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Silicon Valley Bank suspended trading of its shares in the premarket on Friday pending an announcement, as the bank appeared to teeter on the brink of ruin.
Shares of SVB dropped 44% in premarket trading after slumping about 60% in the previous session, when it disclosed plans to raise over $2 billion from investors to counter $1.8 billion in losses from the sale of bonds.
According to a report from CNBC citing sources, the bank on Friday morning was preparing to announce that it was in discussions for a sale — but that its deposits were declining so rapidly that a bailout merger appeared doubtful.
‘The market has to prepare for the possibility that there will not be a sale, and then you can leave it to your own imagination what that means,’ said CNBC anchor David Faber, calling into the network while on vacation.
The bank based in Santa Clara, California is the 18th largest bank in the US with assets of $212 billion as of September, and primarily caters to the tech startups and venture funds of Silicon Valley.
On Thursday night, Founders Fund, the venture capital fund co-founded by Peter Thiel, advised startups to pull their money from Silicon Valley Bank amid concerns about its financial stability, according to Bloomberg.
Theil’s warning, and a similar alert from startup incubator Y Combinator, increased fears that a run on SVB deposits could push the bank into insolvency, if it were unable to meet the demand for customer withdrawals.
Shares of SVB were down 44% in premarket trading, after slumping about 60% in the previous session, with investors concerned about the strength of its balance sheet
On Thursday night, Founders Fund, the venture capital fund co-founded by Peter Thiel (above), advised companies to pull money from Silicon Valley Bank
It came after parent company SVB Financial Group announced a massive equity raise to cover a $1.8 billion loss on the sale of bonds, which the bank was forced to liquidate to cover a steep decline in deposits.
That plan failed to calm investors who worried whether the capital raise would be enough to cover a steep decline in deposits.
SVB said its deposits were dropping faster than it had expected due to increased spending by its clients, largely technology and healthcare startups, as new infusions of venture capital dry up due to rising interest rates.
The situation also raised fears of broader market contagion, after the S&P 500 bank index tumbled more than 6% in its biggest one-day drop in over two years on Thursday.
The four largest US banks — JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup — saw their share prices plunge between 4% and 6%, wiping $52.3 billion from their collective market capitalizations for the day.
In response, billionaire hedge funder Bill Ackman led calls for a government bailout for troubled SVB, which caters to the tech startups of Silicon Valley.
‘The failure of SVB Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,’ wrote Ackman in a tweet.
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‘If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered,’ he added.
SVB revealed on Thursday that it is battling cash burn due to declining deposits from tech startups struggling with a venture capital funding drought.
The company’s assets and deposits had nearly doubled in 2021, and the bank poured much of those funds into US Treasuries and other government bonds.
But as rising interest rates battered the tech startups that the bank primarily serves, declining deposits forced SVB to sell off bond holdings — which in the meantime had plunged in market value due to the rising rate environment.
However, SVB CEO Greg Becker insisted in a letter to investors that the bank remains ‘well-capitalized, with a high-quality, liquid balance sheet and peer-leading capital ratios.’
SVB CEO Greg Becker insisted in a letter to investors that the bank remains ‘well-capitalized, with a high-quality, liquid balance sheet and peer-leading capital ratios’
Billionaire hedge funder Bill Ackman led calls for a government bailout for troubled SVB, which caters to the tech startups of Silicon Valley
The turmoil at SVP sparked a selloff in peers with similar exposure, with San Francisco-headquartered First Republic slumping 16.52% after hitting its lowest level since October 2020.
Declines at the massive big four banks, while smaller in percentage, dragged markets lower, with the 5.4% loss at JPMorgan weighing more than any other stock on the S&P 500.
‘The Silicon Valley raise got everybody nervous about people’s capital levels and what deposits are doing. A lot of institutional investors don’t feel great about owning certain banks right now,’ R.J. Grant, head of trading at Keefe, Bruyette & Woods in New York, told Reuters.
‘It just gets people freaked out because Silicon Valley, historically has been a very strong, well-run bank. If they’re having issues right now, people are wondering what about other banks that are lesser quality and that don’t have the reputation that Silicon Valley Bank has.’
Turmoil at SVB followed Federal Reserve Chair Jerome Powell’s testimony this week, where he said the central bank would likely need to raise interest rates more than expected in response to recent strong inflation data.
The rout at SVB has already triggered investor concerns about the health of other US and European banks.
The S&P 500 bank index dropped 6.6% on Thursday, while a selloff in major European lenders on Friday weighed on the region’s main indexes.
‘Fears about unrealized losses in banks’ bond portfolios, catalyzed by sharp falls in US banks’ share prices yesterday, presents a buying opportunity for European banks in our view,’ Credit Suisse analysts wrote in a note.
Developing story, more to follow.
