Is the bursting of the tech bubble finally spilling over to the financial system?
One day after the biggest crypto-focused bank, Silvergate Capital, announced plans to unwind and liquidate after a deposit run effectively killed its core business model, this morning its far larger peer – the parent company of the venerable Silicon Valley Bank, SVB Financial Group – saw its shares plunge the most in more than two decades after the company took “steps to bolster its financial position” that included not only a highly dilutive stock offering but also a panicked asset sale that sparked fears of a liquidity crisis at one of the biggest and original providers of funding to the Venture Capital industry.
The Santa Clara-based company’s shares sank by as much as 60% on Thursday, their biggest decline in the company’s history since going public in 1987.
The slump in the shares to their lowest level since May 2020, came after SVB i) announced a stock offering, ii) sold substantially all of the available-for-sale securities in its portfolio and iii) updated its forecast for the year to include a sharper decline in net interest income.
Put in context, this 60% plunge smashes SIVB back to its lowest since 2016…
“While we view these actions combined with a weaker guide as a clear negative, we do not believe that SIVB is in a liquidity crisis, especially following the significant proceeds” from its sale of securities, Wedbush analyst David Chiaverini wrote as he cut his price target for the company to $200 from $250. Others clearly disagreed and dumped the stock at a pace not seen in a quarter century.
The bank also said it had sold about $21 billion of securities from its portfolio (with a plan to reinvest the proceeds but don’t hold your breath) which will result in an after-tax loss of $1.8 billion for the first quarter. And the cherry on top was SVB’s announcement of equity offerings for $1.25 billion of its common stock and $500 million of securities that represent convertible preferred shares. Additionally, General Atlantic committed to purchase $500 million of common stock, taking the total amount being raised to about $2.25 billion.
It wasn’t immediately clear whether the SIVB liquidity crisis is a function of assets, i.e., loans collateralized by toxic early stage investments that have turned sour… or liabilities, i.e., a good old-fashioned deposit bank run.
“The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures,” the company said in a letter to stakeholders but judging by the stock reaction, nobody believed it.
Multiple analysts have pointed to the high deposit outflows as the catalyst for the liquidity sale, which stoked fears for the banking industry as a whole.
Truist analyst Brandon King says “the increase in balance sheet asset sensitivity should lower the left tail risk to higher interest rates” but expects material value per share dilution from the proposed capital raise.”
“The proceeds from the sale are expected to be reinvested into short duration US treasuries along and hedged with receive floating swaps”
KBW analyst Christopher McGratty says SVB Financial will exit 2023 on a notable lower earnings run rate due (NII and share count), and “it’s possible that 2024E is in the $16.00-$18.00/share range” pending the price of the capital raise
SVB Financial sold $21B of securities to better manage liquidity, in light of accelerated deposit outflows
For the broader sector, “balance sheet management for the group is unquestionably front and center” and it’s possible that banks with “more volatile/flightly deposits” could trade lower on this news. Namely, SBNY and PACW
Evercore ISI analyst John Pancari:
“We favor SIVB’s strategy to shore up liquidity and reposition the balance sheet for increased asset sensitivity, particularly in lieu of the Fed’s more hawkish recent tone”
Management’s updated outlook reveals incrementally weaker deposit dynamics – an output of more resilient than expected client cash burn trends, and the likely catalyst of the move
Jefferies analyst Casey Haire says the balance sheet restructuring and capital raise will boost net interest income and nudge capital ratios higher…
…but also reveal that SVB Financial’s ecosystem is still challenged due to higher for longer interest rates and a surprise pick-up in client cash burn
Also notes the updated 2023 guidance that implies EPS of ~$15 against consensus of $19
Bloomberg Intelligence analyst Herman Chan notes the sale “comes as a surprise considering the bank’s ability to source off-balance-sheet client funds for deposit funding”
To ease the hit, SVB will raise $2.25 billion through common stock, depositary shares and a sale of shares to General Atlantic
In an earlier note, Chan notes that “SVB is sitting on a $15 billion unrealized loss position in its $91 billion held-to-maturity securities portfolio”
As Lake Cornelia Research Management goes on to note, the market implications of this situation are far and wide.
We have a $210+ billion balance sheet (which was a mere 86 billion 2 years ago) that could well have an unwind. It is not a stretch at all to argue that on a current mark to market basis that equity is negative to the tune of of billions (you can be insolvent but liquid and survive as a bank). The hit to the startup eco-system of an impaired or vanquished $SIVB would be substantial.
Beyond the negative duration risk we highlighted (asset side locked at sub 200 bps vs. liability side could increase to 200+), the simple mark to market on the HTM and the $88 billion of HTM and $70 billion of loans is likely far greater than the realized losses on the AFS securities sold at a $1.8 billion loss. The asset growth since 2020 is crazy. Total assets for $SIVB are 50% of $BSC at time of $JPM bid.
We do not believe it would be crazy to see $SIVB at $50 or lower per share when this is all done. The negative earnings loop, and associated balance sheet pressure, of higher deposit rates plus potential for fleeing private bank clients is a dark scenario. There are many scenarios where they will need to raise more capital (dilution to existing holders) and this may not have fixed the situation.
We have rarely seen a situation where buying a bank when it is down 40% on the day to be a good entry…these things can unwind far quicker than people realize. People with facilities with $SIVB may well call them / draw which would further stress liquidity. Just haircutting by 10% the value of the 21-22 growth of held loans and HTM securities alone would be a $5+ billion hit to book equity (which is ~$20 billion post these transactions).
The GA concurrent PIPE we think was the wrong investor. If there was ever a situation to bring in an “Elliot” / “Baupost” / $GS “Prop Desk” it was this one. The balance sheet needs to be seen as credible and diligenced. The earnings and conference call transcripts are farcical; the CEO talks about the VC funding environment and IPO pipeline as opposed to any questions on the balance sheet position. If this plays out adversely, it will be another sad case of a storied franchise that had a great moat..and then woke up during the $ARKK boom and decided to blow it all on a $140+ billion balance sheet growth splurge on a mortgage and loan book yielding a blended ~3.25% with massive correlation risk…which ran right into rising interest rates.
Seeing the preferred stock trade down 15% today should be eye opening to many. It is at $16.60. This is distress debt mafia stuff. Par is $25 for reference.
Lot of digging to do and all the above could well be wrong. Many / most people far smarter than I am on fins (and other things). The point is we don’t think this is over and there are a lot of second and third order implications.
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