Research: Rating Action: Moody’s downgrades Silvergate Bank’s deposit ratings to Ba3 from Ba1; outlook remains negative
New York, February 17, 2023 — Moody’s Investors Service (“Moody’s”) has downgraded the ratings of Silvergate Capital Corporation (Silvergate Capital) and its bank subsidiary Silvergate Bank, following the downgrade of the bank’s standalone Baseline Credit Assessment (BCA) to b2 from ba3. Silvergate Capital’s long-term issuer rating was downgraded to B3 from B1 and its non-cumulative preferred stock to Caa3 from Caa1. The bank’s long-term deposit rating was downgraded to Ba3 from Ba1 and its long-term issuer rating to B3 from B1. The outlook remains negative.
RATINGS RATIONALE
The ratings downgrade is driven by the substantial decline in capital following the company’s $1 billion loss in the fourth quarter. The loss largely resulted from realized losses from the sale of a large part of its investment portfolio driven by the very steep decline in deposit balances from crypto centric firms. As a result of the loss, shareholders’ equity declined to $600 million in Q4 from $1,331 million as of Q3. While the company has reduced its workforce by around 40%, given the substantial decline in deposits from crypto centric firms, we anticipate profitability will be heavily challenged in coming quarters.
While Silvergate Capital continues to be well capitalized, the company faces the potential for further unanticipated shocks to erode capital given elevated regulatory and legal risks and constrained profitability. The company is also facing challenges in preserving its funding and liquidity profile as it looks to reduce its reliance on brokered deposits and Federal Home Loan Bank funding. In addition, continued large outflows of deposits from crypto centric firms could further adversely impact the bank’s financial condition.
Although currently modest in size, the bank also has a secured lending portfolio collateralized by Bitcoin, known as the SEN leverage business. Moody’s believes that risks in this portfolio are managed through conservative haircuts and automated liquidations if collateral triggers are breached. Nonetheless, risks to this business are elevated following the January 2023 federal banking regulatory guidance on banks holding and lending against crypto assets and the ongoing regulatory reappraisal of this activity, which would further curtail Silvergate’s business model and franchise value.
In Moody’s opinion, another driver of the ratings action was governance. The very large realized loss on its investment portfolio, operational risks related to the material downsizing of bank staffing levels and rising legal and regulatory risks highlight governance deficiencies in terms of the bank’s risk management and its ability to properly assess and respond to abruptly changing operating conditions for its specialized business model, increasing the institution’s exposure to adverse developments. The bank’s negative governance risk has a discernible negative impact on Silvergate’s credit ratings.
The negative outlook reflects the company’s much weaker capital levels, constrained near-term profitability outlook, uncertain franchise value, governance risks and rising legal and regulatory risks which weigh on the company’s credit profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
As the ratings are on negative outlook, there is currently no upward pressure on the ratings of Silvergate Capital or its bank subsidiary. The outlook could return to stable if the legal and regulatory risks along with volatility in the crypto currency market subside. Additional, credit positive developments would include increasing its regulatory capitalization buffers as well as strengthening profitability.
In the longer term, the BCA could be upgraded if legal and regulatory risks or volatility in the crypto currency market decrease materially or if the bank’s capitalization buffers and profitability strengthen, along with successfully reducing its reliance on brokered deposits and Federal Home Loan Bank funding. A higher BCA would likely lead to a ratings upgrade.
The BCA could be downgraded if legal and regulatory risks or volatility in the crypto currency market increase, capitalization declines further, profitability continues to be weak or if the bank experiences a deterioration in its liquidity profile. Additionally, a material deterioration in asset quality, including increased risk appetite, could lead to a downgrade of the BCA. A lower BCA would likely lead to a ratings downgrade.
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
LIST OF AFFECTED RATINGS
Issuer: Silvergate Capital Corporation
..Downgrades:
…. LT Issuer Rating (Local Currency), Downgraded to B3 NEG from B1 NEG
….Pref. Shelf Non-cumulative (Local Currency), Downgraded to (P)Caa3 from (P)Caa1
….Pref. Stock Non-cumulative (Local Currency), Downgraded to Caa3 from Caa1
..Outlook Actions:
….Outlook, Remains Negative
Issuer: Silvergate Bank
..Downgrades:
…. Adjusted Baseline Credit Assessment, Downgraded to b2 from ba3
…. Baseline Credit Assessment, Downgraded to b2 from ba3
…. LT Counterparty Risk Assessment, Downgraded to B1(cr) from Ba2(cr)
…. LT Counterparty Risk Rating (Foreign Currency), Downgraded to B2 from Ba3
…. LT Counterparty Risk Rating (Local Currency), Downgraded to B2 from Ba3
…. LT Issuer Rating (Local Currency), Downgraded to B3 NEG from B1 NEG
…. LT Bank Deposit (Local Currency), Downgraded to Ba3 NEG from Ba1 NEG
..Affirmations:
…. ST Counterparty Risk Assessment, Affirmed NP(cr)
…. ST Counterparty Risk Rating (Foreign Currency), Affirmed NP
…. ST Counterparty Risk Rating (Local Currency), Affirmed NP
…. ST Bank Deposit (Local Currency), Affirmed NP
..Outlook Actions:
….Outlook, Remains Negative
REGULATORY DISCLOSURES
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Sadia Nabi
Vice President – Senior Analyst
Financial Institutions Group
Moody’s Investors Service, Inc.
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Jill Cetina
Associate Managing Director
Financial Institutions Group
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