Signature Bank is betting big on crypto – and now has to reckon with the crash

Signature Bank, America’s 30th largest bank by assets, does not advertise and operates only seven official bank branches. It was also one of the best-performing banks in the country last year, propelled by a decision to court rising deposits from the cryptocurrency industry.

However, as the crypto crashed, Signature Bank’s share price also crashed, leaving it struggling to address fears that its rapid growth could be reversed.

Before its share price tumbled another 10% after its results last week, Signature Bank chief executive Joe DePaolo had tried to put some distance between the unusual institution he nurtured for two decades. and its newest and most controversial clients.

“We are actually much more than a crypto bank,” he told the Financial Times last month.

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By some measures, one of the most successful US banks, weathering the Great Financial Crisis without a loss, it is also one of the least known. Its flagship Manhattan branch is hidden 12 stories up in a downtown office tower, and the average American is more likely to have seen its logo appear onscreen on corporate account statements from bad vegan protagonist Sarma Melngailis only to meet the group.

The secret to Signature’s success, DePaolo said, is a relentless focus on deposit growth. He and Chairman Scott Shay founded the bank 20 years ago in New York and grew it to $109 billion in deposits without a single acquisition, focusing for much of its history on attracting successful private companies and their owners as customers.

Joe DePaolo
Joe DePaolo

Operating much like a wealth manager, Signature grew by hiring teams of competitor bankers, expanding outside of New York, then adding offices on the West Coast to target the capital scene. -venture and investment capital. “Unlike almost every bank in the country, everyone who worked at Signature Bank decided to come here,” Shay said.

What helped make it last year’s best performing stock in the KBW Banking Index was a decision four years ago to accept crypto exchanges, stablecoin issuers and bitcoin miners. as customers, as well as the launch of a blockchain-based payment system called Signet that allows bank customers to transfer dollars between each other at any time of the day.

However, from a peak market cap of $23 billion, Signature’s value has halved, dragging it down the index it recently topped.

“Between 2018 and today, you had a [digital assets] company that started from scratch and now accounts for $29 billion in deposits. Crypto tends to get the most attention these days. It’s been like a lightning rod,” Stephens analyst Matt Breese said.

Collapsing coin prices and a series of bankruptcies of crypto-related firms, including lender Celsius Network, broker Voyager and hedge fund Three Arrows Capital, have raised fears of a financial crisis for the digital asset industry. , 13 years old.

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Sparks flew again for Signature this month after the group said deposits fell by $5 billion in the second quarter – half of client outflows from its New York banking teams and half digital assets. Casey Haire, an analyst at Jefferies, wrote that the decline “will increase investor anxiety about funding future loan growth with [the] excess cash now depleted”.

Signature has also faced speculation that its rapid growth and embrace of a controversial industry may have caught the attention of regulators.

The Federal Deposit Insurance Corporation maintains a confidential watch list of problematic institutions. Every quarter, it publishes the number and total assets of “problem banks,” prompting a question for Signature during its April earnings call from JPMorgan analyst Steven Alexopoulos: “assets have increased $120 billion, which is about your size. I said it publicly, I don’t think it’s you guys. But based on my conversations with investors throughout the quarter, there is still concern there.

DePaolo responded on the call that banks aren’t allowed to comment on the list, but if Signature was on it, “I would know, and I don’t know anything.”

He told the FT that Signature does not hold any crypto, only dollar deposits from its clients. DePaolo said: “It happens to be an ecosystem that we serve but we don’t have any exposure to the digital world or the crypto world. We had a loan that we’ve done so far and it’s been paid off, so we don’t have any outstanding loans, we don’t have any digital assets on our books.

Asked about the area where Signature has rapidly increased the size of its loan portfolio since 2018, so-called “fund lending,” DePaolo called it a remarkably safe niche in the private equity industry. Capital calls from signature funds to investment funds when investors such as pension funds, endowments and sovereign wealth funds lack immediate cash to make investments. “It’s a no-loss business,” he said.

Morgan Stanley analyst Betsy Graseck* raised concerns about crypto volatility and rising interest rates in a note to clients: “We expect higher rates to continue to rise. weigh on deposit growth going forward as clients seek more attractive returns and now expect deposit balances to decline by an additional $2.8 billion in the second half of 2022.”

Column chart showing deposits held by Signature have ballooned in recent years to over $100 billion

A shrinking institution could be a less attractive destination for teams it hires from rivals, and some of the concerns raised privately by investors relate to liquidity: like Signature banks eight of the top 12 crypto brokers, for example, an industry implosion in a credit crunch could see their deposits evaporate quickly.

Signature isn’t big enough yet to release the liquidity hedging measures required by its biggest rivals, but DePaolo said the bank could withstand the death of Bitcoin and its ilk. “Each month, we model assuming every last crypto deposit is withdrawn,” he said, pointing to Signature’s $20 billion in marketable securities, available lines of credit and a cash position that was growing. to $14.6 billion at the end of June.

“The first thing on our minds when we wake up in the morning and the last thing when my head hits the pillow at night is making sure we have ample cash and safe assets,” DePaolo said.

*This article has been edited to correct the author of the Morgan Stanley report

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