Morgan Stanley sees shares of this crypto bank jumping more than 50%

Published Mon, Sep 27 202110:27 AM EDTUpdated Mon, Sep 27 202111:23 AM EDT

Traditional financial institutions once deemed cryptocurrency companies too risky to give them a bank account, but Morgan Stanley is now bullish on a bank that took a chance on those customers. The firm initiated coverage of Silvergate Capital on Monday with an overweight rating and a price target of $158, implying about 52% upside from its closing price Friday. Silvergate Capital is the holding company for Silvergate Bank. "Silvergate is one of the most distinctive banks we cover," analyst Ken Zerbe said in an investor note Monday. "We see a 3:1 bull:bear skew, but recognize that Silvergate 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." San Diego-based Silvergate is the fastest-growing bank Morgan Stanley covers, Zerbe said, adding it would be "inappropriate" to value Silvergate as a traditional bank. Instead, he compares it with other fast-growing companies in the financials sector like Visa, Mastercard or PayPal. As of Monday morning, Silvergate's stock had increased roughly 680% in the last 12 months amid the bitcoin bull run and a surge in institutional interest in crypto and other digital assets like NFTs and stablecoins. Growth in core deposits to the Silvergate Exchange Network, or SEN, is a key part of Morgan Stanley's investment thesis, Zerbe said. The SEN lets customers transfer money around the crypto ecosystem if they deposit dollars into Silvergate. Core deposits have grown 581% on a year-over-year basis to $11.4 billion. Morgan Stanley expects 37% annual earnings-per-share growth through 2025 and said it has potential for further earnings expansion from lending or fee-based products that have yet to be introduced. Silvergate currently also provides bitcoin-backed dollar loans, which Morgan Stanley expects to be the main driver of loan growth, Zerbe said. The cryptocurrency industry has been innovating at light speed compared with traditional banking, and while they've made strides in becoming more digital, "the core products and service model of the more traditional banks feels largely unchanged from five or 10 years ago," Zerbe said. "The only place where we feel we have seen any signs of more significant shifts in business models has been from banks pivoting their business models toward either cryptocurrency or the blockchain," he added, citing New York-based Signature Bank and New York Community Bank.

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Traditional financial institutions once deemed cryptocurrency companies too risky to give them a bank account, but Morgan Stanley is now bullish on a bank that took a chance on those customers.