The volatility in the digital currency market, courtesy of the collapse of Terra and TerraUSD (UST), has affected the investment proposition of Signature Bank SBNY. Notably, the bank’s shares have plunged 36.3% in the quarter-to-date period, wider than the industry’s fall of 14.1%.
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Despite being a rapidly-growing regional bank, SBNY's share price tumble reflects investors’ changing opinion on virtual currencies. Amid the headwinds in the crypto markets, investors are worried about significant deposit outflow pressure.
Markedly, SBNY became the first FDIC-insured bank with a proprietary blockchain-based digital payments platform, Signet, which was launched in 2019. The platform permits commercial clients to make real-time payments in U.S. dollars. By offering services for virtual currency exchanges and related institutional clients, the company had amassed around $29 billion in crypto deposits (as of the first-quarter end).
While SBNY’s exposure to cryptos made it an attractive investment pick for numerous investors, it seems that crypto jitters are overblown and investors have overlooked its strength in the rapidly growing traditional business.
Ahead of its participation in the 2022 Wells Fargo Financial Services Investor Conference, Signature Bank provided a mid-quarter financial update, wherein the bank noted that it did not have stablecoin administrators that have algorithmic backing or those that do not hold a 1:1 US dollar reserve.
Also, the bank said that deposit balances had not been significantly affected by the developments in the digital asset trading space, indicating that it is not entirely reliant on crypto-related deposits. Investors should note that Signature Bank’s deposit base (excluding digital assets) has grown significantly over the past few years.
From the start of the ongoing quarter until May 13, 2022, core loan balances moved up $1.69 billion. With half of the ongoing quarter still left, this seems encouraging. The improvement in lending activity has been supported by the company’s efforts to expand geographically and add new loan verticals.
In the second quarter, it launched a national lending practice, the Healthcare Banking and Finance team, and onboarded 10 people for the same. Beside this, from the end of first-quarter 2022, the bank onboarded six private client banking teams, including one in New York. It expanded the footprint on the West Coast. Also, two teams were added in Reno, NV, marking its entry into the business-friendly state.
Loan growth acceleration and a rise in bond yields will likely help the bank meet its loan and securities growth target of $4-$7 billion in the second quarter.
However, deposit balances have declined $1.39 billion in the quarter-to-date period. As of Mar 31, 2022,total deposits rose 2.9% sequentially to $109.2 billion. Yet, strong loan growth and a low deposit rise are anticipated to be accretive to the company’s margins.
Also, as of Mar 31, 2022, the company had long-term debt (federal home loan bank borrowings and subordinate debt) of $3.02 billion, which declined in the last few quarters. Its earnings before interest and tax were 16 times the interest expenses and increased for the last few quarters. With a record of consistent earnings, and cash and cash equivalents worth $26.3 billion as of the same date, Signature Bank has a lesser likelihood of default of interest and debt repayments if the economic situation worsens or if it witnesses significant crypto deposit outflows.
To conclude, analysts seem confident about SBNY’s earnings potential. Earnings estimates for the ongoing quarter and 2022 have seen 4.8% and 8% upward revisions, respectively, over the past month. These indicate 39.5% and 46.6% respective year-over-year growth.
SBNY currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Given that more banks, as well as financial institutions, are embracing cryptocurrencies, JPMorgan Chase JPM also recently expanded its crypto exposure by making a “strategic investment” in TRM Labs, a leader in blockchain intelligence. In early March, JPM announced that it would invest in the blockchain analysis firm’s crypto compliance and risk-management technology.
Earlier, JPMorgan announced that it opened a virtual lounge — Onyx lounge — in Decentraland (a virtual world based on blockchain technology), thus, becoming the first bank in the United States to enter the metaverse.
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