SVB Financial stock plummets after announcing equity raise, AFS portfolio sale (updated)

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SVB Financial Group (NASDAQ:SIVB) stock plunged 35% in early Thursday trading after the parent of Silicon Valley Bank took investors by surprise by repositioning its balance sheet restructuring and lowering guidance as client cash burn continues amid slowing venture capital deployment.

In response to the Federal Reserve's aggressive tightening policy, the company is repositioning its balance sheet to navigate an environment in which interest rates stay higher for longer. The company said it's increasing its asset sensitivity due to the higher interest rates.

Wedbush analyst David Chiaverini finds the move "interesting" as many peer banks have been reducing asset sensitivity in anticipation of plateauing rates. "SIVB appears to be taking an opposing approach, and is expecting rates to increase and remain higher for longer," he wrote in a note to clients.

After the close on Wednesday, SVB Financial (SIVB) announced that it sold substantially all of its available for sale (AFS) securities portfolio, resulting in an after-tax loss of ~$1.38B in Q1, and plans to offer $1.25B of stock and $500M of preferred depositary shares in public offerings, moves that boosts the company's liquidity.

in a Q1 2023 business update, the company said it expects cash burn to remain elevated for H1 2023, with modest declines in H2 2023. It has reduced its expectations for Q1 average loans to $73B-$75B from its previous view of $74B-$76B and average deposits to $167B-$169B vs. $171B-$175B. Net interest margin is expected to be 1.75%-1.79% compared with its previous outlook of 1.85%-1.95%.

Chiaverini said he believes that credit rating agencies' considering downgrading SIVB "could have been a catalyst behind these moves."

Late on Wednesday, Moody's Investors Service downgraded ratings on SVB Financial (SIVB) and Silicon Valley Bank, though both still remain within investment-grade territory. The bank's long-term local currency bank deposit rating was cut to A1 from Aa3 and its issuer ratings fell to Baa1 from A3. SIVB's local currency senior unsecured and long-term issuer ratings were downgraded to Baa1 from A3. Outlook on the ratings for both the parent and the bank were revised to stable from negative. (Updated at 10:20 AM ET.)

Oppenheimer analyst Chris Kotowski commented in a note: "We remain on the sidelines with regard to SIVB and want to stress that we see it as an outlier in the industry. Other banks have underwater bond portfolios as well, but they generally have lots of retail deposits, which are much less rate-sensitive than SIVB's deposits."

"While we view these actions combined with a weaker guide as a clear negative, we do not believe that SIVB is in a liquidity crisis, especially following the significant proceeds received from the AFS sales, capital raise, and low loan-to-deposit ratio in the mid-40s," the analyst said.

Note that SA's Quant system put a Sell rating on SIVB as of Feb. 16, giving it poor grades in growth, momentum and earnings revisions. By contrast, the average Wall Street analyst rating stands at Buy.

In January, SVB Financial (SIVB) turned in worse-than-expected Q4 results as market volatility and rising interest rates limited growth and drove credit costs higher.