Morgan Stanley is bullish on Silvergate ‘Crypto Bank’

While many financial institutions have looked askance at cryptocurrency, Morgan Stanley, the world’s fourth-largest investment bank by revenue, has actively flirted with it.

In a research note published today, Morgan Stanley recommended shares of Silvergate, which provides commercial banking and lending services to crypto firms. Morgan Stanley analyst Ken Zerbe thinks SI stock is heavily undervalued at its current price of $109. According to his calculations, $158 would be more accurate – with a potential of $300, although he acknowledged there was a risk of it falling as low as $40.

Over the past 24 hours, SI’s stock price has risen 6.5%.

“We believe Silvergate should be valued on the basis of its earnings growth (similar to other faster growing financials), rather than being benchmarked against more traditional, slower growing banks, particularly account given its minimal credit risk because its [held-for-investment] loan portfolio is only 6% of earning assets,” Zerbe wrote.

He makes several cases in favor of Silvergate. First, the company’s Silvergate Exchange Network allows customers to deposit funds with the bank and then transfer digital currencies to and from them. Although it does not pay interest to depositors, Morgan Stanley sees this as a positive. It’s just easier for customers to move funds, but it can avoid the scrutiny of securities regulators who have welcomed high-interest lenders like BlockFi and Celsius, not to mention Coinbasewhich scuttled his own Lend project to avoid a standoff with the SEC.

Silvergate does issue Bitcoin-backed loans, however, and has done so over the past year without incurring any losses or needing to liquidate client positions. Morgan Stanley believes demand for loans will increase, but only a small fraction of loans will be held for investment purposes. This is a good thing. “Unlike most other banks, loan growth is not a significant driver of earnings growth (but deposit growth is), which means much less credit risk at Silvergate than most. other banks,” wrote Morgan Stanley.

Although Zerbe noted the risks to cryptocurrency markets, such as regulation and price volatility, this is offset by a boom in demand for crypto services: “Silvergate offers banking investors an almost exclusive way to participate in the rapid growth of the nascent cryptocurrency industry.”

Silvergate should also benefit from its relationship with Facebook’s Project Diem. In May, the Association Diem announcement that Silvergate would be the sole issuer of its stablecoins.

Morgan Stanley has been tilted towards SI since before. In March, he presented his basket of cryptocurrency exposure, which included shares of Silvergate as well as MicroStrategy, Square, Riot Blockchain and Nvidia (but no Tesla).

This all comes on top of Morgan Stanley giving the stock an “overweight” rating, meaning it believes the stock price will do better than its industry peers. As Morgan Stanley puts it, “Silvergate is unlike any other bank we cover, and that could be a very good thing.”


The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.

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