DBRS Confirms SVB Financial Group at A (low); Trend Remains Stable

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 A (low). The trend for all ratings remains Stable. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings confirmation and Stable trend reflect the Company’s defensible, unique business model that continues to deliver above-peer growth in today’s slow growth environment. Moreover, the balance sheet remains strong with robust liquidity, solid capital, and healthy asset quality. The ratings also consider earnings volatility related to difficult to predict gains/losses on investment securities and warrants, a rapidly growing loan portfolio that is becoming less granular, and the challenges of expanding its presence into international locations including China, the U.K., Israel, and India.

Even with more competition entering SVB’s attractive niche markets, the Company remains the dominant player in the innovation space with approximately 50% of all venture capital-backed companies in the U.S. as clients. Given the Company’s 30 year track record of serving the innovation space through all cycles while building considerable expertise and cultivating deep industry relationships, DBRS expects that SVB will remain the dominant player in the innovation space. Indeed, the Company has already added 550 new early-stage clients in1H13, which is nearly double the amount of early-stage new clients added during 2010.

DBRS notes that while early stage clients remain important to the business model, the vast majority of the growth seen the past few years has come from banking more established companies that tend to use more services and are more profitable. Over the past year, period-end loans have increased $1.8 billion, or 23.5% to $9.6 billion, although the Company expects 3Q13 period-end loans to remain relatively stable. Revenues have benefitted from loan growth, net interest margin expansion, and higher noninterest income. Given the high touch and complex nature of the business model expenses have been high historically, but the Company is now reaping the benefits of investments. Specifically, excluding non-controlling interests and non-core items, SVB generated positive operating leverage in 2012, as well as in 1H13. Overall, 1H 13 net income available to common stockholders was $89.5 million, up 8.6% from 1H12.

Funding and liquidity continue to underpin the rating. While the pace of deposit growth has moderated over the past year, as the Company has been more successful in keeping client funds off balance sheet, total deposits have grown 3.4% to $18.7 billion, which easily funds the loan portfolio. Moreover, average non-interest bearing deposits comprised a very high 71% of total average deposits at June 30, 2013, which contributes to one of the lowest cost of funds in the banking industry at just 17 basis points.

Asset quality remains very healthy. In 2Q13, nonperforming loans were only 0.42% of total gross loans. Meanwhile, gross charge-offs were $15.4 million compared to $5.6 million in the first quarter. The losses came primarily from the other commercial loan and hardware portfolios. Including $4.2 million of recoveries, net charge-offs were $11.2 million, or 0.49% of average gross loans (annualized). The provision for loan losses increased $12.8 million to $18.6 million with $8.8 million of the increase related to loan growth with the remainder providing for net charge-offs, as well as increasing the reserve for impaired loans. Overall, the allowance for loan losses remains sufficient at 1.23% of total gross loans. In addition to the sound loan portfolio, DBRS notes that the $10 billion available-for-sale securities portfolio is mostly unencumbered and comprised of high quality securities.

With most of the loan growth coming from later stage companies, SVB now has 112 clients with loans equal to or greater than $20 million. At $3.6 billion, these loans comprised 36.7% of total gross loans at June 30, 2013. While these credits are less risky than early stage companies, DBRS notes that the inherent danger in larger loans is that deterioration of a few large relationships could dramatically worsen credit quality, hurt earnings and potentially invade capital.

Despite the adverse movement in accumulated other comprehensive income caused by the higher long term interest rates seen in 2Q13, SVB’s tangible common equity to tangible assets ratio increased 8 basis points during the quarter to 8.34% reflecting earnings retention and a smaller balance sheet. The Company continues to make progress improving it’s once most restrictive capital ratio, the Bank’s leverage ratio, which now stands at 7.66% at June 30, 2013.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $22.2 billion in assets at June 30, 2013.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found can be found at: http://www.dbrs.com/about/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.

[Amended on June 18, 2014, to reflect actual methodologies used and to insert a necessary disclosure.]

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.