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Silvergate Stock Gets a Downgrade. Wall Street May Be Turning on Crypto Bank.

Bitcoin prices have tumbled this year, and so has Silvergate stock.

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Chris Ratcliffe/Bloomberg

Morgan Stanley
has downgraded
Silvergate Capital,
becoming one of the first big players on Wall Street to express a firmly downbeat view about the “crypto bank,” which has been a darling of analysts despite major losses in the stock price.

Shares in Silvergate (ticker: SI) fell 6.8% in Monday trading, extending a painful run. Risk-sensitive assets in general have lost ground, but businesses linked to cryptocurrencies have been hit harder. The shares are down 83% so far in 2022.

A team of banking analysts led by Manan Gosalia at
Morgan Stanley
(MS) downgraded the bank to Underweight from Equal Weight, saying continued stress in crypto markets may weigh on Silvergate’s ability to make money. Silvergate didn’t immediately respond to a request for comment.

Wall Street has swung to Silvergate’s defense repeatedly this year even as the market has punished the stock. Of nine analysts surveyed by FactSet who cover the company, seven continue to rate Silvergate at Buy. The average target for the stock price is $51.90, implying that the shares will more than double from here.

Morgan Stanley’s is the only bearish rating.

Silvergate is heavily exposed to crypto, though it isn’t as pure a play as
Coinbase Global
(COIN), an exchange for tokens. It is a federally chartered lender with a traditional banking business and more than $11 billion in deposits, but it also operates a growing crypto financial services business.

At the heart of that expanding operation is the Silvergate Exchange Network (SEN), which allows investors such as hedge funds to send money to crypto exchanges. SEN is what Wall Street likes about the stock, though Silvergate also rakes in dollar deposits from customers that use it as a bridge between crypto and traditional finance.

Yet the SEN network has seen a sharp fall in volume as token prices and crypto companies have collapsed this year. The bankruptcy of FTX last month, which sent tokens lower still and made a regulatory crackdown appear more likely, raises more concerns about whether volume will return, along with crypto-related deposits and loans. 

The latter worry is at the heart of Morgan Stanley’s downgrade.

“The ongoing stress in the crypto ecosystem post the FTX collapse drives significant uncertainty on deposit flows at Silvergate in the near term,” the analysts said. They forecast that digital deposits will plunge 60% quarter-over-quarter by the end of December

This puts “significant pressure” on net interest income and margins, which should be a bright spot for Silvergate given that the Federal Reserve has aggressively raised interest rates this year. Higher rates position banks to collect a wider spread between the interest they pay on deposits and what they collect on loans.

“The fallout of the FTX collapse could drive litigation and headline risk across the crypto space,” the team at Morgan Stanley said. “Although the stock is down 80% year-to-date, we prefer other avenues for deployment within our expanded coverage until the risks become clearer.”

Investors watching the repeated bullish calls from other Wall Street firms should take note: Morgan Stanley doesn’t advise buying the dip. They may be the first to flip bearish on Silvergate, but given the challenges crypto faces after FTX’s collapse, Morgan Stanley may not be the last.

Write to Jack Denton at jack.denton@barrons.com

Credit: marketwatch.com

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