Silicon Valley Bank (SVB) Financial Group (SIVB.O) on Thursday reassured its venture capital clients that their money was safe after raising capital, sending the stock tumbling 60% and helping to wipe out more than $80 billion in bank shares.
SVB, which does business as Silicon Valley Bank, launched a $1.75 billion share sale on Wednesday to bolster its balance sheet. It said in an investor prospectus that it needed the proceeds to plug a $1.8 billion hole in its loss-making bond portfolio, caused mainly by the sale of U.S. bonds. Treasure included. The portfolio returned an average of 1.79%, well below the current 10-year Treasury yield of around 3.9%.
Investors in SVB’s stock were concerned about whether the capital increase would be enough given the deteriorating fortunes of several technology startups the bank has funded. The company’s stock fell to its lowest level since 2016, and shares fell 26% in extended trading after the market closed.
Silicon Valley Bank (SVB) CEO Gregory Baker has been calling customers to reassure them their money is safe at the bank, according to two people familiar with the matter.
Some startups are advising their founders to withdraw money from SVB as a precaution, sources said. One of them is Peter Thiel’s Founders Fund, according to the source.
A San Francisco-based startup told Reuters that they had successfully removed all their funds from SVB on Thursday afternoon, and as of 4 pm Pacific time on Thursday, the funds were “remaining” in their other bank account in the form of an incoming wire.
However, the information publication said the bank told four clients that the transfer might be delayed.
SVB did not respond to multiple requests for comment.
An important lender to early-stage businesses, SVB is the banking partner for nearly half of the US venture-backed technology and healthcare companies listed on stock exchanges in 2022.
“While VC (venture capital) deployments have tracked our expectations, client cash burn increased and increased in February, resulting in lower deposits,” Becker said in a letter to investors seen by Reuters.
broader risks?
The funding winter is the result of high inflation, with the Federal Reserve steadily increasing borrowing costs over the past year.
The SVB turmoil has heightened investor concerns about broader risks in the sector.
Shares of San Francisco-based bank First Republic (FRC.N) sank more than 16.5% after hitting their lowest level since October 2020, becoming the second-biggest loser in the S&P 500 index. Zion Bancorp (ZION.O) fell more than 12% and the SPDR S&P Regional Banking ETF (KRE.P) fell 8% after hitting its lowest level since January 2021.
Major U.S. banks were also hit, with Wells Fargo & Co (WFC.N) down 6%, JPMorgan Chase & Co (JPM.N) down 5.4%, Bank of America Corp (BAC.N) down 6%, and Citigroup Inc. (CN) down 4%.
The stock market value of the 18 banks that make up the S&P 500 Bank Index (.SPXBK) fell by more than $80 billion on Thursday, including a $22 billion drop in JPMorgan’s value.
In a separate deal, SVB said private equity firm General Atlantic would buy $500 million worth of shares.
Meanwhile, rating agency Moody’s downgraded the bank’s long-term local currency bank deposits.
Bank bonds are not performing as badly as equities, said Natalie Trevithick, head of investment grade credit strategy at investment adviser Payden & Rygel.
“Future performance is going to be news dependent but I don’t expect them to properly recover in the near term. It’s not quite cheap enough for a lot of buy-the-dip people to come back in,” Trevithick said.
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Despite the latest concerns, analysts at brokerage firm Wedbush Securities said the bank had significant earnings from securities sales and capital raising.
“We do not believe that SIVB is in a liquidity crisis,” Wedbush analyst David Chiaverini said in a report, referring to the company’s trading symbol.
Positioning for higher rates
Funds raised from the stock sale will be reinvested in short-term debt and the bank will double its term lending to $30 billion, SVB said.
“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients,” Becker said in the letter.
“When we see a return to balance between venture investment and cash burn – we will be well positioned to accelerate growth and profitability,” he said, noting SVB is “well capitalized.”
The bank also forecast a “mid-thirties” drop in net interest income this year, up from a forecast of a “high-teens” drop seven weeks ago.
John Luke Tyner, a fixed income analyst at Aptus Capital Advisors, said bank stocks remained under pressure from “risk-off sentiment” and questions about systemic risks to the industry.
