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HomeMarketWall Street Keeps Defending Crypto Bank Silvergate as Its Stock Crumbles.

Wall Street Keeps Defending Crypto Bank Silvergate as Its Stock Crumbles.

Silvergate Capital stock has been caught up in the wider meltdown in crypto this year.

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Dreamstime

Crypto bank
Silvergate Capital
‘s stock has collapsed by 82% this year, wiping out nearly $4 billion in market cap. But you wouldn’t know it on Wall Street, where most analysts continue to rate it a “Buy.”

Shares in Silvergate (ticker: SI) have been hammered by the contagion spreading through crypto due to the bankruptcy of FTX. Silvergate’s stock has lost more than half its value in the last month alone, including an 11% decline on Monday.

It was up 0.35% to $25.99 midday Tuesday.

Silvergate isn’t a pure play on crypto like
Coinbase Global
(COIN). Rather, it is a federally chartered bank with a traditional banking business, interest income, and more than $11 billion of deposits. The company reported net income of $40.6 million in the third quarter, delivering earnings per share of $1.28.

What excites Wall Street is its crypto services business. The heart is the Silvergate Exchange Network (SEN), a service that allows investors to send money to crypto exchanges. Silvergate also rakes in dollar deposits from customers that use it as a bridge between crypto and traditional finance.

That network is a big reason that analysts recommend Silvergate as one of the best and most regulated ways to get exposure to crypto. Seven of nine analysts polled by FactSet rate the stock a Buy, with an average price target of $52.90, more than double recent prices around $26.

Yet the SEN network has seen a sharp fall in volume as tokens and crypto companies collapsed this year. The bankruptcy of FTX raises more concerns about whether volume will return, along with crypto-related deposits and loans.

Silvergate has tried to reassure investors, saying it has minimal direct exposure to FTX.  As of Sept. 30, deposits from digital asset customers totaled $11.9 billion, of which FTX represented less than 10%, CEO Alan Lane said in a statement on Nov. 11.

“Silvergate has no outstanding loans to nor investments in FTX, and FTX isn’t a custodian for Silvergate’s Bitcoin-collateralized SEN Leverage loans,” he added. Loans collateralized by Bitcoin have performed as expected, “with zero losses and no forced liquidations,” he said.

Silvergate on Monday also clarified that its exposure to BlockFi, the recently bankrupt crypto lender, was limited to less than $20 million of total deposits.

Still, even before FTX collapsed, usage of the SEN network was falling. It declined to $112.6 billion in volume in the third quarter, down 41% from the prior quarter. Total deposits at the bank fell to $13.2 billion as of Sept. 30, down from $13.5 billion at the end of June.

The declining fundamentals at the bank don’t appear to be deterring some analysts, however.

“We believe Silvergate shares are very undervalued and that the recent decline in its stock price has been due in part to a widespread lack of understanding of the company, its balance sheet, status as a regulated bank, the SEN and the SEN Leverage program,” BTIG analyst Mark Palmer wrote in a note on Monday, maintaining a Buy rating with a $51 price target on the stock.

Michael Perito at Keefe, Bruyette & Woods also backed up the stock on Monday. Addressing concerns about Silvergate’s exposure to BlockFi, Perito noted that BlockFi “has no creditors that are classified as ‘bank loans,’ and furthermore, Silvergate isn’t listed directly anywhere as a creditor.” He also maintained a Buy on Silvergate stock with a $58 target.

Silvergate had no comment on its exposures to FTX.

What are investors to believe? Wall Street seems to think the bank still has a future in crypto, acting as a regulated entity that will bring in more institutional clients and revenue. FTX is spreading pain but it will end, the thinking goes, and Silvergate will be come out stronger as investors seek the safety of its regulated business.

Yet no “crypto bank,” no matter how resilient, can grow if crypto continues to wither. FTX’s collapse raises existential questions for the industry, including what role centralized players like Silvergate will play moving forward. 

Until those questions are answered, and there is more clarity on both the crypto market and its regulation, Silvergate stock may keep falling through floors.

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

Credit: marketwatch.com

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