Silvergate Capital (SI) witnessed worse-than-expected deposit outflows in the fourth quarter and the financial impacts of these outflows will have implications on long-term profitability, J.P. Morgan said in a research report on Friday.
J.P. Morgan downgraded its rating on the stock from overweight to neutral and slashed its price target to $14 from $30. Bank of America downgraded its rating on the crypto bank's shares to underperform, while Canaccord Genuity, Wells Fargo and Morgan Stanley all cut their price targets.
Separately, ratings agency Moody's downgraded Silvergate's long-term deposit rating to Ba1, or junk status, based on the announcement of significantly decreased crypto deposits, large losses to meet its liquidity needs, impairment of technology assets and layoffs.
“These events highlight Silvergate Bank's significant operating challenges, in particular the profitability, funding and liquidity risk associated with amplified deposit volatility driven by uncertainty in the crypto currency market and the bank's narrow business model,” Sadia Nabi, a senior analyst at Moody’s Financial Institutions Group, said.
Shares of Silvergate Capital fell over 10% in premarket trading to $11.21. They plunged 43% on Thursday after the bank released some of its fourth-quarter financial results.
“While the challenging backdrop for the crypto settlement business was a factor in the worse-than-expected results being released, we also believe that concerns voiced by short sellers (on Twitter) likely also contributed to Silvergate’s customers withdrawing deposits from the platform at a greater-than-anticipated level,” J.P. Morgan analysts led by Steven Alexopoulos wrote.
J.P. Morgan says it expects deposit balances to "normalize" to late-2020 levels, but cautions that they could normalize at much lower levels as crypto customers have moved to a “risk-off” position and are sitting on the sidelines.
Still, the bank said it remains “bullish” on blockchain technology.
UPDATE (Jan. 6 14:52 UTC): Added Moody's downgrade and details, as well as that of other investment banks.
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