SVB Financial Group (SIVB.Q 2.00%) stunned Wall Street with its first quarter earnings report. The bank holding company earned $195 million in the first quarter, a 92% increase from the year ago period. It also raised guidance for the remainder of the year, raising its outlook for growth in loans, deposits, net interest income, and more.
To say that Wall Street was pleased with the company's first quarter results and updated guidance is an understatement. Shares of the bank jumped by about 16% as of 12:00 p.m. EDT on Friday. Here's what you need to know now.
SVB Financial's first quarter: By the numbers
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Net loans |
$24.6 billion |
$20.4 billion |
20% |
|
Deposits |
$45.9 billion |
$41.1 billion |
12% |
|
Net income |
$195 million |
$101.5 million |
92% |
|
Diluted EPS |
$3.63 |
$2.19 |
90% |
Data source: SVB Financial. EPS = Earnings per share.
What happened this quarter
SVB Financial's first quarter results are the result of a perfect storm. An increase in deposits, loans, and net interest margins helped drive SVB Financial's earnings higher.
- SVB Financial is growing quickly. Total deposits grew by about 12% year over year, and 4% sequentially, to $45.9 billion. Client funds held off its balance sheet (think money market funds and fixed-income investments manged by SVB's asset management arm) grew by 46% year over year, and 12% sequentially, to $67.7 billion.
- Rising rates are a boon for business. Net interest margin (NIM), or the difference between what a bank earns on its assets and pays on its liabilities, widened to 3.38%, up from 3.20% last quarter and 2.88% a year ago. SVB Financial is one of the most asset-sensitive banks on the market, since it doesn't pay interest on about 82% of its deposits, and more than 91% of its loans carry variable interest rates. Thus, as rates rise, what SVB Financial earns in interest on its assets will grow faster than what it pays in interest on its liabilities, leading to rising net interest margin.
- It became a "too big to fail" bank this quarter. SVB Financial is officially a systemically important financial institution (SIFI) after crossing the $50 billion average asset threshold over the last four quarters. So-called "SIFI banks" encounter more regulatory scrutiny and increased compliance costs, but the bank has been planning for this step for several quarters.
- Investment gains buoyed profits. Gains on the company's investment securities and warrants portfolio added about $28 million of pre-tax profit, despite the fact the bank holding company took a $22.2 million pre-tax loss on Roku this quarter. (Don't feel too bad about Roku -- the bank earned about $46 million in net gains over the full life of the investment, according to conference call commentary.)
- Credit quality remains exceptional. The bank reported a net charge-off ratio of 0.15% of average gross loans on an annualized basis in the first quarter, down from 0.23% in the sequential quarter and 0.25% during the year-ago period.
- Lower taxes played their part. Pre-tax income jumped 77% while net income grew 92% year over year. The difference is due to a lower corporate tax rate put into place by the Tax Cuts and Jobs Act. SVB Financial expects its effective tax rate to be near the low-end of its previously guided range of 27% to 30% for the full year.
What management had to say
As rates rise, SVB Financial is looking for ways to maximize the value of its client relationships and grow earnings by convincing its asset management clients to move spare cash into more traditional bank accounts. This issue dominated conference call Q&A, as analysts tried to quantify just how much SVB Financial could grow earnings by bringing client cash on its balance sheet.
On the conference call, SVB Financial's CEO, Greg Becker, confirmed that the bank collected fees tallying to roughly 0.14% of assets annually. He added that the bank previously thought it could charge as much as 0.15% in annual fees if interest rates continued to rise, but it now sees a much higher ceiling. "We now believe there's the upside 17, 18 getting close to 19 or 20 basis points," said Becker, referring to fees booked on client cash held in bank account-like funds.
Image source: Getty Images.
But increased fees are relative pocket change compared to what the bank could earn if it can convince clients to move their spare cash to a deposit account, which would allow the bank to invest it in higher-yielding loans and securities, thus earning a large spread rather than a small fee on client funds.
This is a potentially massive opportunity for SVB Financial, given that its clients had $29.4 billion held in sweep money market funds at the end of the first quarter. Its CFO, Dan Beck, said that the bank is offering certain customers yields "near market rates that they could get off balance sheet" to entice clients to make the switch.
Looking ahead
SVB Financial sees room for improvement in 2018, updating its outlook for the full year to reflect optimism surrounding key business drivers. Its updated outlook calls for net interest income to grow at an astonishing clip in excess of 30% this year on the back of rising rates and balance sheet growth.
The table below shows SVB Financial's guidance changes during the first quarter.
|
Metric |
Change in guidance |
|---|---|
|
Average loan balances |
Increased to high teens from previous outlook of mid-teens |
|
Average deposit balances |
Increased to low double digits from previous outlook of mid-single digits |
|
Net interest income |
Increased to low thirties from previous outlook of high teens |
|
Net interest margin |
Increased to between 3.50% and 3.60% from previous outlook of between 3.35% and 3.45% |
|
Core fee income |
Outlook increased to high twenties from previous outlook of high teens |
Data source: SVB Financial.
Finally, after years of persistently low interest rates, rates are on the rise, and the value of SVB Financial's low-cost deposit mix is starting to play through in the company's income statement.
