Bank of America: Brace For Impact

via SeekingAlpha

It took just two days for the whole fallout on SVB Financial Group (SIVB) to go from fundraising announcement to falling into receivership, as its efforts to raise funds went into flames.

According to the Wall Street Journal or WSJ, its book-running manager Goldman Sachs (GS), had lined up a deal worth $95 per share on Thursday afternoon before SIVB fell from grace due to a classic bank run.

Its VC- and startup-focused customers lost confidence in the bank’s ability to remain solvent. Portfolio companies were also advised by VCs to flee, urging them to withdraw their funds and move away from SIVB in a hurry.

In the era of digital banking, customers no longer need to go to the bank to run with their money. As such, the speed of collapse was not seen in modern times, as SIVB called off its fundraising attempt as it sought a buyout.

Not long later, Californian state regulators took control of the bank, appointing the Federal Deposit Insurance Corporation or FDIC as the receiver on Friday. SIVB didn’t have the chance to start Friday’s regular trading session due to a trading halt. As such, the collapse of SIVB has been nothing short of spectacular, as the contagion fears spread to other regional banks, including First Republic Bank (FRC).

Even Wall Street’s leading bank, Bank of America or BofA (NYSE:BAC), wasn’t spared. Market operators were in a broad risk-off mode across financial names. The Financial Select Sector SPDR ETF (XLF) and the KBW Nasdaq Bank Index (BKX) were battered, suffering their worst weekly performance in recent memory.

But why BAC? Notably, BAC fell 16% from its weekly highs to lows before recovering slightly to close the week. It continued the pullback from its February highs as investors assessed the extent of the fallout.

With a reported $2.42T in total assets for the year ended 2022, BAC is in second place behind JPMorgan’s (JPM) $3.2T asset base.

Why were investors so worried about a leading, highly-regulated, well-diversified bank led by a competent management team?

Let’s see. According to BofA’s 10-K, the bank had about $1.2T in commercial credit exposure at the end of 2022. Moreover, that exposure was well-diversified, with only “asset managers and funds” accounting for more than 10% of its $1.2T exposure.

It was also well-diversified across multiple sectors and industries, helping to reduce its concentration risks, as BofA emphasized: “[Our] risk management framework is in place to manage industry concentrations and provide ongoing monitoring.”

We gleaned that software and services accounted for just 2.14% of its exposure. Tech hardware and equipment took up another 2.49%. Pharma and biotech accounted for another 2.18%. Adding these three industries gives us a total exposure of 6.81%.

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