Daily Management Review

Silicon Valley Bank Is Scrambling To Try And Convince Clients Following A 60% Stock Wipeout


Silicon Valley Bank Is Scrambling To Try And Convince Clients Following A 60% Stock Wipeout
Following a capital raise that caused SVB Financial Group's stock to collapse 60% and contributed to the loss of over $80 billion in value from bank shares, the company scrambled on Thursday to reassure its venture capital clients that their money was safe.
To strengthen its balance sheet, SVB, doing business as Silicon Valley Bank, started a $1.75 billion share sale on Wednesday. It claimed in an investor prospectus that it required the funds to close a $1.8 billion hole left by the sale of a portfolio of bonds worth $21 billion, the majority of which were U.S. Treasury bonds and were losing money. The portfolio was returning an average of 1.79%, which was considerably less than the current yield on the 10-year Treasury note of about 3.9%.
Given the declining fortunes of numerous technology startups that the bank supports, shareholders in SVB's stock worried about whether the capital raise would be adequate. After the market closed, shares of the company fell another 26% in extended trade, dropping to its lowest point since 2016.
According to two people with knowledge of the situation, Gregory Becker, the CEO of SVB, has been calling clients to reassure them that their money is secure with the bank.
According to the sources, some startups have been advising their founders to withdraw their funds from SVB as a precaution. One of the sources says one of them is Peter Thiel's Founders Fund.
One San Francisco-based startup told Reuters that they wired all of their money successfully out of SVB on Thursday afternoon, and by 4 p.m. Pacific Time, the money had appeared in their other bank account as a "pending" incoming wire.
But according to the Information magazine, the bank warned four clients that transfers might be delayed.
There were no comments from SVB.
SVB, a significant early-stage lender, is the banking partner for almost half of the technology and healthcare companies with U.S. venture capital backing that will list on stock markets in 2022.
"While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted," Becker said in a letter to investors seen by Reuters.
The funding winter is a result of both elevated inflation and the Federal Reserve's relentless increase in borrowing costs over the previous year.
Investors' worries about broader risks in the industry increased in response to the SVB turmoil.
First Republic, a bank with headquarters in San Francisco, saw its shares plunge more than 16.5% after reaching their lowest point since October 2020, ranking second among S&P 500 index decliners. After reaching its lowest point since January 2021, Zion Bancorp fell more than 12%, and the SPDR S&P regional banking ETF also declined by 8%.
Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., and Citigroup Inc. all saw declines of 6%, 5.4%, 6%, and 4%, respectively, among the top U.S. banks that were also impacted.
The 18 banks that make up the S&P 500 banks index lost over $80 billion in stock market value on Thursday, including a $22 billion decline in the value of JPMorgan.
Separately, SVB announced that private equity firm General Atlantic would acquire its shares for $500 million.
Moody's downgraded the bank's long-term local currency bank deposit in the meantime.
The bank's bonds aren't performing as poorly as its equity, according to Natalie Trevithick, head of investment grade credit strategy at investment advisor 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.
Despite the most recent worries, analysts at the brokerage Wedbush Securities reported that the bank had made a sizable profit from the sale of securities 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.
SVB stated that the bank will double its term borrowing to $30 billion and reinvest the proceeds from the stock sale in shorter-term debt.
"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 expects a "mid-thirties" percentage drop in net interest income this year, up from a "high teens" drop forecast seven weeks ago.
Bank stocks remained under pressure from "risk-off sentiment" and concerns about systemic risks to the industry, according to Aptus Capital Advisors' John Luke Tyner, a fixed income analyst.