DBRS: SIVB’s Robust 1Q Benefits From Inv. Sec. & Warrant Gains; Success in Moving Deposits off B/S

Summary:
• SVB reported higher sequential quarter net income available to common stockholders of $88.5 million, an increase of 28% excluding the loss associated with the sale of its Indian subsidiary in 4Q.
• Higher venture capital investment and warrant gains and a significantly reduced provision for loan losses more than offset higher expenses.
• 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) 1Q15 results as robust. Indeed, investment gains were strong this past quarter, while warrant gains remained at a high level reflecting the health of the innovation economy. Moreover, average loan growth was very solid and the Company issued debt to support balance sheet growth. Positively, it appears SVB has been gaining traction with clients to move their deposits into off balance sheet products, which helped mute deposit growth and relieve some pressure from capital metrics.

During the quarter, the Company added just over 1,000 new clients and there remains ample capital to fund innovative companies. However, SVB noted that venture capital (VC) investments in early stage companies has slowed over the past four quarters, but this has yet to negatively impact new client acquisition. Moreover, the innovation economy continues to outperform the broader economy and the vast majority of clients SVB surveyed expect 2015 to be an even better year in terms of revenue growth.

Adjusting for noncontrolling interests, revenue grew 3% sequentially reflecting higher investment gains, core fee income, and net interest income. Average loans increased over 10% once again benefitting from PE/VC loans, but period-end loan growth was driven by early-stage and private bank clients. The Company noted it is optimistic that it will receive its license to lend and take deposits in Renminbi at its Chinese JV this summer, which should also augment already strong growth. Already, newer products such as credit cards and private banking continue to progress well. Meanwhile, noninterest expense, net of noncontrolling interests, increased approximately 5% sequentially reflecting seasonality and a higher head count. The Company increased its guidance for expenses, which it now expects to grow in the high single digit range from mid-single digits primarily reflecting expectations of strong performance.

Asset quality remained very healthy even with a modest increase in impaired loans, as the performing loan portfolio improved. Increased competition has hurt structure and pricing within the innovation space, but SVB’s ample growth opportunities and leading market position allows it to remain disciplined and still achieve significant growth. The Company noted that the increase in impaired loans came primarily from two clients, one in software and the other in clean tech. Meanwhile, gross charge-offs remained low at $5.5 million coming primarily from two early stage clients within the hardware portfolio.

Positively, the Company issued $350 million of senior debt during the quarter to support the robust growth SVB is experiencing. The Bank’s leverage ratio, the most constraining capital metric, is once again within management’s stated comfort zone of between 7% and 8% at 7.43%, up from 6.64% last quarter.

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.