SVB Financial, which has been hurt by both rising interest rates and the tech industry downturn, sold a large portfolio of securities at a big loss Wednesday and is embarking on a major capital raise.
The Santa Clara, California, company said that it sold a $21 billion portfolio of U.S. Treasury and agency securities, and that it will realize a $1.8 billion after-tax loss as a result of the sale.
The parent company of Silicon Valley Bank also said that it has commenced an underwritten public offering that seeks to raise a total of $1.75 billion in common equity and mandatory convertible preferred shares.
The total capital raise will be $2.25 billion because the private-equity firm General Atlantic has pledged to invest $500 million on the same terms as the bank’s common offering.
“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses,” SVB Financial CEO Greg Becker said in a letter to stakeholders. “We are confident that these are the right decisions for our profitability and financial flexibility, both now and for the long term.”
SVB also disclosed that Moody’s Investors Service is in the process of considering potential ratings actions, and added that it is possible that Standard & Poor’s will take action.
The bank said that if the actions it announced Wednesday are successful, they “should improve our profile under rating-agency criteria,” but “an adverse ratings action remains likely and could occur at any time.”
Shares in SVB fell by 31.7% to $183 in after-hours trading and had reached $189.90 in premarket activity as of 6:46 a.m. Eastern time.
SVB, which has $212 billion of assets, faces two main challenges. One is that the high-tech economy on which it heavily relies has fallen into a slump. With venture capital firms cooling their jets, many startups that park their deposits at SVB have been burning through cash.
And the trend has worsened since SVB’s earnings call in January, which has led the bank to rely more on higher-cost deposits and short-term borrowings, it said Wednesday.
“While VC deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker wrote in his letter.
The other big challenge is higher interest rates. The Financial Times reported last month that in 2021, when the tech industry was booming and SVB had seen a large influx of deposits, the company invested much of that money into long-dated mortgage-backed securities issued by U.S. government agencies.
Those securities have lost value in a rising-rate environment, and their yields, small by today’s standards, have hurt the bank’s profitability. The firm’s net interest income fell by around 13% between the third quarter of 2022 and the fourth quarter.
SVB said Wednesday that the securities portfolio sales will partially lock in funding costs and reposition its balance sheet to take advantage of the potential for higher short-term interest rates.
SVB also said the sale will help protect its net interest income — it projects a post-tax improvement in annualized net interest income of approximately $450 million — and enhance profitability.
The portfolio that SVB sold represents “substantially all” of the company’s available-for-sale securities, it said, adding that it expects to reinvest the proceeds of the sale into a more asset-sensitive, short-term portfolio.
“To further strengthen balance sheet liquidity, we also plan to increase our term borrowings from $15 billion to $30 billion and hedge these borrowers to mitigate higher funding costs in the future,” Becker wrote.
“We expect these actions to better support earnings in a higher-for-longer rate environment, providing the flexibility to support our business, including funding loans, while delivering improved returns for shareholders.”
Notwithstanding the recent cash burn by its clients, SVB noted that its 43% loan-to-deposit ratio is among the lowest of its peer banks. “Even before today, we had ample liquidity and flexibility to manage our liquidity position,” Becker wrote.
Still, SVB made downward revisions to its outlook for deposits, net interest income and net interest margin, citing the negative trends it has endured during the first quarter.
“Our revised guidance assumes the current market dynamics impacting our business continue through the end of 2023,” Becker wrote. “While it impacts our guidance in the near term, we believe the repositioning of our balance sheet positions SVB for improved profitability in 2024 and beyond.”