Silicon Valley Bank tries to reassure its customers after losing 60% in the stock market

By: News Team

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SVB Financial Group is trying to reassure its private equity clients that their money is safe after the announcement of a capital increase sent its shares tumbling 60 percent and helped wipe out more than $80 billion in banking stocks.

SVB, which operates as Silicon Valley Bank, launched a $1.750 billion share sale on Wednesday to bolster its balance sheet.

In a prospectus for investors, the bank said it needs the proceeds to plug a $1.800 billion hole caused by the sale of a $21 billion deficit bond portfolio, made up mainly of U.S. Treasuries.

The portfolio reported an average yield of 1.79%, well below the current 10-year US Treasury yield, which is around 3.9%.

Investors in SVB shares fear the capital increase is insufficient, given the deteriorating fortunes of many tech companies the bank serves.

The company’s shares, which plunged to their lowest level since 2016, fell another 26% after the market closed on electronic platforms.

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

Some startups have advised their founders to withdraw their money from SVB as a precaution, the sources added. One of them is Peter Thiel’s Founders Fund, according to one of the sources.

A San Francisco-based startup told Reuters they successfully pulled all their funds out of SVB on Thursday afternoon, while the funds had appeared in their other bank account as an incoming transfer “pending” at 4 p.m. Pacific time on Thursday.

However, the publication Information said the bank had told four customers that transfers could be delayed.

SVB did not respond to multiple requests for comment from Reuters.

SVB, a crucial bank for early-stage companies, is the banking partner of nearly half of U.S. venture capital-backed tech and healthcare companies listed on the stock exchange in 2022.

“Although the rollout of VC has followed our expectations, customer cash consumption has remained elevated and increased further in February, resulting in lower-than-anticipated deposits,” Becker said in a letter to investors seen by Reuters.

MAJOR RISKS?

The funding hole is a consequence of the Federal Reserve’s relentless rise in borrowing costs over the past year, as well as high inflation.

SVB’s turbulence has increased investor concern about overall risks in the sector.

Shares of First Republic, a San Francisco-based bank, sank more than 16.5 percent after hitting their lowest level since October 2020, becoming the index’s second-largest decline. S&P 500.

Zion Bancorp fell more than 12% and SPDR S&P regional bank ETFs (exchange-traded funds) fell 8%, after touching their lowest point since January 2021.

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

Thursday’s plunge evaporated more than $80 billion in stock market value from the 000 banks that make up the S&P 18 bank index, including a $500 billion drop in JPMorgan’s value.

In a separate deal, SVB said venture capital 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 aren’t doing as poorly as stocks.

“Future performance is going to depend on the news, but I don’t expect it to recover properly in the short term. It’s not cheap enough for a lot of buyers to come back in,” Trevithick said.

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

“We don’t think SIVB is in a liquidity crisis,” Wedbush analyst David Chiaverini said in a report, referring to the company’s stock symbol.

POSITIONING FOR HIGHER RATES

SVB said funds raised from the share sale will be reinvested in shorter-term debt and that the bank will double its term borrowing to $30 billion.

“We are taking these steps because we expect interest rates to continue to rise, public and private markets to come under pressure, and our customers’ cash consumption levels to be elevated,” Becker said in the letter.

“When we see a return to the balance between risk investing and cash consumption – we will be well positioned to accelerate growth and profitability,” he said, noting that SVB is “well capitalized.”

The bank also forecast a percentage decline of around 35% in net interest income this year, greater than the 16-19% drop it forecast seven weeks earlier.

Bank stocks remained under pressure from “risk aversion” and doubts about systemic risks in the sector, said John Luke Tyner, fixed income analyst at Aptus Capital Advisors.

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