SVB Financial Group struggled on Thursday to reassure its venture capital clients that their money was safe after a capital raise caused the stock to plummet 60% and helped bank stocks wipe out over $80 billion in value.
SVB, which does business as Silicon Valley Bank, launched a $1.75 billion stock sale on Wednesday to bolster its balance sheet. An investor prospectus said the proceeds would be needed to plug a $1.8 billion hole created by the sale of a loss-making $21 billion bond portfolio made up primarily of US -Government bonds exist. The portfolio earned it an average yield of 1.79%, well below the current 10-year Treasury yield of about 3.9%.
Investors in SVB stock worried about whether the capital increase would be enough given the deteriorating fortunes of many of the tech startups that the bank serves. Shares of the company plummeted to their lowest level since 2016, and after the close, shares were down another 26% in extended trading.
According to two people familiar with the matter, SVB CEO Gregory Becker has called customers to reassure them their money is safe at the bank.
Some startups have advised their founders to withdraw their money from the SVB as a precaution, the sources added. One of them, according to one of the sources, is Peter Thiel’s Founders Fund.
A San Francisco-based startup told Reuters that it successfully transferred all of its funds from SVB Thursday afternoon and the funds appeared in its other bank account as a “pending” incoming transfer by 4:00 p.m. Pacific time on Thursday.
However, the information release reported that the bank had informed four customers that transfers could be delayed.
SVB did not respond to multiple requests for comment.
As a major lender to early-stage companies, SVB is a banking partner to nearly half of the US venture-backed technology and healthcare companies listing in 2022.
“While VC (venture capital) deployment met our expectations, customer cash burn remained high and continued to increase in February, resulting in lower than forecast deposits,” Becker said in a letter to investors obtained by Reuters.
The funding winter comes as a result of the Federal Reserve’s relentless hike in the cost of borrowing over the past year, as well as elevated inflation.
The SVB turmoil raised concerns among investors about broader risks in the sector.
Shares of First Republic, a San Francisco-based bank, fell more than 16.5% after hitting their lowest since October 2020 and became the second-biggest loser on the S&P 500 index. Zion Bancorp fell more than 12% and the SPDR S&P Regional Banking ETF slipped 8% after hitting its lowest level since January 2021.
Big US banks were also hit, with Wells Fargo & Co down 6%, JPMorgan Chase & Co down 5.4%, Bank of America Corp down 6% and Citigroup Inc down 4%.
Thursday’s plunge wiped out more than $80 billion in market value from the 18 banks that make up the S&P 500 banking index, including a $22 billion loss in value at JPMorgan.
In a separate deal, SVB said private equity firm General Atlantic would buy its stock for $500 million.
Meanwhile, rating agency Moody’s downgraded the bank’s long-term bank deposits in local currency.
Natalie Trevithick, head of investment-grade credit strategy at investment adviser Payden & Rygel, said the bank’s bonds did not fare as badly as its stocks.
“Future performance will depend on the news but I don’t expect them to recover properly anytime soon. It’s not quite cheap enough that a lot of buy-the-dip people are getting back in,” Trevithick said.
Despite recent concerns, analysts at brokerage firm Wedbush Securities said the bank had generated significant proceeds from selling securities and raising capital.
“We do not believe 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
SVB said the funds raised from the share sale will be reinvested in shorter-term debt and the bank will double its borrowings to $30 billion.
“We are taking these actions because we expect our customers to continue to see higher interest rates, pressure on public and private markets, and increased cash burn,” Becker said in the letter.
“If we see a return to the balance between risk investing and cash burn, we will be well positioned to accelerate growth and profitability,” he said, noting that SVB is “well capitalized.”
The bank also forecast a “mid-thirties” percentage drop in net interest income this year, larger than the “high teens” drop it forecast seven weeks earlier.
Bank stocks remained under pressure on “risk aversion” and questions about systemic risk for the industry, said John Luke Tyner, fixed income analyst at Aptus Capital Advisors.