Signature Bank reported strong earnings growth Tuesday, but its shares fell sharply after it reported a large drop in deposits — including withdrawals by cryptocurrency businesses it serves.
Total deposits declined 4.6% to $104 billion from March 31 to June 30, the New York bank said in its second-quarter earnings release. About half of the $5.04 billion decline in deposits was among clients of the company’s New York banking teams, and an equal amount was attributable to customers of its digital-assets banking team, according to the release.
Signature shares fell nearly 10% in Tuesday morning trading but rallied somewhat, closing at $187.28, a 4.5% drop from the previous close. At midday Wednesday, the stock was virtually unchanged from Tuesday’s finish.
“We believe the pressure on the stock [Tuesday] is warranted given the deposit outflows,” which were “larger than expected,” Wedbush Securities analysts wrote in a research note Tuesday. However, the analysts kept their “outperform” rating on the stock in part because, they said, the company has ample sources of deposit growth.
The $116 billion-asset Signature
Signature in 2019 became the first Federal Deposit Insurance Corp.-insured institution to launch a blockchain-based digital payments platform. Through that service, called Signet, the bank offered crypto clients traditional banking services, like the ability to hold their deposits, and formed business relationships with some of the largest crypto businesses.
Signature piloted a program to back loans with Bitcoin. But the single $100 million loan it offered under that program has been paid off and it has no crypto-backed loans at the moment, Chief Operating Officer Eric R. Howell said in an earnings conference call Tuesday. Signature is looking to "pause" engagement with crypto loans for now, President and CEO Joseph J. DePaolo said during the call.
Given the 65% decline in the value of Bitcoin, “we're pretty pleased with the fact that we only saw a less than 10% outflow in our deposit base there,” Howell said. “But … it's still probably going to be a headwind for a little while, it's very choppy in that space.”
To be sure, Signature’s net income rose 58% year over year to a record $339 million, and diluted earnings per share were $5.26, exceeding the consensus analysts’ estimate of $5.06. Net interest income grew to $649 million, up 42% from the second quarter of 2021, as the bank beefed up on interest-earning assets and benefited from a higher interest rate environment. The bank declared a cash dividend of $0.56 per share for common shareholders and $12.50 per share for preferred holders of stock.
Shares in Signature Bank fell by 29% in early May as cryptocurrency prices plunged. But after the bank’s chairman and outside analysts sent reassuring messages to investors, the New York bank has regained much of the ground it lost.
The strong profits were largely driven by loan growth — gross loans increased by 32% to $72 billion year over year. During the second quarter, Signature launched its national health care banking and finance group to offer health care lending and deposit services, along with six new lending teams on the West Coast and five in New York.
However, "some of [Signature's] peers are seeing better loan growth going forward because of the fact that commercial and industrial lending has really rebounded across the board and that seems to potentially continue for the industry," said Herman Chan, a senior equity research analyst at Bloomberg Intelligence.
The company increased provisions for credit losses to $4.7 billion, a surprise for analysts who thought it would be less. Chan praised the prudent move as "one of the hallmarks of a good performing bank," but said if the crypto winter of recent months continues, "poor investor sentiment is just going to persist because investors will likely be a bit more cautious" because of "less clarity on the growth trajectory of the company."
However, a CFRA Research note said that Signature’s digital-assets team — which added 121 customers in the second quarter — still has promise and that the company overall continues to grow by adding banking teams.
“While we acknowledge deposit headwinds and a likely slowdown in the adoption of digital assets, we continue to view SBNY's prospects as highly attractive as it continues to add banking teams and innovate more rapidly than peers,” wrote Alexander Yokum, a CFRA analyst.
Still, as the Fed continues to push interest rate increases at a
"The cost to retain those deposits went up faster at Signature than other banks, and they also lost some of those deposits," said Jared Shaw, managing director at Wells Fargo Securities. In light of that, some believe the stock declined because "people are trying to extrapolate what this means for the balance sheet in two or three quarters, not just what's happening right now," he said.
DePaolo, the company’s CEO, sought during the call to put things in broader perspective.
“This was only the second quarter of negative deposit growth in nearly 15 years,” DePaolo said. “Although the deposit environment will remain difficult due to the Fed's recent policy of quantitative tightening, we continue to focus on growth” in mortgages, health care and other areas.
