While several financial institutions are wary of Bitcoin and other cryptocurrencies, Morgan Stanley, the fourth largest investment bank globally, has actively been eying investment in crypto assets.
In a research note on Monday, September 27, Morgan Stanley recommended the stocks in Silvergate, which provides commercial banking and lending services to cryptocurrency companies.
As a result, shares of crypto-focused bank Silvergate Capital Corp increased about 6.5% on Monday after Morgan Stanley initiated coverage of the stock with an overweight rating and a $158 price target.
Morgan Stanley analyst Ken Zerbe believes that Silvergate (NYSE: SI) stock is extremely undervalued at its current trading price of $109. He thinks that SI stocks would be at a $158 trading price, indicating a 52% upside from the current price, with a potential for $300.
“We see a 3:1 bull: bear skew, but recognize that SI has the widest risk-reward of any bank we cover as its growth is tied directly to the health and growth of the cryptocurrency industry,” Zerbe highlighted in the note.
In the research note, Zerbe stated that he believes that Silvergate should be valued based on its earnings growth rather than on comparison to slower-growing banks and traditional banks, particularly given its minimal credit risk. The analyst mentioned that Silvergate has witnessed an increase of its earning asset balances by 434% over the last year to $121 billion, with nearly all of the growth coming from increasing the deposits balances of its cryptocurrency customers.
Zerbe noted that Silvergate is one of the only banks that provide “payment solutions” to the cryptocurrency market, giving SI’s investors “a nearly pure-play way to participate in the rapid growth of the nascent cryptocurrency industry,” he stated.
The company highlighted several use-cases in Silvergate’s favour. The analyst pointed out that the firm’s Silvergate Exchange network allows customers to deposit funds with the bank and transfer in and out of cryptocurrencies. Although Silvergate does not pay depositors interest, Morgan Stanley sees this as positive as Silvergate can still offer recommended crypto interest rates that could avoid the scrutiny from securities regulators that has greeted high-interest leaders like Celsius and BlockFi and Coinbase with hurdles in the recent past.
Silvergate provides loans backed by Bitcoin, and the bank did so over the previous year without posting losses or liquidating customers’ positions. Morgan Stanley thinks that loan demand will grow, which is a good thing.
Zerbe expects Silvergate to see 37% annual EPS growth through 2025 and could rise even more with the introduction of new lending or fee-based products.
The analyst also expects Silvergate’s earnings assets balances to grow 48% over the next 12 months,” with minimal credit risk as loans held for investment is just 6% of earnings assets”.
However, Zerbe recognized that there are big risks and potential regulation around the crypto market is perhaps the most significant, yet unknowable, risk facing Silvergate. The analyst also stated that increased competition might offer an alternative to the Silvergate Exchange Network, which could “materially” slow deposit and fee income growth and limit the number of new clients.
Silvergate announced in July that the bank accepted a whopping $4.3 billion in new deposits from new and existing cryptocurrency customers in the second quarter.
Wall Street Expand Reach to Crypto
While few banks are willing to touch cryptocurrency firms, Silvergate has made its name offering fiat banking services for cryptocurrency businesses.
Last year, Silvergate bank reaped a big reward for some of the risks it took by being one of the first banks to allow cryptocurrency firms to open bank accounts. The bank recently disclosed that it accepted $586 million in cryptocurrency deposits in Q3 2020, bringing its total crypto asset to $2.1 billion as of September 30, 2020, compared to $1.5 billion as of June 20, 2020.
Silvergate also stands to gain massive benefit from its relationship with Facebook’s Diem project. In May, the Diem Association announced that Silvergate would be the sole issuer of its stablecoins.
What appears interesting is that Silvergate is paving the way for other banks to do something that previously has been a no-going zone to them.
Since the beginning of this year, Wall Street interest in bitcoin rose with major banks such as JPMorgan, Morgan Stanley, Mastercard, BNY Mellon, Blackrock and others added impetus by moving to open up access to Bitcoin.
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