Silicon Valley Bank shares plunged 60 per cent on Thursday, a day after launching a $2.25bn stock sale to shore up its balance sheet as it grapples with declining deposits from technology start-ups.
Shares of SVB Financial Group, Silicon Valley Bank’s parent company, registered their biggest-ever decline, wiping $9.6bn from the banking group’s market capitalisation, after it admitted large losses on the sale of securities as it attempted to raise cash.
SVB said on Wednesday it had lost roughly $1.8bn on the sale of about $21bn of securities, which represented about 80 per cent of its securities portfolio marked as available for sale.
The decline sparked contagion among financial stocks more broadly, drawing attention to the potential effect that rising interest rates could have on net interest income at other banks. The four biggest US banks — JPMorgan, Citigroup, Wells Fargo and Bank of America — lost $52.4bn of market value in Thursday trading.
SVB, the banking partner for half of US venture-backed tech and life sciences companies, has suffered from a slowdown in venture capital funding, as well as cash burn at many of its clients and losses on investments it made when rates were at rock-bottom levels.
Chief executive Greg Becker told investors on Wednesday: “While VC deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”
He said the bank had taken action to strengthen its financial position “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses”.
Chris Kotowski, an equity analyst at Oppenheimer, said SVB had “painted themselves into a corner” because of its large exposure to rising rates.
It stems from a decision made at the peak of the tech boom to park $91bn of its deposits into long-dated securities such as mortgage bonds and US Treasuries, which were deemed safe but are now worth $15bn less than when SVB purchased them because the Federal Reserve has increased rates.
Kotowski said SVB was an “outlier” in terms of its vulnerability to rates compared with the rest of the US banking industry.
The US banking industry has $620bn of unrealised losses on securities holdings as a result of rising interest rates, according to the Federal Deposit Insurance Corporation. Its chair Martin Gruenberg said on March 6 that unrealised losses on securities have “meaningfully reduced the reported equity capital of the banking industry”.
Some venture capital firms told the Financial Times they were concerned by the decline in the value of SVB’s shares and were advising some of their portfolio companies to consider withdrawing a portion of their deposits from the lender. However, others said they were not giving that advice to their portfolio companies.
Some venture funds and companies that have reduced their holdings at SVB are opening accounts at two rivals: enterprise bank Series Financial and Mercury, a bank for start-ups backed by Andreessen Horowitz, according to two people with knowledge of the situation.
“I’ve never seen anything like it. We’ve seen much higher customer demand in the last few hours than in the last month,” said Brexton Pham, chief executive of Series Financial.
Shares of the lender continued to decline in after-hours trading, falling more than 20 per cent to below $90 a share.
In the capital raising, SVB said it planned to sell $1.25bn of its common stock to investors and a further $500mn of mandatory convertible preferred shares, which are slightly less dilutive to existing shareholders.
Private equity firm General Atlantic has also agreed to buy $500mn of the bank’s common stock in a separate private transaction, which is contingent on the completion of the stock offering.
Moody’s downgraded SVB’s credit rating on Wednesday, citing “significant change” in the bank’s funding and profitability over a short period of time, suggesting a “higher tolerance for risk in its financial strategy and risk management” than the agency had previously understood.