The March banking failures in the US and Europe jolted markets. Silicon Valley Bank, Signature Bank and Credit Suisse were different stories. But there is a common denominator: they all succumbed to risks created by higher interest rates that ultimately led to a crisis of confidence and rapid bank runs. This was somewhat surprising, because higher interest rates are generally good for banking businesses.
Investor concerns are understandable, and interest-rate risks warrant vigilance. However, major controversies in an industry often prompt an emotional market overreaction, as share prices are pushed down indiscriminately across a sector. In situations like this, investors who identify mispriced shares can uncover undervalued companies that aren’t vulnerable to the same risks with strong long-term return potential.
Dynamics Are Different in Europe
Europe’s retail banking sector is rooted in a resilient business model, in our view. Banks in Europe generally have a much larger retail deposit customer base than their peers in the US, where money market funds are popular vehicles for deposits. As a result, many European lenders source more of their funding from millions of household and business depositors. In our view, these customers represent a highly diversified and sticky base, which reduces concentration risk—the danger of a relatively small number of large clients withdrawing their funds simultaneously.