Buy the dip in banks as the Silicon Valley Bank crisis is unlikely to spread, Goldman Sachs says

• Investors could take advantage of the bank sell-off, Goldman Sachs wrote in a Thursday note.
• The risk of a broader contagion from smaller regional banks is unlikely, analysts said.
• "We reiterate our overweight recommendation on the sector and would use any large selloff as an opportunity to add risk."

Investors could take advantage of the fallout from the collapse of Silicon Valley Bank, as contagion is unlikely to spread from small regional lenders, Goldman Sachs analysts wrote in a Thursday note.

Shares of Wall Street giants have fallen, and banks like First Republic, Signature Bank and PacWest also plunged in the past week.

In fact, Thursday's sell-off in bank stocks was the third largest of the last 25 years, after 2020's early-COVID crash and the one in August 2011 when the US government lost its AAA debt rating, Goldman analysts said.

However, the reaction in the bond market was far more contained, they added, with debt from large US and foreign banks better behaved compared to their stocks. That sets up a buying opportunity.

"We reiterate our overweight recommendation on the sector and would use any large selloff as an opportunity to add risk," Goldman Sachs said.

Some investors may have already started buying top bank stocks. On Friday, JPMorgan Chase rallied 2.5%, and Wells Fargo edged up 0.56%.

The note listed three points to back up its view. First, the risk of contagion from small to large banks is remote, given that regional lenders account for just 1.5% of the investment grade bond market.

Second, even their small slice of the market is diversified, and is made up of 15 issuers with no single bank responsible for more than 20% of the allocated bonds.

"Lastly, we think the risk that large US or Yankee banks experience a capital or liquidity event driven by assets/liabilities mismatches or concentrated positions on securities portfolios is remote, considering the post-global financial crisis regulatory environment," Goldman said.

The financial meltdown started when SVB reported losses of $1.8 billion from the sale of a $21 billion bond portfolio, which was hit by rising interest rates. Depositors pulled out their money, and SVB's plans to raise more capital failed, resulting in bank regulators closing the firm to limit the crisis.

Meanwhile, RBC analyst Gerard Cassidy has also dismissed worries of impending contagion. In an interview on CNBC, he said SVB had a uniquely high exposure to bonds while just a small portion of its capital consisted of small consumer deposits.

"This bank is different because they don't have low-cost consumer funding like other banks do," he said.