Battle of Crypto Banks: Silvergate Capital vs. Signature Bank


A many retail investors interested in the crypto space focus on the cryptocurrencies themselves, like Bitcoin and Ethereum, or on bitcoin mining companies. But many of these investors are missing out on the booming crypto opportunity in what many often see as the boring banking space. The crypto banking space allows many institutional crypto traders and crypto exchanges to transact more efficiently, and helps other crypto businesses like miners obtain more efficient capital.

While there aren’t a ton of crypto banks right now, the top two are around $ 12 billion in assets. Capital of Silvergate (NYSE: SI) based in La Jolla, Calif., and the largest Signature Bank (NASDAQ: SBNY) based in New York with nearly $ 108 billion in assets. Let’s compare the two and see which one is the best investment.

Real-time payments

Silvergate and Signature, despite their different sizes, are somewhat similar in their innovation in that the two banks have developed a real-time payment system that allows parties on the network to transact instantly, at any time. the day or the week. Silvergate’s system is called the Silvergate Exchange Network (SEN), while Signature’s is called Signet. The US banking system does not operate on a real-time payment system, while cryptocurrencies are trading all the time, so these platforms are useful for those who trade cryptocurrencies.

Silvergate has more customers and transaction streams on SEN. At the end of the third quarter, the bank reported that it had more than 1,300 customers and that SEN usage reached nearly $ 240 billion in the second quarter before dropping to $ 162 billion by the end of the quarter. third quarter, alongside the decline in crypto spot trading during the quarter. Signature COO Eric Howell said on the bank’s third-quarter earnings call that volume on Signet was $ 149 billion in the second quarter, then fell to $ 128 billion. in the third trimester. In the second quarter, Howell said the bank had 812 customers on Signet.

Image source: Getty Images.

It also appears that Silvergate has a better deposit base. Signature being a larger bank with more legacy transactions, it pays more on its overall deposit base than Silvergate. But even exploring the deposits made by SEN and Signet, SEN seems to have the edge with almost all of its deposits coming from digital asset customers and the overall cost of funding practically zero. Signature CEO Joseph DePaolo said about 30% of his digital asset team’s deposits do not bear interest, while the bank pays a very small amount of interest on 70% of those deposits. Signature still brings a strong deposit base, but I would give Silvergate the deposit advantage, an important metric that banking investors are watching.

Differences in the top row

Because Silvergate and Signature are such strong deposit producers, the problem for both banks – and it’s a good problem to have – is how to deploy those deposits efficiently and generate income. Both banks are making good profits, but Signature seems to have better lending operations. Signature has a loan-to-deposit ratio of over 61%, which means it was able to deploy 61% of its deposits to loans. She was able to do this with a team of fund and venture banking, which mainly deals with providing short-term loans to venture capital firms. I like this line of business because it is really niche, very secure, has lots of cross-selling opportunities, and has actually generated strong loan growth over the past year which is rare. Signature is also building Mortgage Teams for the Small Business Administration (SBA) and US Mortgage Warehouses, which I believe will contribute well to loan growth going forward.

Silvergate, on the other hand, has a much smaller loan operation at the moment. The bank’s loan-to-deposit ratio has fallen to below 14%, and all of its loans will eventually consist of either a mortgage warehouse, lines of credit provided to mortgage originators, or a new product called SEN Leverage. , which is a US dollar line of credit secured by Bitcoin. The bank is in the process of liquidating its commercial real estate and residential mortgage portfolios. SEN leverage is a very promising product, although it is not clear how the regulation could impact it down the line. Signature has the ability to make loans similar to Silvergate’s leverage, but management has indicated that it is not interested in making many of these loans at this time.

As for the other big contributor, commission income, Silvergate seems to have the edge right now. Both Signet and SEN attract many new customers to the bank who can take advantage of other more traditional banking products and services. In the third quarter, Silvergate got about 27% of its total commission revenue, while Signature got about 6%.

What is the best investment?

Whichever way you slice it up, the market has given Silvergate the best valuation, whether it’s a higher price-to-book ratio or a higher earnings multiple.

SBNY price chart at tangible book value

SBNY price data on tangible book value by YCharts

I think both of these banks are good investments because crypto-banking is a great industry right now. In my opinion, Signature is a safer investment due to its more traditional and diverse lending segments, which are unrelated to Bitcoin. Subprime banking, mortgage warehouse and SBA loan units can offer attractive yield and volume and will help the bank to better absorb excess liquidity.

But Silvergate appears to be the greatest long-term growth opportunity. It appears to have the first-mover advantage with the higher volume processed and more clients on SEN. And while both banks are working in the stablecoin arena, Silvergate is going to be the exclusive issuer of Facebook‘s Diem stablecoin pegged to the US dollar, which could be huge. With a market cap of less than $ 4 billion, Silvergate could also be an acquisition candidate, not that I think he would be interested in the promise of the future right now. There is more regulatory risk at Silvergate, due to the importance the bank places on SEN leverage and the still unclear stablecoins regulation. I would also like to see more diversified loans at Silvergate, but ultimately Silvergate has the capacity to grow very quickly and become something very special.

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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Bram Berkowitz owns shares of Bitcoin, Ethereum, and Silvergate Capital Corporation. The Motley Fool owns shares and recommends Bitcoin, Ethereum, and Facebook. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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