DBRS Confirms SVB Financial Group at BBB (high); Revises Trend to Positive

DBRS Inc. (DBRS) has today confirmed the ratings of SVB Financial Group (SVB or the Company) and Silicon Valley Bank (the Bank), including SVB’s Issuer and Senior Debt rating of BBB (high). At the same time, DBRS changed the trend for all ratings, excluding the Bank’s Short-Term Instruments rating, to Positive from Stable. The Bank’s Short-Term rating remains Stable since this rating would not change in case the long-term ratings were to be upgraded by one notch. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Positive trend recognizes the improved product set and capabilities developed to keep later stage companies as clients both domestically and globally, the Company’s robust liquidity profile and DBRS’s belief that SVB’s growth prospects are considerably better than those of most banking peers. Indeed, the Company’s targeted industries of technology, life sciences, venture capital (VC) and private equity (PE) are performing better than most parts of the economy. Specifically, VC funding and exit opportunities were up considerably in 2010 as market valuations and activity rebounded. Moreover, with very little real estate exposure, SVB has been able to avoid an asset class that continues to subdue results of more traditional bank balance sheets. If the Company is able to deliver improved profitability while maintaining its sound balance sheet, the ratings would likely be upgraded one notch. Conversely, if credit fundamentals deteriorate or expense growth mute earnings, the trend could revert back to Stable.

SVB’s ratings reflect its dominant market position serving early stage companies, sound asset quality and solid capital base. The ratings also consider volatile earnings, a less granular loan portfolio and the Company’s high expense base. DBRS notes that SVB’s business model has now been tested twice over the past decade by major market declines combined with low interest rates and has performed relatively well.

With approximately 50% of all private VC-backed companies as clients, SVB remains the dominant player in the entrepreneurial space. While competition has increased for the Company, its leading position and deep industry relationships position the Company well to continue to dominate their targeted niches. Indeed, during the fourth quarter, the Company added another 428 new loan clients. DBRS notes that while early stage clients account for less and less revenue given the growth of later stage companies, these clients remain critical to SVB’s future success. Specifically, SVB has the necessary product set and expertise to continue to support these clients as they grow and become more established.

Funding and liquidity help underpin the rating. Over the past year, deposit growth has been very robust with average total deposits increasing 36.8% to $12.0 billion in 2010. While some of these deposits may leave the Bank once interest rates start rising or more attractive investment opportunities arise, core deposits still easily fund the loan portfolio. Moreover, average noninterest bearing deposits accounted for 60% of this total and contribute to one of the lowest cost of funds in the industry.

For the fourth quarter, SVB reported net income available to common stockholders of $17.5 million, down from $37.8 million in the previous quarter, but up from $6.0 million in 4Q09. DBRS notes that excluding the $23.6 million in pre-tax gains from the sale of available-for-sale (AFS) securities, net income would have been $23.6 million in 3Q10. Highlights of the quarter include robust loan and deposit growth, improving asset quality and further investments made to grow the business globally. On a sequential quarter basis excluding the AFS gains, a higher loan loss provision, higher expenses and lower net interest income from margin compression, more than offset higher noninterest income primarily from foreign exchange fees and deposit service charges. While the loan loss provision did increase by $4.5 million to $15.5 million during the quarter, it is important to note that the larger provision was driven by loan growth, not deteriorating credit quality.

Asset quality metrics continue to improve with both gross charge-offs and nonperforming assets declining during the quarter. Specifically, gross charge-offs totaled $10.6 million and were primarily driven by early stage software clients. The Company did benefit from $3.4 million in recoveries resulting in net charge-offs of $7.2 million, or 0.57% of average loans (annualized). This was an improvement from 0.73% in the third quarter. Management indicated that client confidence is building and that technology remains one of the stronger sectors in the economy. These dynamics should allow the Company to maintain solid asset quality and grow the loan portfolio. DBRS notes that loans equal to or greater than $20 million comprised 23.0% of total gross loans. While these loans are made to stronger credits, it has made the loan portfolio less granular.

Given a high touch and complicated business model, the Company’s expense base is elevated with an operating efficiency ratio of 69.7% in 2010. After keeping expenses relatively in check in 2009 after incentive targets were missed, expenses grew considerably in 2010 reflecting better performance and further investments in the business. During the fourth quarter, SVB made investments in its China bank JV, the U.K. branch project, private banking enhancements and IT spending. These initiatives are important to capitalize on future growth opportunities and improve capabilities, especially as a global provider of financial services to larger companies. Approximately 50% of 2011’s anticipated expense growth will be spent on the Company’s global and private banking initiatives and its continued investment in its IT platform.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $17.5 billion in assets at December 31, 2010.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 8 December 2009

For additional information on this rating, please refer to the linking document below.