DBRS Comments on SVB Financial Group’s 3Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q12 financial results of SVB Financial Group (SVB or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend.

SVB reported net income available to common stockholders of $42.3 million for the quarter, down from $47.6 million in the previous quarter, but up from $37.6 million in 3Q11. Highlights of the quarter include solid new client acquisition, robust loan growth and the maintenance of very strong asset quality. New client acquisition included both early stage clients, as well as later-stage clients that have been driving the majority of the Company’s growth. Venture capital funding was relatively stable, but different sectors are faring better than others. For instance, cleantech funding has declined, but such sectors as cloud computing models and biotechnology continue to attract investment.

The Company disclosed its preliminary outlook for 2013 that included average loan growth in the high teens to low twenties, net loan charge-offs between 0.30% and 0.50% of average gross loans, net interest income growth in the mid-single digits, core fee income growth in the mid to high teens, and expenses, net of noncontrolling interests, in the mid to high single digits.

Despite continued margin pressure, the Company was still able to grow net interest income (FTE) by $2.5 million to $154.9 reflecting strong loan growth. Specifically, the net interest margin contracted 10 basis points during the quarter to 3.12%, while average loans grew a very strong 9.3% to $7.9 billion. As a result of higher than expected prepayments on certain securities, the Company lowered its annual outlook for both net interest income and margin. Meanwhile, the loan growth came primarily from sponsor-led buyouts by later stage clients within the software and hardware industries. DBRS notes that loans to any single client of at least $20 million, totaled $2.6 billion, or a high 31.5% of total gross loans.

Noninterest income, net of noncontrolling interests and excluding certain non-core items, declined $2.2 million during the quarter to $55.6 million primarily from lower warrant gains. In the quarter, the Company changed some of its assumptions that it uses to value warrants, which contributed to the lower warrant gains.

Noninterest expense, net of noncontrolling interests, increased $600,000 to $132.4 million during the quarter. Increases in premises and equipment and professional service expenses more than offset a decline in compensation and benefits.

Asset quality remains very sound. Specifically, net charge-offs (NCOs) were only $3.4 million, or just 0.17% of average total gross loans (annualized). Gross charge-offs of $4.6 million were primarily related to the Company’s life sciences and hardware portfolios. Even though the provision for loan losses exceeded NCOs by $3.4 million building the overall allowance for loan losses, strong loan growth caused the allowance for loan losses to modestly contract to a still sufficient 1.23% of gross loans.

Deposit trends were mixed in the quarter. While average deposits increased 4.9% to $18.3 billion, period-end deposits were down $400 million to $17.7 billion. DBRS notes that tremendous deposit growth had once pressured the Bank’s leverage ratio, but the Company has had good success in moving some of these deposits off its balance sheet through an off-balance sheet sweep product. Indeed, although period-end deposits were down, period-end client investment funds increased $1.0 billion during the quarter. As a result, total period-end client funds increased by $635.3 million to $38.8 billion.

Capital metrics remain sound, especially on a risk-adjusted basis. The Company’s most restrictive capital metric, the Bank’s leverage ratio, remained relatively stable at 7.00%. Meanwhile, the Company’s tangible common equity to tangible assets ratio improved 21 basis points during the quarter to 7.60%. On a risk-adjusted basis, this metric improves to 12.43%.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Alan G. Reid
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 2 April 2012

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