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Wall Street May Be Losing Its Stomach for Silvergate Stock in Crypto Rout -- Barrons.com

Barron's · 01/06/2023 08:44
By Jack Denton

Long a defender of Silvergate Capital, Wall Street may be losing its stomach for the group that has positioned itself as a key banker for the cryptocurrency industry. Given the stock price has just about halved this week, that pessimism is understandable.

Shares in Silvergate (ticker: SI) plunged 43% on Thursday and were headed a further 11% lower in Friday premarket trading, bringing the stock's performance over the past year to an eye-watering 91% loss.

The wider market is also selling off, but a meltdown in crypto is exacerbating the pain -- more of which could come as cracks continue to spread across the digital asset landscape. November's shocking collapse of crypto exchange FTX -- once a major client of Silvergate -- has been yet another headwind for the bank, with a grim update this week revealing just how much pressure the group is under.

In unaudited preliminary financial statements Thursday, Silvergate revealed that deposits plunged by more than two-thirds in the fourth quarter and that it had to sell assets at discounted prices to remain liquid and process withdrawals. The result was a $718 million loss, which wipes away at least seven years of earnings.

Silvergate didn't immediately respond to a request for comment early Friday.

While some analysts have remained optimistic, though perturbed, the team at J.P. Morgan is having a hard look at Silvergate. The stock was once a darling of Wall Street and touted as one of the best and most regulated ways to play the crypto boom, because Silvergate is a federally chartered lender with a traditional banking business.

"There is no way to sugar coat that what the company released as the preliminary results were far worse than we expected and with near- as well as longer-term implications to the business," analysts led by Steven Alexopoulos at J.P. Morgan wrote in a Friday note.

The group downgraded Silvergate stock to Neutral from Overweight and slashed their target price to $14 from $30. The shares were poised to open below $11.50 on Friday.

Following a call with company management, J.P. Morgan noted that there appears to be a slowdown in institutional clients entering the space -- a gloomy indicator for crypto at large -- and that Silvergate will likely have to sell more securities through this year. Near term, the analysts said the impacts to the business "appear considerable" including a material reduction in tangible book value.

"Over the medium term, it's likely that deposit balances continue to migrate back toward 2020 levels (which was prior to the bull run in crypto prices)," wrote Alexopoulos and his team. "Over the longer term, given a 70% reduction in period-end customer deposits in a single quarter, it's also likely that the company will need to maintain even higher levels of liquidity than in the past, which will impact long-term profitability."

While the stock, after such precipitous declines, might look cheap, investors would do well to be wary.

"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," the J.P. Morgan analysts said.

Write to Jack Denton at jack.denton@barrons.com

(END) Dow Jones Newswires

January 06, 2023 08:44 ET (13:44 GMT)

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