Silicon Valley Bank Scrambles to Reassure Clients after 60% Stock Wipe-Out

· Deposits drop faster than forecast -SVB

· Capital raise, PE injection, asset restructure to help

· Stock tumbles 60%, drives other banks sharply lower

SVB Financial Group (SIVB.O) scrambled on Thursday (09.03.2023) to reassure its venture capital clients their money was safe after a capital raise led to its stock collapsing 60% and contributed to wiping out over $80 billion in value from bank shares.

SVB, which does business as Silicon Valley Bank, launched a $1.75 billion share sale on Wednesday to shore up its balance sheet. It said in an investor prospectus it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79% return, far below the current 10-year Treasury yield of around 3.9%.

Investors in SVB's stock fretted over whether the capital raise would be sufficient given the deteriorating fortunes of many technology startups that the bank serves. The company's stock collapsed to its lowest level since 2016, and after the market closed shares slid another 26% in extended trade.

SVB's CEO Gregory Becker has been calling clients to assure them their money with the bank is safe, according to two people familiar with the matter.

Some startups have been advising their founders to pull out their money from SVB as a precautionary measure, the sources added. One of them is Peter Thiel's Founders Fund, according to one of the sources.

One San Francisco-based startup told Reuters they successfully wired all their funds out of SVB on Thursday afternoon, and the funds had appeared in their other bank account as a "pending" incoming wire by 4 pm Pacific Time on Thursday.

However, the Information publication reported the bank told four clients that transfers could be delayed.

SVB did not respond to multiple requests for comment.

A crucial lender for early-stage businesses, SVB is the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022.

"While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted," Becker said in a letter to investors seen by Reuters.

Broader Risks?

The funding winter is a fallout of a relentless increase in borrowing costs by the Federal Reserve over the last year as well as elevated inflation.

The SVB turmoil raised investors' concerns about broader risks in the sector.

Shares of First Republic (FRC.N), a San Francisco-based bank, sank more than 16.5% after hitting the lowest level since October 2020, becoming the second-biggest decliner in the S&P 500 index. Zion Bancorp (ZION.O) dropped more than 12% and the SPDR S&P regional banking ETF (KRE.P) slid 8% after hitting its lowest point since January 2021.

Major U.S. banks were also hit, with Wells Fargo & Co (WFC.N) down 6%, JPMorgan Chase & Co (JPM.N) down 5.4%, Bank of America Corp (BAC.N) 6% lower and Citigroup Inc (C.N) 4% lower.

Thursday's slump evaporated over $80 billion in stock market value from the 18 banks making up the S&P 500 banks index (.SPXBK), including a $22 billion drop in the value of JPMorgan.

In a separate deal, SVB said private equity firm General Atlantic will buy $500 million worth of its shares.

Meanwhile, ratings agency Moody's downgraded the bank's long-term local currency bank deposit.

Natalie Trevithick, head of investment grade credit strategy at investment adviser Payden & Rygel, said the bank's bonds were not doing as poorly as the equity.

"Future performance is going to be news dependent but I don't expect them to properly recover in the near term. It's not quite cheap enough for a lot of buy-the-dip people to come back in," Trevithick said.

Despite the latest concerns, analysts at brokerage firm Wedbush Securities said the bank had received significant proceeds from selling securities and raising capital.

"We do not believe that 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 that funds raised from the stock sale will be re-invested in shorter-term debt and the bank will double its term borrowing to $30 billion.

"We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients," Becker said in the letter.

"When we see a return to balance between venture investment and cash burn – we will be well positioned to accelerate growth and profitability," he said, noting SVB is "well capitalized."

The bank also forecast a "mid-thirties" percentage decline in net interest income this year, larger than the "high teens" drop it forecast seven weeks earlier.

Bank stocks remained under pressure from "risk-off sentiment" and questions about systemic risks to the industry, said John Luke Tyner, a fixed income analyst at Aptus Capital Advisors.