Despite HSBC buying SVB, the Indian Markets fell. More pain ahead? [Fundamental Analysis]

hi everyone welcome to today’s video so on this video I am going to share some critical updates regarding the Silicon Valley Bank crisis and second key point I am going to quickly discuss as to why did the Indian stock market fail today and what does the future prospects look like so the first critical update that you need to be aware of is that Silicon Valley Bank has been acquired at a price of one pound by HSBC so HSBC is one of the world’s foremost banks with a fairly strong balance sheet now since HSBC has acquired

Silicon Valley Bank it means that the end depositors mostly startups and Silicon Valley Banks case they are going to get paid sooner rather than later so this is first critical issue that has been solved due to hsbc’s acquisition now comes the natural question that okay why did they acquire only at one pound is it the fair value this that’s okay so this was almost a defunct asset which is Silicon Valley Bank they went under completely so when HSBC takes over Silicon Valley Bank they also take with it all the problems that come with it right

so therefore the acquisition price has been set at one dollar so this is a very quick point that you need to understand now the second

critical point is that does this mean that the entire crisis is over so not really you need to understand the finer points so let me quickly take you through them so if we work through the fundamentals then two critical parties have been impacted due to Silicon Valley Bank crisis so the first critical party were the depositors these were mostly startups the primary customer base of Silicon Valley Bank are the startup

organizations and again I had released the video yesterday I will link it in the description and comment box please watch it you will understand that critical crisis in very easy to understand terms so I’m not believing that point there so these startups were impacted because their money as depositors got stuck with Silicon Valley Bank so for example uni are retail customers and we deposit our money in ICICI access bank all these different different banks so we are depositing our money and the first category or the most important category for Silicon Valley Bank from a customer

Viewpoint were the startup they had deposited their money now with hsbc’s acquisition these parties are somewhat safe so this is point one that you need to understand the second party that got impacted due to Silicon Valley Bank crisis were the other Banks so for this you need to quickly understand how the banking system works so let me quickly draw out a figure and explain that so when it comes to banking it is very commonly seen that Banks lend money to one another for example Silicon Valley Bank is one important Bank in the US and now

there are different layers of banks in the US for example there are Regional Banks there are large International Banks like HSBC Morgan Stanley all these are big big Banks now what happens is that bank Five bank six might be inter loaning some funds to each other similarly they might be inter loaning money to Silicon Valley Bank Silicon Valley Bank might be inter loaning a lot of amount to other Regional Banks so that is how the entire banking system works not only in the US but also in India now what is the implication of Silicon Valley

Bank crisis so the implications are fairly simple and what ends up happening here is that for example Silicon Valley Bank went under and you need to understand the question as to why did it go under well the reason there was very simple so it had a liquidity problem now what is the meaning of liquidity problem so here you need to understand two terms one is liquidity problem and second is asset quality problem so liquidity problem means that for example real estate right so let’s say that you have a house the cost of that house or

the current market value of that house is one crore Rupee now you need to undertake some medical expenses and your total bill is 20 lakh rupees now if you go in the market and try to liquidate this one crore rupee house fairly quickly you might not end up recovering the entire market value you might only end up getting let’s say 80 lakh rupees because you are doing a quick fire sale so these are called as distressed sales so this represents a type of a liquidity problem not an asset problem per se because if you think

about it here what was the asset the asset was the house and its fair value was at one crore rupee it is because of your circumstances because you did not maintain your money in other bank accounts and you did not maintain liquid savings therefore you have to liquidate that entire house at 80 lakh rupees so similar problem happened with Silicon Valley Bank that they had a liquidity problem not an asset quality problem because the one of the key triggers of the Silicon Valley Bank crisis were mortgaged bags Securities these were 30-year mortgage-backed Securities again I

would urge you to watch my video from yesterday to get a better understanding but these mortgage-backed Securities are blue chip Securities so it’s not as if that they had asset quality problem so I hope this point is clear now what ends up happening in such situation is that at all the parties credit rating agencies they will look or they will start looking at the balance sheet of all these different banks and specially Regional Banks because these are smaller their customer diversification is very low to begin with they have more liquidity oriented concerns also and as

a result of this today a bunch of regional small banks in the US they fell quite aggressively in the stock market so does this mean that small Regional banks are also going to suffer similar fate similar to Silicon Valley Bank the short answer is no but this definitely impacts their operations how exactly because think about it this way that in India we have small Finance Bank like given small Finance Bank equator small Finance Bank who do they lend money to they lend money mostly to small businesses same thing happens in the US that these small

