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The Ratings Game: Signature Bank, Silvergate Capital sustain downgrades due to crypto exposure

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Signature Bank and Silvergate Capital, two financial companies with exposure to the digital currency universe, have seen their share prices fall sharply since cryptocurrency broker FTX blew up nearly one month ago.

Analysts have responded with downgrades of both Signature Bank
SBNY,
+2.40%

and Silvergate Capital
SI,
+3.44%

in recent days.

Neither company directly buys or sells digital currencies, which has insulated them from the volatility in crypto prices. But the pair provides services to the digital currency world as regulated banks.

Signature Bank has been a deposit-holder for digital currencies, but does not lend on digital assets or custody any digital assets. It also offers traditional deposit banking, including cash and treasury management services, to institutional customers.

Silvergate runs the Silvergate Exchange Network, which offers real-time U.S. dollar and euro settlement services between counterparties for crypto exchanges such as Coinbase Global Inc.
COIN,
+4.22%

and Bitstamp.

Signature Bank and Silvergate Capital have chalked up double-digit percentage losses since FTX ran into a cash crunch and filed for bankruptcy on Nov. 11. (See chart)

This week, Signature Bank disclosed plans to limit its digital currency-related deposit exposure to less than 20% of total deposits and run off between $8 billion and $12 billion of deposits in the next several months. Over time, the bank plans to reduce its exposure to under 15% of deposits.

On Wednesday, Raymond James cut its rating on Signature Bank to market perform from strong buy after the lender disclosed plans to diversity its business and limit its exposure to digital currencies.

“While we remain bullish on the bank’s long-term prospects to produce superior loan growth, operating efficiency, and credit metrics, we see near-to intermediate-term headwinds related to its balance sheet initiatives,” analyst David J. Long said in a research note.

The bank’s plan to diversify its business model will likely result in slower growth and net interest margin compression, Long said.

Signature Bank’s largest lending portfolio, capital call lines of credit, “will remain stagnant or potentially decline as it focuses on deposit gathering within its fund banking business,” Long said.

Morgan Stanley analyst Manan Gosalia on Monday downgraded Silvergate Capital to equal weight from overweight amid volatility in the bank’s digital deposit base, which makes up about 23% of its total deposit base.

“As clients withdraw their deposits (either to manage their own liquidity or if theymove to the sidelines until the volatility plays out), Silvergate faces pressure on both their net interest margins (NIM) and net interest income (NII) as they would need to fund deposit outflows with securities sales and more expensive wholesaleborrowing,” Gosalia said.

To be sure, not all analysts are souring on Silvergate. On Tuesday, Wedbush analyst David Chiaverini reiterated its outperform rating on Silvergate.

Chiaverini said a letter from the company explaining its dealings with FTX and trading unit Alameda Research acted in accordance with banking industry practices.

“The burden of the FTX fraud and FTX’s misappropriation of funds is borne by FTX, not Silvergate, in our view,” Chiaverini said.

The letter came after Sen. Elizabeth Warren requested information about its FTX relationship.

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