DBRS: SIVB’s Continued Strong 2Q Results; Robust Inv. Sec. & Warrant Gains and Core Fee Income

Summary:
• SVB reported strong net income available to common stockholders of $86.5 million, down modestly from 1Q primarily reflecting an increase in the provision for loan losses.
• Venture capital investment securities and warrant gains remain robust, while core fees grew strongly as well.
• 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) 2Q15 results as strong as the Company continues to execute very well on its strategy that is benefitting from a healthy global innovation economy. Specifically, SVB added over 800 new clients, while venture-backed funding and exit opportunities remain vibrant. For the second consecutive quarter, SVB had success moving client funds off balance sheet, which has helped relieve some pressure on the Bank’s leverage ratio. Positively, the Company was finally granted a license that allows its joint venture to transact in renminbi, which should help accelerate growth in China.

Once again, venture capital investment securities and warrant gains, which in aggregate totaled $39.6 million, helped drive the results, but management cautioned these elevated gains are not sustainable. Relatively broad-based growth, with particular strength in foreign exchange fees, contributed to 13.6% growth in core fee income sequentially. Meanwhile, expense, net of noncontrolling interest, was up modestly, as the Company’s strong 1H15 performance led to higher incentive compensation.

Average loan growth was relatively modest, especially considering the high growth rates previously seen. The Company noted loan growth was good with the exception of private equity and venture capital reflecting significant levels of repayments on capital call lines. Overall, SVB still believes average loan growth will increase in the mid-20% range in FY15.

Nonperforming loans more than doubled during the quarter primarily driven by two loans, both within the Software and Internet portfolio, but overall levels remain sound at 0.70% of total gross loans. The impaired loans also resulted in a $20 million incremental sequential increase in the provision for loan losses. Meanwhile, gross and net charge-offs remained low.

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.