What Happened to Silicon Valley Bank?
If you weren’t following the markets on Thursday, you might have missed the utter collapse of the fifteenth-largest bank in the United States. Silicon Valley Bank or the SVB Financial Group (NASDAQ: SIVB) saw its stock fall by more than 60% during trading hours and a further 21% in extended trading. What caused this massive sell-off? It was a perfect storm of events that went from a snowball to an avalanche in the course of a few hours.
Silicon Valley Bank, as its name suggests, was a major funder of venture capital tech and healthcare startups. In fact, it was so influential that it backed nearly half of all of the publicly-traded tech and healthcare companies on the market. Thursday’s sudden collapse was a reminder that the current rate hikes by the Fed are continuing to have an impact on major industries including the financial sector.
In a letter from the CEO Greg Becker, Silicon Valley Bank reported that it would be raising capital in the amount of $2.25 billion via a stock sale. This capital raise is to effectively cover up the losses on a firesale of its $21 billion bond portfolio. It was not properly positioned for the rapid rise in interest rates, and the sale resulted in a loss of $1.8 billion.
Becker insists that SVB is liquid and that it is in no danger of insolvency. This comes even as Peter Thiel has recommended that companies withdraw their money from the bank immediately. Some on Wall Street are suggesting that the bank could be acquired by a larger entity like JPMorgan (NYSE: JPM). Whatever the outcome, it is the second black eye that the financial industry has received this week alone. A coincidence? Or a sign of things to come?
What is in Store for Silicon Valley Bank?
This all took place just a day after crypto-based bank Silvergate Capital (NYSE: SI) announced it would be liquidating its assets. Silvergate’s stock plummeted and lost a further 42% on Thursday. Is this the start of a new global financial crisis? Not so fast.
As many have pointed out, the big banks have taken measures to ensure that another global financial crisis is avoided. For what it's worth, several analysts believe that SVB will pull through and manage to stay in business. Becker pointed at the interest rate hikes as the main reason why SVB’s bond portfolio value dropped so much. It was invested in bonds with a yield of 1.79% compared to the current yield of about 4.71%.
So will SVB survive this meltdown? It’s hard to say. The bank seems to be in better shape than Silvergate Capital and has already secured $500 million from a private equity firm. If you are thinking this might be an opportunity to buy the dip on the stock, I would think twice about it. There isn’t much telling us that the bank will survive this, or at least operate at the same level as it did before. Will companies trust SVB after its poorly planned portfolio was exposed? The stock does not pay a dividend and there is not much upside in holding shares until the dust settles. We could certainly see the further downsides as more details of the story emerge.