Signature Bank's (SBNY) stock fell more than 9% after the bank reported second-quarter earnings results last week. It reported record earnings for the quarter and beat analyst estimates, but investors were miffed by some deposit trends and a lower growth forecast for the year. Despite strong earnings results for the first half of the year, Signature Bank's stock is down 46%. Is it a buy or a value trap?
Headwinds arise
Signature Bank has built out a lot of different lending verticals recently, but the big change that has really transformed the bank in recent years is its deposit base.
It has built a payments system called Signet that enables multiple parties on the network to transfer funds in real time. The network is particularly useful for crypto trading between institutional traders and crypto exchanges because the U.S. banking system doesn't operate in real time and is closed on the weekends while crypto trades around the clock. Clients of Signet bring lots of non-interest-bearing deposits to the bank with them that the bank doesn't pay any interest on. At the end of the second quarter of this year, nearly 40% of the bank's total deposits were non-interest-bearing.
Signature's crypto business, however, ran into some trouble during the second quarter, as the crypto winter set in and the price of Bitcoin dropped from about $45,000 to less than $20,000 between April 1 and June 30. That led the bank to report a decline of $5.3 billion in non-interest-bearing deposits in the quarter, driven by a $2.4 billion reduction from Signature's digital asset banking team.
Within that $2.4 billion amount, $1.8 billion of the decline came from crypto exchanges, which were pressured in the quarter because trading volume fell and prices of crypto assets faltered.
The other issue in the quarter is that Signature lowered its forecast for loan and securities growth for the full year. The bank had been anticipating interest-earning assets to increase by $4 billion to $7 billion this year. Now, management is only expecting $1 billion to $3 billion of growth, primarily because it wants to be able to fund all of its loan growth with deposits, which may not grow as management had initially expected or may decline further this year.
The broader business is still intact
Despite the struggle with crypto deposits, total deposits at the bank only fell about 4.5%, while the price of Bitcoin dropped a whopping 56%. Things certainly could have been worse. Furthermore, Signet in Q2 added 121 clients to the network, which means there was no shortage of interest in getting involved in crypto trading during the quarter. Signet also saw the highest quarterly transfer volume go through its network in the quarter at $254 billion, another good sign because overall crypto trading volume was lower in the quarter.
Signature's chief executive officer, Joe DePaolo, said that two more crypto exchanges will be starting on the network on July 29 and exchanges can bring large amounts of deposits with them. DePaolo added that the bank is currently working on adding a third exchange as well.
Signature saw solid Q2 loan growth of 8.2%, led by the bank's fund banking team, which provides private equity firms with lines of credit, multifamily commercial real estate, and specialty finance. Signature hired 11 new teams for its fund banking division. While deposit growth might slightly constrain loan growth for the rest of the year, the bank has built out a wide array of lending capabilities including venture banking, healthcare banking, commercial and industrial lending, mortgage finance, and more that should provide Signature with good long-term growth opportunities.
Is it a buy or a value trap?
Signature's deposit business is heavily tied to the crypto industry, and right now we are in a crypto winter. Deposit outflows certainly could have been worse, and the bank is a large beneficiary of rising interest rates, which is why even though there were headwinds in Q2, Signature still generated record earnings in the quarter. It's trading at about 135% to its tangible book value, or net worth, and right around eight times forward earnings, I think this is much too cheap for this high-performing business, which is why I would rate the stock as a buy.
