DBRS: SVB’s 3Q Solid; Lower Secs & Warrant Gains, Higher Core Fee Income; Some AQ Deterioration

Summary:
• SVB reported net income available to common stockholders of $81.7 million, down from $86.1 million for 2Q15, yet up from $64.0 million for 3Q14, as overall results were solid.
• Lower sequential earnings reflected lower levels of securities and warrant gains, as well as a $6.9 million increase in provisions for loan losses.
• 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) 3Q15 results as solid as the Company continues to execute very well on its strategy that is benefitting from a resilient global innovation economy. For the third consecutive quarter, SVB had success moving client funds off balance sheet, which has helped relieve some pressure on the Bank’s leverage ratio. The Company’s fundamentals remained sound in the quarter, including solid sequential loan and deposit growth, and still healthy asset quality despite some deterioration.

During the quarter, total revenues moderately contracted, as higher levels of spread income and core fee income were more than offset by a decline in securities and warrant gains. Improved spread income primarily reflected solid average loan growth, spurred by higher levels of private equity/venture capital loans, and growth in sponsored buyout loans within the software and internet loan portfolio. Meanwhile, the increase in core fee income was broad-based, led by higher levels of deposit service charges, foreign exchange fees, and letters of credit fees. Higher deposit charges were driven by solid deposit growth. Finally, the Company’s expense base remains well managed, and the sequential decline in expenses mostly reflected lower compensation and benefits, primarily driven by a decrease in costs related to incentive compensation plans.

Asset quality remains sound, despite higher levels of non-performing loans (NPLs) and net charge-offs (NCOs). Specifically, NPLs were up 15% sequentially, reflecting exposures to two sponsored buyout clients in the life science & healthcare loan portfolio. Overall, NPLs remain very manageable, representing a still low 0.75% of total gross loans (0.70% at June 30, 2015). Meanwhile, NCOs were elevated at 0.75% of average total gross loans for the quarter, but represented a low 0.31% for the nine month period ended September 30, 2015. The higher NCOs for the quarter were driven by one sizable growth stage client loan within the software and internet loan portfolio, the bulk of which was previously reserved against.

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.