SVB Financial Group Inc. (NGS: SIVB), a diversified financial services company. We expect earnings to remain under pressure due to a flat lending environment and a precipitous decline in the net interest margin. The investment portfolio is also expected to face pressure from lower interest rates and faster prepayments in mortgage securities. We expect continued increases in investment banking revenues as Leerink is now fully integrated.
Results in the third quarter were aided by two large factors. A positive $52 million impact from a negative credit loss provision, resulting in a gain of $1.00 per share, and a $149.2 million gain on investments in BigCommerce Holdings Inc. (BIGC), which boosted earnings by $2.87 per share. (BIGC went public at $24.00 per share and is currently trading near $90.)
Management’s outlook for 4Q20 calls for mid-single-digit growth in loans, deposits and net interest income, offset by a lower NIM and fee income and higher noninterest expenses. The outlook for 2021 calls for high single-digit growth in loans and net interest income along with high teens to low 20s deposit growth. Management expects a net interest margin of 2.45%-2.55%, flat fee income, and low to mid-single-digit growth in noninterest expense. Based on these projections and the stock’s recent run-up, we believe that SVB is fully valued at 15-times our EPS estimate for 2021.
On October 22, SVB reported 3Q20 EPS of $8.47, up from $5.15 a year earlier and $4.42 in 2Q. Revenue rose 24% from the prior year to a record $1.09 billion.
In connection with the COVID-19 pandemic, the company has more than 4,400 outstanding PPP loans with a value of $1.8 billion, and deferments of up to six months for smaller borrowers.
On June 2, SIVB issued $500 million of 3.125% senior notes due 2030.
In December 2019, the company issued $350 million in preferred stock to retire $350 million of 5.375% senior notes due 9/15/20.
On August 17, the company paid a quarterly cash dividend of $13.13 per share on its 5.25% fixed-rate noncumulative perpetual Series A preferred stock. The total amount paid was $4.6 million. The next quarterly payout will be made on November 16, 2020 to holders of record at the close of business on November 3.
EARNINGS & GROWTH ANALYSIS
We expect SVB to post flat to lower net interest income in 2020, in line with management’s guidance. With respect to the net interest margin, the 3Q20 margin fell to 2.53%. Management projects a net interest margin of 2.45%-2.55% in 4Q20, reflecting its forecast for average deposit and loan balances and deployments of surplus cash into investment securities. We look for flat to low single-digit revenue growth in 2020, driven primarily by increased investment banking fees in the second half. Noninterest expenses are expected to be higher due to increased performance-based incentive compensation.
The loan book totaled $37.3 billion at September 30, 2020, with $34 billion (91%) in variable-rate loans. Some 63% of the variable loans are based on prime lending rates and 37% are based on LIBOR. The provision for loan losses was a negative $52 million in 3Q, compared to positive $37 million a year earlier and positive $66 million in the second quarter. The allowance for credit losses rose to $513 million from $304 million in the prior-year quarter, representing 1.34% of loans. However, the allowance fell by $77 million from the second quarter, reflecting changes in the company’s forecasts and improved credit performance in the Private Bank. Management identified three areas of credit concern, representing 13% of total assets: Technology (9%), Healthcare & Life Sciences (2%), and Wine (1%).
Management expects the effective tax rate to hold steady in the 27%-28% range in 4Q20 and 2021. In 2021 we estimate to $19.58 from $14.61. Our revised estimates assume no stock repurchases under the company’s remaining $290 million buyback authorization, which expires on October 29, 2020.
FINANCIAL STRENGTH & DIVIDEND
Moody’s rates SVB’s debt at A3/stable, while S&P has a rating of BBB/stable.
The CET 1 ratio was 10.75% at September 30, 2020, down from 11.12% a year earlier. Book value rose to $143.91 per share from $118.67 per share.
MANAGEMENT & RISKS
SVB is led by President and CEO Gregory Becker. The CFO is Daniel Beck. The company is transparent with its performance and offers guidance for average deposit growth, net interest income growth, and net interest margin. The company is subject to a range of risks, including changes in interest rates, credit quality, regulatory complexity, and market volatility.
SVB Financial Group, a diversified financial services company, provides banking and financial services. The company operates through three segments: Global Commercial Bank, SVB Private Bank, and SVB Capital. It was founded in 1983 and is headquartered in Santa Clara, California.
We believe that SVB has promising growth prospects that should benefit ROE and EPS over time. However, based on management’s 4Q20 and 2021 guidance and the stock’s recent run-up, we believe that SVB is fully valued at 15-times our EPS estimate for 2021, when we expect earnings to normalize. We also expect it to face pressure in the prolonged low interest rate environment.
On October 26, HOLD-rated SIVB traded at $290.01, down $6.37.