DBRS: SIVB’s Strong 4Q Driven by Continued Robust Growth and Higher Gains on Warrants and Securities

Summary:
• SVB reported lower sequential quarter net income available to common stockholders of $58.8 million. Excluding the loss associated with the pending sale of its Indian subsidiary, net income available to common would have increased 12% sequentially to $70.3 million.
• Once again, the Company reported strong growth in loans, deposits and client funds, as well as higher net gains from both warrants and investment securities.
• DBRS rates SVB Financial Group Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views SVB Financial Group’s (SVB or the Company) 4Q14 results as strong highlighted by continued robust growth in loans, deposits and client funds. Moreover, SVB reported materially higher gains on equity warrants and investment securities, net of noncontrolling interests. Overall, strong revenue growth more than offset higher expenses and a large increase in the provision for loan losses. The Company’s innovation clients continue to thrive benefitting from positive trends in both funding and exit opportunities.

Evidencing franchise strength, SVB grew its net client count by 21% in 2014. Moreover, 64% of all US venture-backed innovation companies that went public in the past two years have been SVB clients. Given the strength of the innovation market and the investors that serve them, 2015 should be another robust growth year for the Company.

The Company reached an agreement to sell SVB India Finance Private Limited, a non-banking financial company in India resulting in a post-tax loss of approximately $11.4 million. SVB will continue to support its clients in India as they seek to expand outside of India, largely on a non-lending basis. DBRS notes that the Company’s primary international strategy remains focused on the innovation markets in the UK and China (a local currency license has been applied for with hopes of receiving approval later this year). Additionally, SVB added over 1,000 global clients and doubled their global deposits in 2014, showing that there are plenty of growth opportunities even without their Indian subsidiary.

Strong revenue growth reflected improved net interest income from higher average earning assets despite net interest margin pressure, sound core fee income growth, and very healthy warrant and investment securities gains. DBRS notes that average loans grew 11% during the quarter with a significant portion of this growth coming from higher utilization rates in the private equity capital call portfolio. Meanwhile noninterest expenses, net of noncontrolling interests, increased 4% sequentially reflecting higher compensation and benefits, including higher incentive compensation for stronger than expected loan growth. Overall, SVB generated positive operating leverage both QoQ and YoY.

Although the provision for loan losses jumped considerably to $40.4 million, over half of the provision was related to loan growth, not credit quality deterioration. The reserve for impaired loans did increase $12.7 million primarily from one large software loan that appears to be an isolated incident and not a trend. DBRS notes that the loan portfolio is less granular now with loans of at least $20 million accounting for 42.5% of total gross loans compared to 38.4% a year ago. While these loans are less risky, they can lead to large swings in credit quality and potentially earnings if several loans go bad at the same time. Overall, asset quality remains very strong despite the jump in impaired loans with nonperforming assets comprising a very low 0.27% of gross loans.

With continued robust balance sheet growth, the Bank’s leverage ratio of 6.65% is now below the Company’s 7% comfort zone. To address this, the Company has filed a shelf registration allowing it to issue senior debt opportunistically. Management noted that they expect to access the debt market in order to raise additional capital.

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

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