Don’t Overlook Crypto Bank Stocks. They Could Be Bargains Now.

A couple of banks that are building crypto businesses look like bargains for investors seeking value in the digital-asset space.

Silvergate Capital and Signature Bank reported strong quarterly results this past week. It’s a sign that their crypto businesses are going strong despite weakness in digital asset markets, yet the market doesn’t seem to be responding.

Silvergate reported institutional digital-currency deposits of $14.7 billion in the first quarter, up 130% year over year. It said it added 122 institutional customers to a digital-asset exchange network it is building to handle payments, lending and funding for clients such as hedge funds and exchanges, taking its total to 1,503.

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Earnings per share in the quarter came in at $0.79, topping consensus estimates by 73%. Net interest income–a measure of profits on loans and other assets–was $50.5 million, gaining 32% over the prior quarter and beating estimates by 14%.

Silvergate is building other crypto revenue streams, including collateralized Bitcoin loans and an infrastructure platform for stablecoins through its acquisition of Diem, a stablecoin project that was launched and then halted by Meta Platforms (FB) and others. Stablecoins are designed to maintain a fixed $1 value, acting as proxies for cash in crypto trading and lending.

JP Morgan analyst Steven Alexopoulos came away impressed with Silvergate’s earning report, reiterating an Overweight rating and a $200 target on the stock. Shares traded around $131 on Friday.

Silvergate is “positioned as an indispensable banking partner with many of the key industry participants in the crypto ecosystem,” he wrote, adding that its stablecoin initiative looks like a “free option” at current valuations.

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Silvergate is also sensitive to rising interest rates, which could increase its net interest income. With almost all its deposits in non-interest bearing accounts, its balance sheet is “highly levered” to rising short-term rates, said Alexopoulos. A one percentage-point increase in short-term interest rates should boost net interest income by 60%, he estimated, making the bank far more leveraged to rates than many small-cap lenders.

“We see SI shares as a bargain at current valuation,” he wrote, noting that the stock trades for 18 times estimated 2023 earnings per share, a 23% discount to the Russell 1000 Growth Index and a 57% discount to crypto-related stocks overall.

Signature Bank also reported strong trends in institutional adoption of crypto, adding 160 clients to reach a digital-asset customer base of 1,202. It is now the primary bank for four of the top 12 crypto exchanges. And it has a banking partnership with Circle Financial—backer of the USD Coin, one of the largest stablecoins with $50 billion in circulation.

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Crypto deposits from institutional customers hit $29 billion in the first quarter, accounting for 27% of Signature’s total, and up from $2 billion in crypto deposits at the end of 2019.

The bank reported earnings per share of $5.30 in the quarter, topping consensus forecasts by 23%. Net interest income of $574 million beat forecasts by 0.4%.

Signature is also making its balance sheet more rate sensitive and appears to have strong credit quality, including a 0.11% charge-off rate for nonperforming loans. Exposure to commercial real estate in New York City could be an overhang on the stock and investor sentiment. But so far the loan portfolio is holding up well, according to Alexopolous, who calls Signature one his top ideas.

“Once the markets better understand the company’s role in banking the crypto economy, as well as [the] growth runway ahead, we think the current valuation of the stock will end up firmly in the history books,” he wrote in a note this past week, reiterating an Overweight rating and $460 price target. Shares traded at $264 on Friday.

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Signature also looks relatively inexpensive at 12 times the consensus forecast for 2022 earnings of $22.33 a share, and 10 times 2023 estimates of $27.47. Signature’s price/earnings ratio is in line with regional bank stocks, but it is growing faster than most rivals, with EPS expected to rise 49% this year and 23% in 2023, according to consensus estimates.

Yet investors don’t appear impressed with any of this. Silvergate is down 12% this year while Signature is off 18%. The weak performance may reflect concerns about a slowdown in crypto prices and institutional adoption of the asset class; rising regulatory pressures on the crypto industry; and rising prospects for a recession as the Federal Reserve raises rates sharply to fight inflation. A recession would likely depress lending volume as the economy slows and would lead to an uptick in loan delinquencies and charge-offs.

That skepticism may be priced in, though, making the banks some of the few crypto stocks that look reasonably valued.