Silvergate Capital Corporation stock has been downgraded to ‘Hold’ by analysts at Canaccord Genuity (TSX:CF, LSE:CF) after the crypto-focused US bank delayed the filing of its annual 10K earnings report in a move that saw its share price slump 58% on Thursday.
The analysts also reduced their price target for the company which had exposure to collapsed crypto exchange FTX to $9 from $25.
“Such a notice might generally not be surprising given all that has transpired over the last couple of months,” the analysts wrote in a note to clients. “But in its filing last night, the company disclosed subsequent events that look to have transpired in late January and the month of February that lead us to downgrade the stock to HOLD.”
READ: As Silvergate tanks even further, Microstrategy, Coinbase and others jump ship
The analysts said they continue to believe that Silvergate has been managed as any prudent bank should. Given its success in becoming a key component of financial services infrastructure to the digital assets industry, they said the bank to some degree has become a ‘lightning rod victim’ of circumstances given industry news flow over the last few months.
“In particular, we note that Silvergate fully paid down short-term borrowings it had with the Federal Home Loan Bank (FHLB) of approximately $4.3 billion,” the analysts wrote. "Chartered banks often borrow from the FHLB for short-term liquidity needs. The company likely had cash available to pay down this amount given its year-end cash balance of approximately the same amount.
“Still, having to pay down these short-term but still material borrowings so rapidly is a surprise to us, and we are not sure as to why it occurred either. Silvergate also disclosed that further securities sales occurred in late January and February.”
While the analysts said they were not aware of any chartered bank in US history that survived such a deposit drawdown as Silvergate did post the FTX collapse late last year, they couldn’t be sure as to the implications for the company post the repayment of the FHLB borrowings, which will reduce bank liquidity materially.
“As such, we are taking our rating to HOLD until the dust clears here,” they said. “Given our current lack of information relative to how the FHLB borrowings were repaid (mix between cash on hand and sales of securities), we are not changing our estimates right now. We lower our price target to $9.”
Silvergate's shares declined a further 12% to $5.36 by late Friday morning in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com