A few banks building crypto businesses look like great deals for investors looking for value in the digital asset space.
(symbol: SI) and
(SBNY) reported strong quarterly results last week. It’s a sign that their crypto business is doing well despite weak digital asset markets, but the market doesn’t seem to be reacting.
Silvergate reported institutional digital currency deposits of $14.7 billion in the first quarter, up 130% year-over-year. It said it has added 122 institutional clients to a digital asset exchange network it is building to handle payments, lending and funding for clients such as hedge funds and exchanges, bringing its total at 1,503.
Earnings per share for the quarter were $0.79, beating consensus estimates by 73%. Net interest income – a measure of earnings on loans and other assets – was $50.5 million, up 32% from the prior quarter and beating estimates by 14%.
Silvergate is building other crypto revenue streams, including collateralized Bitcoin loans and a stablecoin infrastructure platform through its acquisition of Diem, a stablecoin project that was started and then shut down by
(FB) and others. Stablecoins are designed to hold a fixed value of $1, acting as proxies for money in crypto trading and lending.
Analyst Steven Alexopoulos came away impressed with Silvergate’s earnings report, reiterating an overweight rating and a $200 target on the stock. Shares traded around $131 on Friday.
Silvergate is “positioned as an indispensable banking partner with many key players in the crypto industry,” he wrote, adding that his stablecoin initiative looks like a “free option” at current valuations.
Silvergate is also sensitive to rising interest rates, which could increase its net interest income. With nearly all of its deposits in non-interest bearing accounts, its balance sheet is “very leverage” to higher short-term rates, Alexopoulos said. A one-percentage-point increase in short-term interest rates should increase net interest income by 60%, he estimated, making the bank far more leveraged at rates than many small-cap lenders. .
“We view SI shares as a bargain at the current valuation,” he wrote, noting that the stock is trading at 18 times estimated 2023 earnings per share, a 23% discount to the
Russell 1000 Growth Index
and a 57% discount on crypto-related stocks as a whole.
Signature Bank also reported strong trends in institutional crypto adoption, adding 160 customers to reach a digital asset customer base of 1,202. It is now the primary bank for four of the top 12 crypto exchanges. And it has a banking partnership with Circle Financial, backer of the
one of the largest stablecoins with $50 billion in circulation.
Institutional client crypto deposits reached $29 billion in the first quarter, representing 27% of Signature’s total, and an increase from $2 billion in crypto deposits at the end of 2019.
The bank reported earnings per share of $5.30 in the quarter, beating consensus forecasts by 23%. Net interest income of $574 million beat forecast by 0.4%.
Signature is also making its balance sheet more rate sensitive and appears to have good credit quality, including a 0.11% write-off rate for non-performing loans. Exposure to commercial real estate in New York could be an overhang on the stock and investor sentiment. But so far, the loan portfolio is doing well, according to Alexopolous, who considers Signature one of his best ideas.
“Once markets better understand the role of the company in banking the crypto economy, as well as [the] growth track ahead, we believe the stock’s current valuation will go firmly into the history books,” he wrote in a note last week, reiterating an overweight rating and price target. of $460. The shares traded at $264 on Friday.
Signature also looks relatively cheap at 12 times consensus forecast for 2022 earnings of $22.33 per share and 10 times 2023 estimates of $27.47. Signature’s price-to-earnings ratio is in line with regional bank stocks, but it is growing faster than most of its competitors, EPS is expected to rise 49% this year and 23% in 2023, according to consensus estimates.
Still, investors don’t seem impressed by all of this. Silvergate is down 12% this year while Signature is down 18%. The weak performance may reflect concerns over a slowdown in crypto prices and institutional adoption of the asset class; increasing regulatory pressures on the crypto industry; and the growing prospect of a recession as the Federal Reserve hikes rates sharply to fight inflation. A recession would likely reduce lending volumes as the economy slows and lead to increased defaults and write-offs.
This skepticism can be accommodated, however, making Banks one of the few crypto stocks that seem reasonably valued.
Write to Daren Fonda at [email protected]