Regional Banks lend a lot of money to small businesses now these small banks are going to become slightly more conservative they think yeah you know what problems so I’m not going to lend out like too much money right now so the credit flow will become slower because all these banks for the next one or two quarters are going to set a lot of cash now this is one of the Prime problems that is happening in the market right now that the lending or the credit flow in the economy is going to slow down further due

to the Silicon Valley Bank crisis and this is a real concern so I hope this first critical principle is clear to everyone now let me just quickly speak about Point number two so as a result of lower credit growth what ends up happening is that people would start believing or at least the investment Community will start believing that you know what because let us just wait and watch and there is a lot of mistrust on banking especially when these type of Crisis blow now fun is being made of Silicon Valley Bank and Forbes especially now

here is our snippet and Forbes recently declared literally like five six days back that Silicon Valley Bank is one of the best banks in America and it has made the Forbes list so these type of media coverages becomes like a laughing joke and now people or the investment Community will think they are Forbes and go number one rating yeah top banking rating they had given and five days later this is the situation so why should we trust the banking sector so there’s a little bit of mistrust that is going now something similar had happened in

2015 2016 time in India that that was a highly localized problem that Indian Banks were facing so everyone started believing that type of story so right now the public perception is against the American Bank so to say especially these small Regional banks that is going to impact the credit flow especially to small businesses and that slows down the American economy because the dependence of American economy on small and mid-sized businesses is very very large so if these small businesses and mid-sized businesses and not getting adequate loans from Regional banks that slows down not only the

American economy but also the world economy at large so this is the second critical point that you need to remember now comes the third and final point that okay and why is the Indian market falling because this looks like a local American problem when for that you need to go back to the Genesis of the entire crisis which has to do with very high interest rate so here is the interest rate chart and you will see that in India the interest rates have gone up quite aggressively in the US the interest rates have gone up

quite aggressively we are hitting almost 10 12 years high in terms of interest rate now whenever interest rate goes High it creates problem in the stock market but a more concerning situation right now is that literally a week back the FED had announced that you know what this inflation problem is not getting tamed to the extent that we would like so we will raise the interest rate even more aggressively in the next meeting but now what has happened is that due to this banking collapse so to say or banking trouble so to say the FED

looks like that they are going to derail their time that we are not going to increase the interest rate quite aggressively now you’ll say that okay this is good news for the market then why is Market acting negatively well because everyone understands right now okay interest rate or increasing the interest rate is actually good for the economy in the mid to long term this needs to be taped inflation is really really high inflation de facto on real terms is High please don’t look at the official number of inflation you tell me whether gas prices have

come down to what extent they have been resent petrol prices onion prices whatever your vegetable bill was it has increased quite aggressively in de facto terms huh CPI data will show you that part Center inflation at six percent it has gone up by but that is not the de facto data how it’s impacting people so cost of living has seriously gone up and therefore fed had to do something called as hard Landing by increasing the interest rate but now it looks like that they will hold their plan so this is creating a little bit of

uncertainty and as a result midterm investors in the market are dropping off further and as a result the Indian stock market also of it so this brings me to the final section that if you’re an investor what you should be doing what you should be considering so number one Silicon Valley banking crisis according to me is over right and with HSBC takeover it is going to get sorted no issues there number two the credit flow for small and mid-sized businesses is going to suffer no doubt about that that is going to lead to lower exports

all across the world third key thing is that our economy was on recovery there was no problem there the world economy was moving in the right direction because hard steps were being taken by Central Bank there is a small glitch that has happened that the interest rate they should have risen but they are not it looks like that they might not rise it so there is a little bit of uncertainty here but please remember that I have presented a slightly negative commentary that does not mean that I am not optimistic about the market I am

100 optimistic about the market this is not a serious serious issue you know the entire Market is going to fall by 10 15 20 something like this it is highly unlikely that this will happen this entire situation will get curtailed my opinion here would be that as we get clarity on the interest it rise or fall the markets will start behaving in a certain fashion right now people are just stopping and watching and rightly so my simple advice to all of you would be that please wait and watch do not sell anything do not buy

anything aggressively in this type of a market just wait and study whatever is going to happen next I hope you enjoyed this conversation if you did do press the like button and I will see you soon

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