Down 46% this year — Is this crypto play a buy or a value trap?

Signature bank‘s (SBNY -3.54%) the stock fell more than 9% after the bank reported second-quarter earnings results last week. It reported record revenue for the quarter and beat analyst estimates, but investors were irritated by some deposit trends and a lower growth forecast for the year. Despite strong first half earnings results, Signature Bank’s stock is down 46%. Is it a buy or a value trap?

Headwinds occur

Signature Bank has developed many different lending verticals recently, but the big change that has really transformed the bank in recent years is the deposit base.

It has built a payment system called Signet that enables multiple parties on the network to transfer money in real time. The network is particularly useful for crypto trading between institutional traders and crypto exchanges because the US banking system does not operate in real time and is closed on weekends while crypto trades around the clock. Customers of Signet bring many non-interest-bearing deposits to the bank on which the bank does not pay interest. At the end of the second quarter of this year, close to 40% of the bank’s total deposits were non-interest-bearing.

Signature’s crypto business ran into some trouble during the second quarter, however, as the crypto winter set in and the price of Bitcoin fell from around $45,000 to less than $20,000 between April 1 and June 30. That led the bank to report a $5.3 billion decline in non-interest-bearing deposits in the quarter, driven by a $2.4 billion reduction from Signature’s digital asset banking team.

Within that $2.4 billion amount, $1.8 billion of the decline came from crypto exchanges, which were pressured in the quarter as trading volume fell and crypto asset prices faltered.

The other issue in the quarter is that Signature lowered its forecast for lending and securities growth for the whole year. The bank had expected interest-earning assets to increase by $4 billion to $7 billion this year. Now, management expects only $1 billion to $3 billion of growth, primarily because it wants to be able to fund all of its loan growth with deposits, which may not grow as much as management initially expected, or may slow further this year.

The wider business remains intact

Despite the battle with crypto deposits, total deposits in the bank only fell about 4.5%, while the price of Bitcoin fell a whopping 56%. Things could certainly be worse. Furthermore, in Q2, Signet added 121 customers to the network, meaning there was no shortage of interest in getting involved in crypto trading during the quarter. Signet also saw the highest quarterly transfer volume go through the network in the quarter at $254 billion, another good sign because overall crypto trading volume was lower in the quarter.

Signature CEO Joe DePaolo said two more crypto exchanges will launch on the network on July 29 and exchanges could bring large amounts of deposits with them. DePaolo added that the bank is currently working on adding a third exchange as well.

Signature posted solid second-quarter loan growth of 8.2%, led by the bank’s fund banking team, which provides private equity firms with lines of credit, multifamily commercial real estate and specialty financing. Signature hired 11 new teams for its fund banking division. Although deposit growth may limit lending growth slightly for the rest of the year, the bank has built out a wide range of lending options, including venture banking, healthcare banking, commercial and industrial lending, mortgages and more that should give Signature a good long-term outlook. -long-term growth opportunities.

Is it a buy or a value trap?

Signature’s deposit business is heavily connected to the crypto industry, and right now we are in a crypto winter. Deposit outflows could certainly be worse, and the bank is a big beneficiary of rising interest rates, which is why, despite headwinds in Q2, Signature still generated record earnings in the quarter. Trading at about 135% of tangible book value, or net worth, and about eight times forward earnings, I think this is far too cheap for this high-yielding business, which is why I would rate the stock a buy.