If you signed on the dotted line and bought shares of Signature Bank (NASDAQ:SBNY) despite the risks involved, you’re in a tough position right now. I am bearish on SBNY stock (although it has been halted), even though the financial sector overall should remain intact through the current crisis.
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Signature Bank is, or maybe I should say, was, a large New York-headquartered bank. Chances are pretty good that you didn’t have an account at Signature Bank, as it catered mainly to commercial-level and private-equity investors.
There’s nothing wrong with that, but Signature Bank has a problem. As we’ll discover, Signature Bank didn’t take risk mitigation seriously enough. Consequently, SBNY stockholders could end up paying the price for the company’s lack of judgment. Even if you didn’t hold a position in the stock, you can still consider how Signature Bank got into trouble and adjust your own investment strategy accordingly.
Signature Bank Seemed Fine, but There Were Underlying Issues
On the surface, Signature Bank seemed fine just a few weeks ago. Financial traders who weren’t careful might have asked, “What could possibly go wrong?” As we’re finding out now, though, a lot went wrong with Signature Bank.
Signature Bank appeared to check all of the right boxes. The company beat quarterly consensus EPS estimates on a regular basis (albeit not in 2022’s fourth quarter). Furthermore, Signature Bank demonstrated substantial net income growth from 2020 to 2021 and then again in 2022.
So far, so good. Here’s where things get complicated, though. Signature Bank is known as a cryptocurrency-friendly bank. That’s fine if everything is done in moderation. However, “digital asset-related deposits” comprised 20% of Signature Bank’s total deposits at the end of 2022. That’s a heavy reliance on cryptocurrency for a bank, and if you remember what happened to crypto prices in 2022, you can probably predict the ending to this unfortunate story.
It’s also worth noting that, on March 1 of this year, KPMG LLP signed off on Signature Bank’s audit, giving Signature a clean bill of financial health. This happened even though, as the Wall Street Journal reports, “A large amount of [Signature Bank’s] deposits were uninsured.” It just goes to show that you have to conduct your own due diligence on a company; don’t just put your faith in someone else’s opinion.
A Domino Effect of Problems Caused the Downfall of Signature Bank
Just to understand the scope of the problem with Signature Bank, consider this. According to D.A. Davidson analyst Gary Tenner, around 90% of Signature Bank’s deposits were uninsured. So, all it took was a market decline and an SVB Financial (NASDAQ:SIVB) collapse, and the next thing you know, there was a domino effect as anxious investors attempted to withdraw their deposits.
As Signature Bank concurrently saw its net worth and reputation plummet, some onlookers might have assumed that some financial whale would buy Signature Bank’s assets at a discount, thereby saving the company from ruin. As of right now, however, there haven’t been any confirmed buyers. JPMorgan (NYSE:JPM) analyst Vivek Juneja posits that Signature Bank’s “ties to the crypto industry” may have reduced the company’s appeal to other banks that might otherwise have considered a merger.
Thus, since customers’ funds were at risk, regulators had little choice but to get involved. On March 12, in order to protect the failed bank’s depositors, the New York Department of Financial Services took possession of Signature Bank. Meanwhile, as the Wall Street Journal states, “KPMG’s audit work likely will be scrutinized by regulators” — and rightly so, as the auditors themselves ought to be audited from time to time.
Is SBNY Stock a Buy, According to Analysts?
Turning to Wall Street, SBNY is a Moderate Buy based on seven Buys, three Holds, and one Sell rating. The average Signature Bank stock price target is $145.90, implying 108.4% upside potential.
However, there are things to consider here. First, most analysts’ ratings are from before SBNY’s collapse, so these ratings are outdated. Also, since the stock is halted, you essentially can’t buy it right now.
Conclusion: Should You Buy the Financial Dip?
As mentioned above, SBNY stock is halted, but that might change if somehow Signature Bank is bailed out (though it doesn’t look like the U.S. Treasury Department is in a bailing-out mood at the moment). Still, you may be tempted to be a hero and buy shares of similarly distressed banking businesses.
My response to any dip-buying instinct is, don’t do it. Signature Bank provides a valuable lesson in what can happen when financial institutions don’t exercise moderation or prepare themselves for worst-case scenarios. So, feel free to watch Signature Bank and other imploding banks circle the drain, but I would resist any temptation to commit investable capital to them.
