DBRS: SVB Financial Reports Record 1Q14 Earnings; Continued Broad-Based Growth

Summary:
• SVB reported record net income available to common stockholders of $91.3 million, reflecting broad-based growth and significant gains on private equity and venture capital related investment securities and equity warrants for the third consecutive quarter.
• Evidencing franchise strength, the Company added over 1,000 new clients during the quarter.
• DBRS rates SVB Financial Group Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers SVB Financial Group’s (SVB or the Company) 4Q13 results as robust given record net income available to common stockholders of $91.3 million, continued broad-based growth including new clients and improved asset quality. The tremendous balance sheet growth, especially in deposits, has pressured the Bank’s leverage ratio, which if sustained, could cause the Company to issue equity and/or debt.

For the third consecutive quarter, SVB recorded outsized gains on private equity and venture capital related investment securities and equity warrants. Specifically, these items totaled $62.8 million, net of noncontrolling interests, in 1Q14, or $160.8 million over the past three quarters. The Company did note that the price of FireEye, a current holding that has contributed large gains the past two quarters, has fallen in price since quarter-end, and would negatively impact revenues by an aggregate $22 million, net of noncontrolling interests, based on the stock price at 4/23/14. Nonetheless, the funding environment for new companies remains very healthy, as does the exit market, both of which benefit SVB.

During the quarter, average deposits, average loans and average client funds all experienced strong growth. While these high growth rates are indicative of a strong and defensible business model, the growth has pressured the Bank’s leverage ratio, even with record earnings. Specifically, the Bank’s leverage ratio fell to 6.72% at quarter-end, and is below SVB’s stated comfort range of between 7% and 8% at the Bank. With strong client procurement and a strong operating environment, high growth rates should continue, so the Company will need to be more effective in moving client funds off-balance sheet, or issue debt and/or equity to support the growth.

Despite higher gross charge-offs primarily associated with one large loan that was impaired in 4Q13, credit quality remains strong. Indeed, impaired loan balances dropped by over half reflecting payoffs, and to a lesser extent, charge-offs. The Company’s loan portfolio continues to benefit from a stronger funding environment, as well as stronger business models relative to the prior dot.com bubble.

As a result of the very strong 1Q14, the Company raised guidance in numerous categories, including loan and deposit growth, net interest income, core fee income and higher noninterest expense related to the stronger performance.

DBRS rates SVB Financial Group Issuer & Senior Debt at A (low) with a Stable trend.