When a bank collapses, there is always the risk of some kind of contagion. That's because banks make loans to businesses, serve consumers, employ people to work at the bank, and also use a lot of outside vendors and third parties to help them run their day-to-day business and form longer-term strategies.
One of those vendors that works with a lot of banks is the cloud-banking technology company nCino (NCNO -0.91%), which helps banks in multiple capacities -- whether it's through loan origination systems, automating workflows, or providing analytical tools that can help bankers see trends and find opportunities, all of which can help banks increase efficiency.
But with the sector facing significant pressure and challenges after three U.S. banks collapsed in March and Credit Suisse was forced into an acquisition, it's certainly fair to wonder how nCino's business will hold up during this uncertainty. Let's take a look.
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The impact of SVB and Signature Bank
SVB Financial, the parent company of Silicon Valley Bank, and Signature Bank were two of the banks taken into receivership by the Federal Deposit Insurance Corp. (FDIC). Subsequently, the FDIC sold most of these banks' assets and deposits to other banks to try to soften the blow for the overall banking system and provide some level of continuity for existing customers.
Both banks had been customers of nCino, and the company had previously disclosed that these two banks represented less than 2% of nCino's total revenue in the third and fourth quarters of the fiscal year 2023 (ended on Jan. 31 of this year). nCino does have a diversified customer base composed of 1,850 financial institutions of varying sizes and based in different geographies. Furthermore, the FDIC also said that the bridge banks it established for Silicon Valley Bank and Signature would continue to pay their vendors on time.
Unfortunately for nCino, the FDIC sold most of the assets and deposits of Silicon Valley and Signature to banks that are not customers. As such, the bank is expecting to lose $3.25 million in revenue that it had previously gotten from SVB and Signature. "While we have frequently been the beneficiary of M&A, that was unfortunately not the case in these two specific transactions," nCino's CFO Greg Orenstein said on the company's recent earnings call.
The broader impact
Aside from the obvious impact of losing these two customers, nCino is definitely in for a tougher environment, especially in the near term. That's because banks all over the country are trying to get their ducks in a row and stabilize deposits and overall liquidity. Many smaller and regional banks have likely seen outflows or have had to significantly pay up to keep deposits after what happened to SVB and Signature.
This led to some deals that had been expected to close in Q4 getting pushed out. Furthermore, nCino's management team expects to see longer sales cycles. As one analyst pointed out on the earnings call, it typically takes nCino's sales team two or three quarters to sell its systems and tools to smaller financial institutions, and four to six quarters for the larger ones. nCino's President Josh Glover said he expects deals to get added scrutiny before being approved because banks are under a microscope right now and also may be facing near-term earnings pressure.
Management is also baking in a higher churn rate for its customers, which will impact subscription revenue. It expects to see elevated churn in its business with independent mortgage banks that are struggling due to the higher interest rate environment, which has depressed mortgage activity. Historically, nCino has had a churn rate of 2% or 3%, but in fiscal year 2023 the churn rate was 5% and this year management is using a 6% churn rate for its guidance.
But even after factoring in the longer sales cycles and higher churn rate, management is still guiding for as much as 18% revenue growth in fiscal year 2024.
Will nCino be OK long term?
While there certainly is no shortage of short-term challenges due to the current state of the banking sector, I do expect things to eventually settle down and for nCino's products to once again have strong appeal.
The company has proven that its products can save bankers time, help them process more loan applications faster, find opportunities in their markets, and make banks more efficient overall, which has been and will continue to be an important metric for bank stocks.
Despite these challenges, nCino is still guiding for solid growth and expects to be cash-flow positive this year while continuing to invest in its products and services. nCino can definitely still be a long-term winner because the inherent problem it solves is not going away.
