By Michael Elkins
Keefe, Bruyette & Woods (KBW) downgraded Silvergate Capital Corporation (NYSE:SI) to a Market Perform rating (from Outperform) and cut the price target on the stock to $16.00 (from $25.00) as the company’s shares continue to be volatile in the wake of the deleveraging of the crypto industry and FTX bankruptcy fall-out.
Analysts wrote in a note, “As SI's shares have fallen, we have defended the bank's management, operating platform, role within FTX's platform, and strength of their balance sheet. We still feel validated on these positions, as 1) SI has strong operating procedures, particularly around compliance, that had stringent oversight from their primary regulators, 2) we believe social media claims continue to fundamentally misrepresent SI's role and exposure to the FTX organization, and 3) SI survived a significant deposit run in Q4, highlighting the bank's strong liquidity and capital position with cash still expected to be held in excess of client deposits for the near-future. If we take a step back, however, almost two months removed from year-end financials, we have had minimal updates, and the shares are trading at about 1.2x TBV with limited visibility on the bank's sustainable ROE, and while the DTA valuation allowance is significant, it is not likely to be reversed in the next two years. There is a wide range of possible outcomes for SI; and the recovery of the crypto institutional trading market will take time to play-out. Our Market Perform rating reflects increased patience, particularly after the bounce back in the shares off the lows of nearly $10. For investors looking for exposure to higher-growth digital banks, we think more established banking-as-a-service players, such as top-pick CCB, makes more sense from a risk / reward standpoint.”
KBW maintained their estimates, although the degree of difficulty in forecasting SI's deposit balance is the highest since covering the company. Although the analysts note that for every $1 billion of deposit outflow relative to KBW’s $5.5B YE23 assumption, their 2024E goes down -34%.
Shares of SI are down 3.45% in afternoon trading on Wednesday.