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Silicon Valley Bank's shares have taken a severe beating as an unfolding crisis continues to worsen. On Thursday alone, their stock dropped over 60% in regular trading - wiping out nearly $80 billion worth of value.
SVB's problems stem from heavy deposit runoff that has worsened as it contends with higher interest rates and quantitative tightening. This has put SVB in an unusual predicament.
Shares of Silicon Valley Bank have plunged as the financial crisis unfolds on Wall Street. The tech-driven lender has been forced to sell assets in an attempt to realign its portfolio, while a slowdown in private markets and venture capital puts additional pressure on its balance sheet.
According to a company filing on Wednesday, the lender is facing an acute liquidity crunch that has rendered it unable to service its bond portfolio. Furthermore, they reduced their forecast for 2023 significantly.
Due to this, the bank was obliged to sell off a $21 billion loss-making bond portfolio containing U.S. Treasurys that were yielding an average 1.79% return.
On top of that, the company had to reduce its projected revenue for the second quarter by 2% - an important setback as it decreased its profit outlook, analysts note.
Another issue is the bank's client funds are decreasing faster than anticipated due to a slowdown in fundraising.
That isn't ideal for SVB, which finances some of the world's most innovative businesses such as solar panel provider Sunrun and autonomous construction equipment vendor Built Robotics. That is why investors are encouraging startups to withdraw their money from SVB and move it elsewhere.
The bank's stock, which had been a leader in the venture debt market, is declining as clients spend money at much higher rates than expected.
According to its most recent quarterly report, customers' total cash burn is two times higher than pre-2021 levels.
Cash burns are contributing to SVB's declining deposit levels. That is because some of SVB's startup clients have been moving their deposits to larger banks or using other funding sources such as bank lines of credit that aren't insured by FDIC insurance.
That can be disastrous for a company with historically strong liquidity. Not only is this bad for any business, but especially damaging to banks that depend on having an intact balance sheet to weather tough economic periods.
Silicon Valley Bank's shares have plunged 60% in regular trading this year, an incredible decline that could see the company go under as investors flee its stock which has lost two-thirds of its value in one year.
On Thursday, shares of Silicon Valley Bank experienced a sharp decline of more than 60% during regular trading, reaching a new 52-week low after the lender cut guidance and initiated a capital raise. This sell-off spread throughout the entire banking sector as investors worried that issues at SVB might influence other growth-oriented institutions.
Investors were particularly worried about the effects on SVB, a lender heavily exposed to tech startups and venture capital firms. It boasts an extensive network of venture firms including Sequoia and Andreessen Horoo; in fact, it does business with more than 50% of all U.S. venture-backed companies according to Crunchbase data.
The bank serves a variety of businesses, such as high-tech manufacturers and healthcare organizations. Unfortunately, its reliance on those customers, who have been burning through cash in the past year, has caused deposit levels to plummet - sending shockwaves through the entire banking sector and even taking down other California-based lenders like First Republic.
Analysts report SVB is in the midst of a "funding winter," in which higher borrowing costs and rising inflation make it harder for startups to secure new capital. As a result, deposits at the bank have declined, and venture capitalists are less willing to sign large checks due to uncertainty regarding when the economy will recover.
SVB is an essential lender for early-stage technology and healthcare businesses, serving nearly half of U.S. venture-backed firms that plan to list on stock markets by 2022.
On Wednesday, the bank cut its guidance for the current fiscal year due to an increased level of client cash burn and declines in venture funding. That, combined with a $2.3 billion capital raise and $1.8 billion loss from selling securities holdings, sent shares plunging, leading to a 23% drop in after-hours trading.
Meanwhile, SVB Financial Group, the parent company of SVB Bank, reduced its ratings with ratings agency Moody's and downgraded its long-term local currency bank deposit from A3 to Baa1. These ratings reflect the potential risk of a recession in the banking sector that could negatively affect SVB and its subsidiary SVB Bank.
Silicon Valley Bank?s shares have plunged 60% in regular trading and 21% after-hours due to a $1.8 billion loss on securities sales, the repositioning of their balance sheet, and declining customer deposits - signaling an impending crisis for the bank. Fearing that Silicon Valley Bank, which works with about half of all venture-backed companies, might soon collapse and be acquired by a rival, investors have become alarmed by this downward spiral in its stock price.
On a Thursday call from SVB CEO Greg Becker, clients were encouraged to remain calm as the bank appeared not to be in any imminent danger of failing. On Twitter however, some founders and investors called for startups to pull their funds from the bank as they felt its reputation as an honest financial partner was at risk.
Becker wrote to investors in a letter that while venture capital investments have been tracking expectations, the mismatch between client cash burn and investment spending has caused lower deposits than anticipated. This has caused what economists refer to as a "funding winter," an extended period of low funding levels which has driven up loan costs and caused SVB's ratio of deposits to loans to drop below 43%.
On Thursday, prominent venture capital firms such as Founders Fund, Coatue Management and Union Square Ventures advised their portfolio companies to withdraw cash from the bank due to uncertainty over its long-term viability, according to those familiar with the matter.
Other prominent VC firms, including Peter Thiel's Founders Fund and Canaan, also advised their portfolio companies to withdraw cash from SVB. However, they cautioned that if many did so it could exacerbate the mismatch in fund flows between deposits and withdrawals, further straining SVB's balance sheets.
As word of the crisis spread, SVB's online banking and mobile services were unavailable for business customers. Sunny Juneja from Canopy Analytics - a tech firm that uses data to assist real estate developers find properties for sale - attempted to move his cash out of SVB but couldn't access his account, ultimately having to switch it over to another bank.
Companies on the stock market reward shareholders through dividends and buybacks. Dividends are often seen as inefficient rewards for investors, while buybacks help increase the value of a company's shares.
Investors typically view buybacks as positive signs when they suggest that a company believes its share price to be undervalued. They may also suggest management is confident in the company's future and believes its stock will appreciate in value over time.
Many companies have an incentive to repurchase their own shares, as it allows them to return cash to shareholders. Repurchasing stock helps maintain the capital ratios of a firm and may make it more attractive for investors to provide new equity or debt financing in the future.
Another advantage of buying back shares is that it reduces a company's floating share count. This allows the business to earn higher earnings per share when it goes public, since there will be fewer shares on the market than before the buyback. For investors seeking higher returns through dividend payments, buying back shares could mean paying less in dividends.
However, it's essential to be aware that buybacks can sometimes have negative repercussions for a company's share prices. They tend to be expensive to execute and may fail to use cash effectively, which could eventually hurt shares in the long run.
Samsonite, for instance, which bought back a significant number of its shares last year, saw its share price decline by 50% once the tender offer was completed. This occurred because investors weren't convinced that such an extensive purchase of stock was justified by the company's performance.
At the height of the financial crisis, SVB had been investing in low-yielding securities. When interest rates started to rise, its investments lost money. To cover losses on its portfolio, it had to sell a portion of its bonds; as a result, investors began doubting its prospects and shares experienced an extensive decline.