SVB stock stalled after portfolio move blows up banking

SVB stock (Ticker: SIVB) fell 60% to $106.04 on Thursday and fell as much as 66% in pre-market trading on Friday. Thursday’s decline was the sharpest among companies in the United Arab Emirates

Standard & Poor’s 500,

It was the biggest drop ever.

The sell-off caused traders to take a closer look at all of the banks’ stocks – particularly their deposits – which caused a sell-off

KBW Nasdaq Bank Index

(BKX) is down 7.7%, its worst showing since June 11, 2020, when it fell 9%.

SVB, the parent company of Silicon Valley bank, has enjoyed a rally in 2021 as it has lent to VC-backed startups in tech, life sciences, healthcare, and even Napa Valley wineries, in an age of low interest rates and easy money.

She has fallen on hard times since then. SVB stock is down more than 80% from its late 2021 high as interest rates have risen, boosting the cost of deposits the bank uses to fund loans. The company said in a press release on Wednesday that its recent actions are partly due to expectations of a continued high interest rate environment and partly to lower deposit levels.

Given the current volatile economic environment, venture capital firms have been less willing to fund startups — a problem for SVB, which takes deposits from VC-backed startups that were previously flush with cash. As of February 28, SVB had client funds of $326 billion, down from $341 billion at the end of last year.

“What we’ve learned over the past 12 to 24 months is that in a rapidly rising rate environment, customer deposit dynamics are different than we expected,” Chief Financial Officer Daniel Beck said on a conference call with Bank of America analysts. before the update on Wednesday.

The decline in deposits forced SVB to take drastic measures. After the market closed on Wednesday, SVB said it sold all of the $21 billion worth of securities classified as available-for-sale (AFS), a portfolio made up primarily of US Treasurys and mortgage-backed securities. It said it posted an after-tax loss of $1.8 billion, reported in the first quarter of 2023, as a result. Fixed income securities such as MBS and Treasury debt fall in price as interest rates rise.

The company plans to reinvest the sale proceeds into short-term debt to take advantage of higher interest rates. SVB also said it would raise $2.25 billion, including $500 million from private equity firm General Atlantic and offer $1.25 billion in convertible preference shares and common stock to investors.

“Significantly selling all of our available-for-sale securities will enable us to increase our asset sensitivity, partially stabilize financing costs, better insulate net interest income (NII) and net interest margin (NIM) from the impact of higher interest rates, and enhance profitability,” SVB said.

Selling so-called available-for-sale securities to banks has been a lurking risk in the market since the Federal Reserve began its efforts to raise interest rates to curb inflation last year. Rising inflation forced customers to spend their deposits – a low-cost source of financing for banks. As that dries up, banks are forced to turn to their portfolios of securities to raise capital, but as bond prices fall, banks sell those securities at a loss.

With the broader market losing interest in high-growth stocks, some of those concerns were expected to carry over into the venture capital space. And that’s what they did. “Concern about the slow-recovery venture capital environment has us cautious about SIVB shares and it’s likely to remain a headwind as prices continue to rise,” said Gary Tenner, analyst at DA Davidson. He rates the stock at Neutral and lowers his price target to $200 from $250.

The concerns must remain. Moody’s, for example, downgraded SVB Financial Group (SVB) and its banking subsidiary, Silicon Valley Bank, on Thursday and changed their ratings outlook to negative from stable.

“SVB’s balance sheet restructuring is reallocating its balance sheet towards sensitive assets, which will benefit profitability at the expense of realized losses on investment sales. Moody’s, however, does not anticipate that the environment will
Recovering enough of the SVB to materially improve its profitability, financing and liquidity, Moody’s analysts wrote, prompted today’s action.”

The fear is that other banks will have the same problems, which explains Thursday’s sell-off in the industry. Banks take deposits, which they then use to make loans or buy securities. If their deposits decline, as SVB did, they will be forced to sell assets at a loss.

Some observers believe the fears are exaggerated. SVB had a single funding base, which made life difficult for it when the easy cash for startups ran out. Despite this, the country’s largest banks have more diversified funding sources, which should help insulate them from SVB troubles, according to Wells Fargo Securities analyst Mike Mayo,

“[The] “SIVB moment” is not a complete indicator of the industry but does affect sentiment, May wrote.

Sometimes, though, feelings are all that matters.

Write to Karishma Vanjani at [email protected]