Insider Monkey
15 Best Bank Stocks to Buy Now According to Hedge Funds
Ramish Cheema
11 min read

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In this piece, we will take a look at the 15 best bank stocks to buy now according to hedge funds. For more bank stocks, head on over to 5 Best Bank Stocks to Buy Now According to Hedge Funds.

These days, anything that anyone can talk about in the finance industry is the collapse of SVB Financial Group (NASDAQ:SIVB). SVB's fate is closely tied to the current situation of the American economy, and before we get to that, it's better to first take a primer on the current situation.

For the banking and stock markets, along with the corporate world in general, the main topic of discussion for the past twelve months now is the Federal Reserve Bank. Known as the Fed, the central bank is responsible for defending the U.S. dollar's purchasing power against inflationary pressures, and after it reduced interest rates to a record low due to the coronavirus pandemic, it has spent the past year in course correction to bring down inflation. This has seen the Fed hike interest rates by a massive 4.25 percentage points since March 16 last year, as it aims to reduce the demand for capital in the market and control the flow of currency to bring down goods and services prices as a consequence.

However, these are not the only consequences of the monetary policy shifts. Another direct result of rising interest rates comes in the form of higher bond yields. For the uninitiated, a bond's yield is its interest payment divided by its price (the interest rate is fixed). So, since the interest payment is fixed for previously issued bonds, if the Fed raises interest rates, the prices of the low rate bonds fall in the market and their yields start to rise. This dynamic sits at the heart of the SVB collapse, as the bank had heavily bought these bonds during the coronavirus pandemic when interest rates were low. What made it buy these bonds? Well, back then, the bank's deposits had soared to a whopping $124 billion from an earlier $62 billion, at a pace that saw it beat much larger rivals such as JPMorgan Chase & Co. (NYSE:JPM), as SVB's client based, mostly consisting of the technology industry, saw its fortunes rise with the technology sector in the wake of the coronavirus pandemic.

This large deposit base was made up of unstable money that belonged to companies and venture capital firms - both of which could withdraw it at a moment's notice and leave SVB without adequate funds to cover its obligations. Since these deposits accrued faster than the bank's customers required money, SVB had to invest them into securities. This investment decision is at the heart of its collapse and the impact of the Fed's rate hike induced yield spiral. At this point in the decision making cycle, banks can choose to either invest the funds into available for sale or held to maturity securities. The former enables the bank to quickly recover the money without taking losses, but the latter requires it to take a haircut if the bonds are sold before their maturity date - a fact that bit SVB hard when the interest rate hike drove down the prices of older bonds since between 2019 and today, while its available for sale portfolio grew by 93%, its held to maturity portfolio grew by a stunning 607%! At the same time, the bank's balance sheet at the end of December 2022 revealed that $86 billion of its $91 billion HTM securities were expected to mature after ten years. Out of these $ 91 billion dollars of HTM securities, the bank booked an unbelievable $15.160 billion in unrealized losses in its last fiscal year. These losses shocked the market when SVB announced that it would sell $2.5 billion in shares to help buffer them, sending its shares tumbling by 60%.

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