Signature Bank bet big on crypto — and must now reckon with the crash

Signature Bank, the 30th-largest bank in America by assets, doesn’t advertise and operates just seven official bank branches. It was also one of the best-performing banks in the country last year, propelled by a decision to court the surging deposits of the cryptocurrency industry.

However, as crypto has crashed so too has Signature Bank’s share price, leaving it struggling to address concerns that its rapid growth is being thrown into reverse.

Before its share price dropped by another 10 per cent after its results last week, Signature Bank’s chief executive Joe DePaolo had attempted to put some distance between the unusual institution he has nurtured for two decades and its newest and most controversial customers. 

“We’re actually much more than a crypto bank,” he told the Financial Times last month.

By some measures one of the most successful US banks, sailing through the great financial crisis without loss, it is also one of the least well known. Its Manhattan flagship branch is hidden 12 floors up a midtown office tower, and the average American is more likely to have seen its logo flashed on screen on the business account statements of Bad Vegan protagonist Sarma Melngailis than encounter the group. 

The secret to Signature’s success, DePaolo said, is a relentless focus on growth in deposits. He and chairman Scott Shay founded the bank 20 years ago in New York and grew it to $109bn of deposits without a single acquisition, focusing for much of its history on attracting successful private businesses and their owners as clients.

Operating much like a wealth manager, Signature grew by hiring away teams of bankers from rivals, expanding outwards from New York and then adding offices on the West Coast to target the venture capital and private equity scene. “Unlike just about every bank in the country, everyone who worked at Signature Bank has decided to come here,” Shay said.

What helped make it last year’s best-performing stock in the KBW Bank Index was a decision four years ago to accept crypto exchanges, stablecoin issuers and bitcoin miners as customers, as well as the launch of a blockchain-based payments system called Signet that allows bank customers to transfer dollars between each other at any time of the day.

From a peak market capitalisation of $23bn, however, Signature’s value has halved, dragging it to the bottom of the index it recently topped.

“Between 2018 and today, you had a [digital assets] business that started at zero and it’s now $29bn in deposits. Crypto tends to grab the most attention these days. It’s been like a lightning rod,” said Matt Breese, analyst at Stephens. 

Collapsing coin prices and a series of bankruptcies at crypto-related companies, including the lender Celsius Network, the broker Voyager and the hedge fund Three Arrows Capital, have sparked fears of a financial crisis for the 13-year-old digital asset industry.

Sparks flew again for Signature this month after the group said deposits dropped by $5bn during the second quarter — half the outflow from clients of its New York banking teams and half from digital assets. Casey Haire, analyst at Jefferies, wrote that the drop “will increase investor angst about funding future loan growth with [the] excess cash position now exhausted”.

Signature has also faced speculation that its rapid growth and embrace of a controversial industry may have attracted the attention of regulators. 

The Federal Deposit Insurance Corporation maintains a confidential watchlist of problem institutions. Each quarter it publishes the number and total assets of “problem banks”, which prompted a question to Signature on its April earnings call from JPMorgan analyst Steven Alexopoulos: “the assets went up $120bn, which is about your size. I’ve said publicly, I don’t think it’s you guys. But based on my conversations with investors through the quarter, there is still a concern out there.”

DePaolo responded on the call that banks aren’t allowed to comment about the list but that if Signature was on it, “I would know, and I know nothing.”

He told the FT that Signature holds no crypto, only the dollar deposits of its customers. DePaolo said: “it happens to be an ecosystem that we service but we have no exposure to the digital world, or the crypto world. We had one loan that we’ve done so far and it was paid back. So we have no loans outstanding. We have no digital assets on our books.”

Questioned about the area where Signature has rapidly grown the size of its loan book since 2018, so-called “fund lending”, DePaolo characterised it as a remarkably safe niche in the private equity industry. Signature funds capital calls to investment funds when investors such as pension funds, endowments and sovereign wealth funds lack immediate cash to make investments. “It’s a zero-loss business,” he said.

Morgan Stanley analyst Daniella Cohen flagged concerns about crypto volatility and rising interest rates in a note to clients: “We expect higher rates to continue to weigh on deposit growth going forward as clients seek more attractive yields, and are now expecting deposit balances to decline another $2.8bn in the second half of 2022.”

A shrinking institution might be a less attractive destination for the teams it hires from rivals, and some of the concerns raised in private by investors relate to liquidity: as Signature banks eight of the 12 largest crypto brokers, for instance, an implosion of the industry in a credit crunch could see their deposits rapidly evaporate. 

Signature is not yet large enough to publish the liquidity coverage metrics required by its bigger rivals, but DePaolo said the bank could withstand the death of Bitcoin and its ilk. “Every month we model with an assumption that every single last crypto deposit is withdrawn,” he said, pointing to Signature’s $20bn in marketable securities, available credit lines and a cash position that stood at $14.6bn at the end of June.

“The first thing we think about when we wake up in the morning and the last thing when my head hits the pillow at night is to make sure that we have plentiful liquidity and safe assets,” DePaolo said.