Silicon Valley Bank shares plunge on stock-sale plan to stem cash burn

(Reuters) SVB Financial Group shares fell more than 62% Thursday, a day following a $1.75 Billion share sale by the lender to help shore up its balance sheets and manage declining deposits from startups in need of funds.

Shares suffered their largest loss in 25-years as the bank stated that venture capital funding would be limited in the short term. Chief Executive Greg Becker, however, said that clients’ cash burn increased in February.

Two people familiar with the matter say that Becker called clients to ensure their safety. According to sources, some startups have advised their founders that they withdraw their money from SVB for safety reasons.

SVB is a crucial lender for entrepreneurs in the early stages of their businesses. It was the banking partner for almost half of U.S.-based venture-backed healthcare and technology companies that were listed on stock exchanges in 2022.

“While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker stated this in a letter to investors.

The Federal Reserve’s relentless increase in borrowing costs over the past year and the rise in inflation are the causes of the funding winter.

SVB stock dropped almost 63% during trading on Thursday, just one day after it launched the share sale and lowered its outlook for 2023.

Investors raised concerns about wider sector risks after the SVB crisis.

After hitting its lowest point since October 2020, shares of First Republic, a San Fransisco bank, plunged more than 16.5%, making it the second-largest decliner in S&P 500. Zion Bancorp fell more than 12 percent, while the SPDR S&P regional bank ETF dropped 8%. Its lowest point since January 2021 was reached by Zion Bancorp.

Major U.S. banks were also affected, with Wells Fargo & Co falling 6%, JPMorgan Chase & Co falling 5.4%, Bank of America Corp 6% and Citigroup Inc 4% respectively. 

Thursday’s slump saw over $80 billion disappear in stock market value from 18 banks that make up the S&P 500 bank index. This includes a $22 Billion drop in JPMorgan’s value.

SVB announced that General Atlantic, a private equity firm, will purchase its shares in a separate deal. It is estimated that the transaction will be worth $500 million.

Moody’s Ratings downgraded Moody’s bank’s long-term deposit in local currency.

Natalie Trevithick is the head of investment-grade credit strategy at Payden & Rygel. She said that the bank’s bonds are not performing as well as its equity.

“Future performance is going to be news dependent but I don’t expect them to properly recover in the near term. It’s not quite cheap enough for a lot of buy-the-dip people to come back in,” Trevithick spoke.

Analysts at Wedbush Securities stated that the bank received substantial proceeds from the sale of securities and capital raising.

“We do not believe that SIVB is in a liquidity crisis,” David Chiaverini, Wedbush analyst said this in a report. He was referring specifically to the company’s trading symbols.

California-based SVB had $21 billion of its securities portfolio sold, which would have resulted in an after tax loss of $1.8B in the first quarter.

The bank will double its term borrowings to $30 billion and reinvest the proceeds in short-term debt.

“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients,” Becker said.

“When we see a return to balance between venture investment and cash burn – we will be well positioned to accelerate growth and profitability,” He noted that SVB is “well capitalized”.

The bank also predicted a “mid-thirties” This year’s percentage decline in net income was greater than the “high teens” Drop it forecast seven more weeks in advance

Stocks of banks remain under pressure “risk-off sentiment” John Luke Tyner is a fixed income analyst at Aptus Capital Advisors Fairhope, Alabama. He said that there are questions about systemic risk to the industry.

Reporting by Ananya Mariam Rajesh, Niket Nishant and Tom Westbrook in Bengaluru, Tom Westbrook and Chuck Mikolajczak respectively in Washington, Krystal U, Nupur Anand, and Chuck Mikolajczak respectively in New York; Editing done by Jane Merriman and Sriraj Kalluvila as well as Lananh Nguyen and Deepa Babington.