Crypto Bank battle: Signature Bank appears to be winning over Silvergate Capital

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Silvergate Capital Inc (NYSE:SI) and Signature Bank Inc (NASDAQ:SBNY) have very different scales in terms of the amount of assets they hold, and very different banks in terms of their balance sheets. But they are two of the only banks in the United States that operate real-time payment networks that allow parties to clear and settle transactions instantly any time of the day, all year round. These payment systems help facilitate crypto trading between institutional traders and crypto exchanges. And while Silvergate has a first-mover advantage in this space, it looks like Signature has been making gains in recent quarters.

Network Earnings

Silvergate’s payment network, the Silvergate Exchange Network (SEN), and Signature’s payment platform, Signet, are deposit magnets, attracting large sums of deposits on which institutions pay little or no deposit. ‘interest.

Image source: Getty Images.

In the fourth quarter, Silvergate’s average deposits increased by nearly $2.6 billion quarter-over-quarter to $14.3 billion. Signature, on the other hand, holds more than $118 billion in assets, but it started out as a more traditional bank. It also discloses fewer details than Silvergate, but CEO Joseph DePaolo said on the bank’s recent earnings call that deposits at Signet grew by $2.4 billion in the fourth quarter to $7.7 billion. . DePaulo also said that in the first weeks of January, total deposits on Signet exceeded $10 billion on several occasions. Signature also has a digital asset depository book that looks much bigger than what’s on Signet. Signature’s chief financial officer, Eric Howell, said the deposit book has nearly $29 billion, but the majority doesn’t appear to be on Signet.

Where it really seems like Signature wins over Silvergate is in their respective numbers of customers and transfer volumes.

Period Silvergate SEN customers/transfer volume Signature Bank Signet customers/transfer volume Q2 2021 $1,224/239.6 billion ~$803/149 billion Q3 2021 $1,305/162 billion $903/128 billion Q4 2021 $1,381/$219.2 billion $1,042/$213.7 billion

Source: Revenue documents and call transcripts

As you can see, in the second quarter of 2021, SEN had about 421 more customers than Signet. However, by the end of 2021, its lead had shrunk to 339. Notably, SEN only added 76 customers in the fourth quarter, while Signet added 139.

However, onboarding customers to these networks can take time, and these additions can be finalized in blocks. Silvergate recently said it has around 300 customers in the integration pipeline for SEN, so their number of newly added customers may not be the best indicator of how well they are doing with each other. compared to others. But Signet’s gains over SEN are even more apparent in terms of transfer volume. In Q2 2021, SEN processed over $90 billion more volume than Signet. By the fourth quarter, that gap had narrowed to just $5.5 billion.

Does Signature really make gains?

As institutional management teams have attested, even after a client is onboarded to a network, it can take a while to transfer assets to them and begin to fully utilize that network, so perhaps Signet comes to reach cruising speed in the fourth quarter. But with transfer volumes on each network closer than ever, it’s hard to completely ignore them, as volumes on these networks correlate with broader crypto transaction volume during the quarter.

Not too long ago, the market valued Silvergate higher than Signature on a price-to-tangible book value basis (market cap to tangible common stock), but now Signature is trading at around 300% of its tangible book value. , while Silvergate has fallen and is now trading at 247% of its tangible book value. Silvergate is still trading at a higher multiple based on earnings. Both of these banks are solid operations, although they cannot be compared on a strict apples-to-apples basis given that Signature is much larger and still has legacy banking operations. But looking at their latest results, it certainly looks like Signet has made gains on SEN this quarter. Investors will want to keep tabs on how their competition for payment network customers and deposits evolves in real time.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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