Buy large cap US bank stocks as there's no evidence of a systemic banking crisis, research firm says

• Investors should treat the collapse of Silicon Valley Bank as an opportunity to buy large cap US bank stocks, according to TS Lombard.
• The investment research firm said it sees no evidence of a systemic banking crisis unfolding.
• "Market participants are now paying more attention to balance sheets, but the official response is enough to prevent contagion," TS Lombard said.

Investors should take advantage of the recent sell-off in large cap US bank stocks and tactically buy shares, according to investment research firm TS Lombard.

In a recent note, the firm said it sees no evidence of a systemic banking crisis despite the recent failures of Silicon Valley Bank, Signature Bank, and Silvergate Capital, as well as the ongoing crisis in confidence of Credit Suisse, which plunged as much as 30% to record lows on Wednesday. 

According to TS Lombard, these are natural effects of the Federal Reserve embarking on an aggressive quantitative tightening policy that has included consistent interest rate hikes and an ongoing reduction of its balance sheet.

"We knew that after a decade of perma low rates and quantitative easing, built-up stress would expose vulnerabilities that feed into the real economy and markets," TS Lombard's Skylar Montgomery wrote. "SVB is the latest victim of rising rates, but the large (i.e. systemically important) banks are not at risk."

The SPDR S&P Banking ETF, which mostly owns large cap US banks, has dropped 23% since the start of March, representing one of its swiftest declines on record. The sell-off continued on Wednesday, with shares of JPMorgan, Bank of America, and Wells Fargo all falling more than 4%. 

According to Montgomery, the sell-off is over done, even if an economic recession does materialize.

"The SVB crisis has meant a significant tightening in financial conditions, which, in effect, is having a similar impact to that of another Fed hike... The SVB crisis raises our conviction in [our recession] call. However, the market reaction in the short term looks to be overdone; we tactically buy US large cap banks," Montgomery said.

Large cap banks have been a beneficiary of the SVB failure, with Bank of America attracting $15 billion in new deposits in a matter of days, while JPMorgan also reportedly received a lot of inbound interest from new clients. And the valuations on large cap bank stocks are not stretched. 

JPMorgan trades at a price-to-earnings ratio of 10.5x, well below its five-year average of 12.1x, while Bank of America trades at price-to-earnings ratio of 8.9x, well below its five-year average of 12.8x. Meanwhile, the S&P 500 currently trades at a price-to-earnings ratio of about 20x.