Silvergate shares post big losses for second straight day as Wall Street reacts to steep drop in deposits

On Jan 6, 2023

By Steve Gelsi

Silvergate draws downgrades from two major investment banks following fourth-quarter warning

Shares of Silvergate Capital Corp. marched sharply lower for the second straight day on Friday on the heels of at least two downgrades of the cryptocurrency bank’s stock as well as one debt-rating cut.

Silvergate Capital’s stock continues to face questions over deposit-funding concerns, along with the suspension of its stablecoin initiative — both of which put into question the company’s ability to generate positive earnings, BofA Securities analysts said Friday. On top of those issues, Silvergate Capital faces regulatory scrutiny of digital currency overall in the wake of the collapse of FTX.

Also read: Crypto regulation: 2 big questions loom in 2023 after a chaotic year for digital assets

Silvergate Capital’s (SI) stock dropped about 11% to $11.20 a share on Friday, after shedding 43% in the previous session. On Wednesday, the stock was trading at about $22 a share.

The bank, based in La Joya, Calif., warned Thursday of an $8 billion, or 68%, drop in deposits from its digital-asset account holders, to about $3.5 billion.

Also read: Cryptocurrency bank Silvergate has lost 68% of its digital deposits. Here’s what we know about its predicament

Key data on the bank’s situation is due on Jan. 17 when it reports fourth-quarter results, including how its securities losses, impairment charges and other items related to the layoffs of 200 employees, or 40% of its total staff, will affect its business.

Analysts gave a Bronx cheer to Silvergate Capital on Friday, with downgrades at JPMorgan Chase and BofA Securities, as well as a debt downgrade at Moody’s Investors Service.

BofA Securities cut its rating on Silvergate Capital to underperform from neutral and drastically reduced its price target to $8 from $37. Analysts at BofA Securities also cut their 2023 earnings outlook for Silvergate to 67 cents a share, below the current consensus of 78 cents a share, according to FactSet data.

“Institutional customers ‘lost confidence’ in the broader crypto ecosystem [and] moved money into U.S. Treasurys,” BofA analyst Brandon Berman said. “Management [is] reluctant to provide guidance (nascent industry, correlations weak), but don’t expect these deposits to go to zero. That said, we don’t believe this risk is off the table.”

JPMorgan analysts downgraded Silvergate Capital to neutral from overweight and cut their price target on the stock to $14 from $33.

Analysts noted that the company’s $4.7 billion reduction in average deposits from digital-asset customers was “well above even the high end of the range” under various stress scenarios.

“While one could argue that the shares remain cheap on the surface, given the wildcards associated with the medium- as well as long-term impacts to the business, we see upside potential being fairly limited until the earnings power of the franchise is better understood,” JPMorgan analysts said.

Moody’s downgraded Silvergate Capital’s long-term issuer rating to B1 from Ba2 and its long-term deposit rating to Ba1 from Baa2.

The downgrades reflect Silvergate Bank’s “significant operating challenges, in particular the profitability, funding, and liquidity risk associated with amplified deposit volatility driven by uncertainty in the cryptocurrency market and the bank’s narrow business model,” Moody’s said.

Also read: FTX collapse isn’t just Coinbase’s problem — it’s also Robinhood’s

-Steve Gelsi

(END) Dow Jones Newswires

01-06-23 1136ET