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 model, which primarily caters to companies in the innovation space, including technology, life science and healthcare industries, as well as to private equity and venture capital firms. Furthermore, credit fundamentals remain strong with ample funding and liquidity, solid asset quality, as well as a sound capital position. The ratings also consider the challenging operating environment, increasing regulatory and compliance demands, earnings volatility associated with gains and losses on investment securities and warrants, as well as managing the Company’s growth both domestically and internationally.

SVB’s strong franchise reflects its long established track record and hard to replicate relationships with start-ups and the people who fund them, which allows the Company to dominate the innovation space even with increasing competition, while receiving premium pricing. In addition, SVB continues to strengthen its unique position in its targeted markets, as evidenced by the favorable client growth it has experienced over the long-term, including adding more than 1,000 new corporate clients in 3Q16.

Despite the challenging environment in the first half of the year, which included economic uncertainty, a slowdown in early-stage investments, a pullback in valuations and weak exit markets, the Company still generated solid results. With sentiment and market conditions improving in the second half of 2016, SVB reported record earnings in 3Q16. Overall, for the nine months ended September 30, 2016, net income available to common shareholders totaled $283 million, up 10% from the similar period in 2015. The improved bottom-line result was driven by strong loan growth and a wider NIM, reflecting the utilization of fixed income securities to fund loan growth, with deposit growth moderating. Meanwhile, core non-interest income, which excludes non-controlling interests (non-GAAP basis), was approximately $339 million for 9M16, up 3% from 9M15, led by broad-based core fee income growth, which more than offset substantial declines in net gains from investment securities and warrants.

SVB’s credit quality remains favorable, as nonperforming assets declined 14% from year-end and net charge-offs represented a manageable 0.47% of average total gross loans during 9M16. In addition, pressure in the Company’s modestly-sized early-stage portfolio (approximately 6% of total loans) has been abating with the gradually improving funding environment. Overall, SVB’s loan portfolio is comprised of a considerable amount of large loans, as customers with gross loans equal to or greater than $20 million (individually or in the aggregate) totaled $8.5 billion, or 44 percent of total loans. However, these loans are generally made to more creditworthy clients and the majority of loans over $30 million were to private equity and venture capital firms. Importantly, DBRS notes that the Company’s business model was proven quite resilient during both the dot-com bubble burst, as well as the most recent market downturn.

SVB’s strong funding and liquidity profile continue to provide key support to the ratings. Specifically, deposits very easily fund the entire loan portfolio (loans/deposits ratio was 50% as of 3Q16) and represented 97% of total liabilities, of which, 81% were non-interest bearing at September 30, 2016. As a result, the Company’s cost of funds (0.11% as of 3Q16) remains among the lowest in the industry. DBRS notes that total client funds, which includes deposits and off-balance sheet investment funds, declined modestly from year-end primarily due to the headwinds experienced in the first half of the year, but the Company expects a return to growth over the next year.

Overall, the Company’s capital ratios remain sound and have improved over the past year, reflecting strong earnings and no shareholder payouts. Specifically, the Company’s CET1 ratio was 12.8% at 3Q16. Lastly, SVB’s Bank leverage ratio, which is its most restrictive metric, stood at 7.7% at September 30, 2016, remaining within the Company’s 7% to 8% targeted range.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $43 billion in assets at September 30, 2016.

RATING DRIVERS
DBRS views SVB as comfortably placed within its rating category. Over the long-term, successful global expansion, which enhances the Company’s franchise strength or material growth in core fee income as a percentage of revenues could have 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.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: Michael McTamney, CFA
Rating Committee Chair: William Schwartz
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 07 December 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.