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 niche business of providing financial services to companies in the innovation space, which includes the technology and life science & healthcare industries, as well as to private equity and venture capital firms. Importantly, its loan book with exposure primarily to established customers, along with growth in private equity capital call lines and a growing new client list continues to drive SVB’s solid earnings generation. It should be noted that the Company’s bottom line can be volatile, due in part to swings in gains/losses on investment securities and warrants, which have generally been a long-term positive contributor to earnings. Ratings also reflect robust liquidity and funding positions which have benefited from healthy funding/exit environments and highly liquid clients. Credit quality remains sound, yet reflects some recent manageable deterioration. Finally, ratings also consider the Company’s solid capital position, and it’s prudent and measured approach to international expansion.

DBRS notes that solid performance through a steep market correction, or material growth in core fee income as a percentage of revenues could have positive rating implications. Conversely, operational/execution missteps resulting in a weaker franchise, a material decline in credit quality, or sustained negative operating leverage could have negative ratings implications.

SVB’s strong franchise reflects its long established track record within the innovation space, and hard to replicate relationships with start-ups and the people who fund the companies. Importantly, and reflective of its top tier position within the space, the Company’s client base continues to grow. Specifically, during 2Q15, new client growth was approximately 20% (annualized), consisting overwhelmingly of early stage clients.

DBRS views SVB’s earnings power as solid, driven by sound loan growth, as well as some revenue diversification through its core non-interest income revenues. Moreover, earnings have benefited from warrant and investment securities gains, a tailwind that is slowing down. For 9M15, net income available to common shareholders totaled $256.4 million, up 24.5% from $205.9 million for the similar period in 2014. Improved results for 9M15, year-over-year (YoY) mostly reflected higher revenues, driven by improved spread income, spurred by a 30% increase in average loans along with a 43% increase in average securities. Supporting earning asset growth, average total deposits for the nine month period increased 32% YoY. Meanwhile, core non-interest income, which excludes non-controlling interests (non-GAAP basis), was approximately $329 million for 9M15, up 33% from $248 million for 9M14, led by higher levels of foreign exchange fees and credit card fees. DBRS anticipates solid earnings momentum heading into 2016, given the continuing sound health of the innovation economy.

Despite some deterioration seen in the last two quarters, SVB’s credit quality remains sound. Specifically nonperforming loans represented a manageable 0.75% of total gross loans at September 30, 2015, up from 0.27% at December 31, 2014. Meanwhile, net charge-offs were elevated and totaled 0.75% of average loans for 3Q15, as compared to 0.28% for 3Q14, yet were a more moderate 0.31% for 9M15, as compared to 0.39% for 9M14. The increases in NPAs and charge-offs were related to a few larger loans. Specifically, newly impaired loans since YE14 included two software and internet clients, of which one was an asset based loan and the other was a sponsored buyout loan, and two sponsored buyout clients in SVB’s life science & healthcare loan portfolio. DBRS notes that on a historic basis, the volatility in SVBs credit quality has generally been driven by its less granular loans. If several of its larger loans were to default at the same time, capital could be invaded. During the financial crisis, SVB suffered two consecutive quarterly losses starting in 4Q08, due to an increase in nonperforming loans and net charge-offs. DBRS notes that the Company’s business model has proven quite resilient following both the dot.com bubble burst, as well as the most recent market downturn. DBRS expects NPAs and NCOs to remain manageable and that credit quality will remain sound.

Ratings also take into consideration the Company’s strong funding/liquidity and capital profiles. Funding and liquidity is underpinned by a high level of core deposits, which easily fund loans. Overall, deposits are overwhelmingly non-interest bearing, benefitting the NIM. Meanwhile, capital remains sound. The Company’s most restrictive capital metric remains the Bank’s leverage ratio, which ended the quarter at 7.13%, or just above the low end of the Company’s 7% to 8% targeted range. SVB continues to encourage its customers to consider off-balance sheet products to reduce deposit balances, which has been gaining traction in FY15. Moreover, the Company may choose to tap the capital markets again to support growth, including a potential debt issuance.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $41.7 billion in assets at September 30, 2015.

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 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: May 31, 2006
Most Recent Rating Update: 19 November 2014

For additional information on this rating, please refer to the linking document under Related Research.