Shares of banking company SVB Financial Group SIVB fell 60% on Thursday over news of an offering and the need to raise capital. The company’s CEO Greg Becker sent a letter citing higher interest rates and elevated cash burn from clients as reasons for the need for capital.
Analysts are reacting to the huge drop in the share price and liquidity concerns moving forward.
The SVB Financial Group Analysts: Raymond James analyst David Long downgraded SVB Financial Group from Outperform to Market Perform and removed the former price target of $375.
Truist analyst Brandon King downgraded the stock from Buy to Hold and lowered the price target from $174 to $100.
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The SVB Financial Group Takeaways: Long downgraded shares of SVB Financial Group with concerns over “worsening cash burn” and “cash burn expectations.”
The analyst said he sees earnings per share dilution from any capital raises and the potential of lower client fund balances.
“Uptick in rates and cash burn changes the narrative,” Long said.
The company announced a $1.25-billion stock offering, a $500-million convertible preferred stock offering and a $500-million private placement.
“We model for a close of the common offering near the Thursday closing price of $106.04, but note that the deal had not priced as of the publishing of this report.”
The analyst sees continued dilution risk with the company having 90% of its HTM portfolio tied to mortgage-backed securities.
“While we are optimistic that level heads will prevail, several media outlets are reporting that certain VC funds are pushing sponsored companies to consider deposit diversification.”
King downgraded the stock as well, citing uncertainty over deposits for the banking company.
“We believe there is too much uncertainty to recommend the stock to investors,” King said. “The stock reaction today is evident of concerns around the bank’s liquidity and the potential for HTM securities sales, which could severely impair tangible capital and profitability.”
The analyst notes investors should wait on the sidelines until there is more clarity for the stock in regards to outflow of deposits and a capital raise.
“We estimate that accelerated deposit outflows increases the odds of further securities sales in the HTM portfolio that has a fair value of $76 billion as of 4Q22 compared to the carrying value of $91 billion.”
The analyst said lower customer confidence in the bank could result in increased deposit outflows.
“A sudden withdrawal of deposits could limit the ability of the bank to tap other liquidity sources to fund withdrawals.”
The analyst said its previous recommendation did not take the risk of withdrawals into account.
“We believe SIVB has enough balance sheet liquidity and access to other liquidity sources to operate as a going concern, if deposit outflows aren’t outsized and too sudden.”
SIVB Price Action: Trading in SVB Financial shares was halted Friday morning.
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