 2023, was -9.74%, with a 1-month return of -17.23%. The expense ratio of KRE is 0.35%.

SVB Financial Group SIVB is a holding in SPDR S&P Bank ETF (KBE) with a weight of 1.70% as of the last update. KBE is an exchange-traded fund that seeks to track the performance of the S&P Banks Select Industry Index, which is a subset of the S&P Total Market Index that includes banking companies listed on US exchanges. The ETF invests in large, mid, and small-cap banks, with a focus on regional banks. The top holdings of KBE include Jackson Financial Inc JXN, Voya Financial Inc VOYA, and SVB Financial Group. The performance of KBE is affected by a wide range of factors that impact the banking industry as a whole, such as changes in interest rates, regulatory environment, and economic conditions.

As of the most recent data available, Silicon Valley Bank was a 1.26% holding in the Invesco KBW Bank ETF (KBWB). The top 5 holdings of Invesco KBW Bank ETF KBWB are: Citigroup Inc. C - 9.12%, JPMorgan Chase & Co. JPM - 8.57%, Wells Fargo & Co. WFC - 7.80%, Bank of America Corp. BAC - 7.49%, U.S. Bancorp USB - 5.39%