Signature Scales Back Real Estate Lending Amid Crypto Crash

Major multifamily lender Signature Bank reported record earnings in the second quarter, but said it will roll back in its commercial real estate lending in the coming months. The primary culprits: rising interest rates and plunging crypto markets.

At $339.2 million or $5.26 per share, Signature’s earnings jumped 58 percent from the same period last year as revenue surged 43 percent to $686.8 billion. But those figures masked underlying headwinds: Deposits declined after a cryptocurrency crash drove investors to pull funds from Signet, Signature’s blockchain-backed digital payments platform, while rising interest rates brought about a decline in non-interest-bearing income.

To maintain a healthy loan-to-deposit ratio, the bank said it would cut back on lending, including in commercial real estate, one of its largest sectors.

Signature will curtail loan growth to between $1 billion and $3 billion in the third quarter, down from the $4 billion to $7 billion it had initially projected, CEO Joseph DePaolo said on an earnings call Tuesday.

“Two areas we expect to slow or are focusing our intention to slow is commercial real estate and fund banking,” DePaola said.

The bank grew its overall lending portfolio to $72 billion, an increase of $5.6 billion or 8 percent from the previous quarter. As interest rates have risen, lending has driven steeper profits, and Signature said the majority of its lending portfolio is floating-rate debt, which is more sensitive to rate hikes in the near term.

But Signature also reported that deposits shrank to $104 billion in the quarter, about a $5 billion decline from the previous quarter. Fewer deposits mean less money to lend, and less growth to come. Signature’s stock was down about 8 percent in mid-day trading Tuesday.

DePaola noted that if the firm pulls in $10 billion in new deposits, it would use that money to fund new loans.

But Signature isn’t anticipating that type of growth. Despite holding a liquid loan-to-deposit ratio of 69 percent — the ideal range for banks is between 80 and 90 percent — the firm said it expects the macroeconomic “choppiness” that hampered deposits in the second quarter to continue.

In part, the collapse of crypto markets, which have hemorrhaged $2 trillion since November, drove that decline. Signet held about $29 billion, or 27 percent of Signature’s total deposits, as of March 2022, American Banker reported. The bank lost $2.4 billion in digital currency assets in the second quarter as crypto-sensitive customers withdrew funds.

“Clearly there are people leaving [the crypto] space, and therefore deposits are leaving,” said Chief Operating Officer Eric Howell, who added that the unpredictability of crypto would remain a pain point for digital banking.

As of July 19, the price of Bitcoin was down over 50 percent from the start of the year.

“The digital winter hasn’t quite gone away yet,” Howell said.

Meanwhile, the Federal Reserve’s interest rate hikes will likely deliver another blow to the firm’s non-interest-bearing deposits, about 40 percent of its holdings. If interest rates continue to spike, it’s likely that more investors will withdraw funds that aren’t reaping a higher rate of return and move them elsewhere.

In total, the bank lost $5.3 billion in non-interest-bearing deposits quarter over quarter, offset slightly by a small gain in interest-bearing liabilities.

“The rates have been increased by 75 basis points and couple that with the quantitative tightening, it’s unprecedented,” DePaolo said. “And it could make it tough on the deposits side, so we’re just being cautious.”