SVB Financial Group's Earnings Ride Rates Higher

Image source: SVB Financial Group.

SVB Financial Group (SIVB.Q -1.96%), the parent company of Silicon Valley Bank, reported earnings of $99.5 million in the fourth quarter, a 13.7% increase from a year ago. As a banker primarily to the tech and finance industries, the company saw earnings rise due to an increase in interest rates and growth in its loan portfolio.

SVB Financial Group's quarter by the numbers

Data source: SVB Financial investor relations.

What happened this quarter

SVB Financial shareholders should pay particularly close attention to a few key items in its report.

• Loan growth buoyed interest income and profits. Total gross loans grew 18.8% year over year and 4.1% quarter over quarter. Loans to private equity and venture capital firms were the fastest-growing category in dollar terms.
• A decline in deposits isn't what it may appear to be. Excluded from deposits are clients' off-balance sheet accounts like money market funds and fixed-income assets that are similar to deposits from the customers' perspective, but aren't true bank deposits for regulatory or accounting purposes. Period-end total client funds (off-balance sheet assets plus deposits) grew 4.8% quarter over quarter and 2% year over year.
• Net interest margin expansion is playing into the bank's favor. This quarter, it earned a net interest margin of 2.73%, up about 19 basis points from the year-ago period. Further increases should flow through in the first quarter of 2017, which will include the full benefit of the Fed's December 2016 rate increase.
• SVB reported gains of about $30 million vs. $42.9 million last quarter and $30 million in the year-ago period. Gains or losses are primarily driven by interest rate fluctuations and changes in the valuation of its equity and warrant securities, and can be highly volatile from quarter to quarter. Large increases or decreases in earnings from quarter to quarter can frequently be explained by this line item on the income statement.
• Credit quality is mostly trending in the right direction. The company's net charge-off ratio of 0.44% compares nicely to 0.48% last quarter, but remains elevated compared to 0.28% in the year-ago period. Nonperforming loans made up just 0.59% of total gross loans vs. 0.55% last quarter and 0.73% a year ago.

What management had to say

According to Greg Becker, president and CEO of SVB Financial Group:

Our positive expectations for 2017 have improved in light of recent short-term rate increases and we believe there could be potential upside if rates continue to rise. While there is still uncertainty in the global markets, and very early stage companies are still feeling the effects of the recalibration, we believe SVB's position as the bank to the world's most dynamic companies, entrepreneurs and investors remains a distinct competitive advantage.

Management seems to be feeling good about the bank's prospects as well as the possibility of Federal interest rate hikes. Keep an eye on the Fed's interest policy because Silicon Valley is well-positioned to take advantage of rising rates. 

Looking ahead

SVB released its outlook for 2017, and the key items are summarized in the table below:

Data source: SVB Financial press release.

On the conference call, the company explained that higher expenses would be partially driven by its preparation to cross $50 billion in assets, a point at which it will endure greater regulatory scrutiny and likely higher ongoing compliance costs as a "systemically important financial institution."

Ultimately, though, many of the biggest moving parts for 2017 are out of SVB Financial's direct control. Its executives estimated that the bank would stand to earn about $1 million in additional annual net income for every basis point increase in interest rates. Irregular but significant gains on the company's securities and derivatives portfolio typically follow IPOs and new venture capital and private equity activity, which can ebb and flow from quarter to quarter.

Where rates go from here is anyone's best guess, but bank executives were upbeat about the prospects for heightened IPO activity in 2017 vs. 2016, which could trigger elevated realizations in its portfolio of warrants and equity holdings.