Citi says Europe's banks are unlikely to face SVB-like issues and names 3 top picks

Published Tue, Mar 14 20232:04 AM EDT

European banks are unlikely to experience the issues seen at U.S.-based Silicon Valley Bank , according to analysts at investment bank Citi, who named their three top stocks in the sector. SVB's decision to sell $21 billion of bonds at a $1.8 billion loss to shore up its balance sheet due to higher customer withdrawals was among the factors which led to a bank run and, ultimately, its failure . The bonds held by SVB had been losing value since the Federal Reserve began raising rates in early 2022, but the losses were only recognized when sold and revealed last week. In a note to clients on Mar. 12, Citi analysts said there is "very limited read-across" to the European banking sector due to differences in reserve capital and regulatory framework. "The European banks have less deposit concentration, are still seeing relatively healthy deposit flows, operate with large liquidity portfolios, and remain well capitalized," said the analysts led by Andrew Coombs, director of the European banks equity research team at Citi. They pointed out that one of the unique features of SVB's deposit gathering model was its concentration of $175 billion in deposits across just 20 U.S. branches, with a focus on commercial clients. They estimated that 88% of accounts had balances over the $250,000 FDIC insurance limit , and 40% of deposits were concentrated in early-stage technology and life science/healthcare companies. "In Europe we are not aware of any banks with such high deposit concentration risk," the Citi analysts added. European bank stocks to buy Citi analysts are overweight European banks, and said BBVA , Lloyds , Intesa were their "top picks." Analysts at Bank of America have a similar view to Citi, noting that European banks did not assume that deposit inflows would remain stable permanently and did not invest them in long-term bonds. Instead, they chose to build less risky cash deposits, the analysts noted in a note to their clients on Mar. 10. This means that European banks have not experienced a large drawdown in capital from a change in bond values, according to the analysts. Their research cites HSBC , which took over the U.K. arm of SVB , as having seen a meaningful drawdown in capital during the first half of last year but with few ill effects.