DBRS Confirms SVB Financial Group at A (low); Trend Remains Stable

DBRS, Inc. (DBRS) confirmed the ratings of SVB Financial Group (SVB or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Silicon Valley Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

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. Additionally, credit fundamentals remain strong, with robust funding and liquidity, sound asset quality, as well as solid capitalization. The ratings also consider SVB’s less granular loan portfolio, 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 roughly 1,300 new core commercial clients in each of the past two quarters.

SVB reported record earnings in 3Q17 of $149 million, representing an ROA of 1.18%, a 20% improvement versus the linked-quarter and more than 30% compared to 3Q16. The improved results were driven by very strong balance sheet growth, the impact from the recent rate hikes, significantly improved core fee income and equity warrant gains, partially offset by higher expenses, which was largely attributable to incentive compensation. Specifically, average loans were up 5% from 2Q17 primarily due to growth in private equity capital call lines, software/internet loans and residential mortgages, driving the 9% increase in net interest income and 10 basis points of net interest margin expansion. Meanwhile, total noninterest income increased 24% sequentially, reflecting improved foreign exchange, credit card and lending related fees, as well as higher equity warrant gains, which was bolstered by Roku’s successful IPO.

The Company’s asset quality metrics remain strong, with very low nonperforming loans (NPL ratio of 0.56%) and quarterly net charge-offs (NCO ratio of 0.19%). Of note, SVB does not expect the impact from the recent wildfires in Northern California to have a material effect on the credit quality of its wine portfolio ($925 million, representing 4% of total loans, including approximately $700 million to clients in Napa/Sonoma) or its private bank mortgage exposure in the region. Moreover, subsequent to some stress experienced in 2016, credit quality within SVB’s modestly-sized early-stage portfolio (approximately 6% of total loans) has stabilized this year, but DBRS remains cognizant that current high valuations and soft exit markets still pose a risk to the portfolio. DBRS notes that the Company’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 $10.2 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 and the financial crisis.

SVB’s strong funding and liquidity profile continues to provide key support to the ratings. Specifically, deposits very easily fund the entire loan portfolio (loans/deposits ratio was 50% at the end of 3Q17) and represented 96% of total liabilities, of which, 82% were non-interest bearing at September 30, 2017. As a result, the Company’s cost of funds (0.09% as of 3Q17) remains among the lowest in the industry. During 3Q17, average total client funds, which comprises on balance sheet deposits and off balance sheet investment funds, were up nearly 7% sequentially, benefiting from the still favorable equity funding environment and continued strength in new client acquisition.

With some balance sheet expansion, but no shareholder payouts, capital ratios have remained stable in recent periods. Specifically, the Company’s CET1 ratio was 13.0% at the end of 3Q17, while the Bank’s leverage ratio, which is its most restrictive metric, stood at 7.6%, remaining well within the Company’s 7% to 8% targeted range.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $51 billion in assets at September 30, 2017.

The Grid Summary Scores for SVB are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good; Funding & Liquidity – Very Strong/Strong; Capitalisation – Strong/Good.

RATING DRIVERS
Delivering sustained above peer median financial results, including growing core fee income, while maintaining sound balance sheet fundamentals could have positive rating implications. Over the long-term, successful global expansion, which enhances the Company’s franchise strength would have positive rating implications. Conversely, operational/execution missteps resulting in a weaker franchise, or sustained decline in credit fundamentals could have negative ratings implications.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com 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, Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President, Global FIG
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 2 August 2017

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.