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 is benefitting from healthy funding and exit environments, as well as higher valuations for innovative companies. Moreover, the balance sheet remains strong with robust liquidity, sound capital, and healthy asset quality. The ratings also consider earnings volatility related to difficult to predict gains/losses on investment securities and warrants, especially given today’s high valuation levels, managing robust growth both domestically and internationally, and dealing with more complex regulatory and compliance demands.

Given the attractive growth and profitability attributes of SVB’s targeted markets, competition has increased, which has caused pricing pressure. Nonetheless, the Company’s long established track record and hard to replicate relationships with start-ups and the people who fund them allows the Company to still dominate the innovation space, while receiving premium pricing. Indeed, SVB added over 2,000 new early-stage clients in 2013 and has been adding new clients at a record pace so far in 2014. Positively, DBRS notes that activity has been robust in the innovation space, so SVB can walk away from less attractive deals, and still generate substantial growth.

For the nine months ended September 30, 2014, net income available to common stockholders was $205.1 million compared to $157.1 million for the similar period in 2013. The material increase in earnings was primarily driven by higher net interest income reflecting substantial loan and deposit growth that contributed to a 41% increase in average interest-earning assets. Meanwhile, noninterest income, net of noncontrolling interests, totaled $248.3 million, an increase of 8% compared to 9M13 driven by broad-based core fee income growth. Given the current health of SVB’s targeted markets, DBRS expects 2015 to be another strong year for the Company, absent a major market correction.

Funding and liquidity continue to underpin the rating. Indeed, total deposits have grown by almost 56% over the past year, easily funding the loan portfolio with the excess deposits being used to fund purchases of high quality, liquid securities. With 72% of total deposits non-interest bearing in nature, SVB has one of the lowest cost of funds in the industry at only 0.12% for 3Q14.

As a result of robust growth, SVB’s capital metrics have been pressured despite strong earnings, no shareholder payouts, and a common equity raise in 2Q14. The Company’s most restrictive capital metric remains the Bank’s leverage ratio, which ended the quarter at 7.05%, or just above the low end of the 7% to 8% targeted range. While retained earnings will support growth to an extent, SVB is planning to offer more off-balance sheet products to reduce deposit balances. Moreover, the Company may choose to tap the capital markets again to support growth, including a potential debt issuance.

Credit quality is strong and improving. Specifically, nonperforming assets totaled only $12.4 million, or just 0.10% of total gross loans, while losses remain at very manageable levels. Early-stage lending remains risky, but only comprises 11% of gross loans, as the Company has been lending to more established, less risky companies. While less risky, DBRS notes that this has made the loan portfolio less granular with 127 clients having loans of at least $20 million totaling $4.3 billion, or 35.7% of gross loans. If a few large loans go bad at the same time, capital can be invaded, as evidenced by five large problem loans during the financial crisis that caused a spike in nonperforming loans and net charge-offs and resulted in two consecutive quarterly losses starting in 4Q08. Nonetheless, DBRS notes that the Company’s business model was proven quite resilient following both the dot.com bubble burst, as well as the most recent market downturn.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $36.0 billion in assets at September 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: William Schwartz
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 24 September 2013

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