The last three months were a good time to be the banker of hot tech start-ups and the funds that invest in them. SVB Financial (NASDAQ:SIVB) earned $237.8 million in the second quarter, a 93% increase over last year, helped by rising interest rates, a growing balance sheet, and lower corporate taxes on its profits.
Here's how SVB Financial's earnings nearly doubled in the course of a year.
SVB Financial's second quarter: By the numbers
|$25.7 billion||$20.7 billion||24%|
|$48.9 billion||$42.5 billion||15.1%|
|$237.8 million||$123.2 million||93%|
What happened this quarter
Though SVB Financial has close ties to the tech industry -- two-thirds of VC-backed tech and science companies that went public this year were SVB clients -- it's still a bank that makes its money by taking in deposits and making good loans.
Here are the most important metrics from this quarter's earnings report.
- Deposit growth continued in the second quarter, as total deposits grew about 15.1% year over year, and 6.4% sequentially, to $48.9 billion.
- Customer funds held off balance sheet in money market funds, bond funds, and similar cash-like investments, grew by 46% year over year, and 11.9% sequentially, to $75.7 billion. Last quarter, management said that higher yields offered by money markets and other products made them more attractive to larger clients.
- Rising interest rates are playing through in earnings. The company reported that its net interest margin (NIM) widened to 3.59%, up from 3.38% last quarter and 3% a year ago. On the conference call, management reiterated that it expects each Fed rate hike will result in a $50 million increase in net interest income on an annual basis.
- Credit quality is superb. The bank charged off just 0.22% of loans on a net basis this quarter, compared to 0.15% of loans in the sequential quarter, and 0.44% of loans in the year-ago period.
- Lower taxes helped earnings in a big way. Net earnings increased by 93% year over year, substantially higher than the 58.8% increase in its pre-tax earnings over the same period. Comparing earnings on a pre-tax basis gives a better view into how much of its earnings growth is being driven by operating performance rather than changes in tax rates.
- The bank opened its first office in Germany during the second quarter. Roughly 10% of all outstanding loans and 23% of all deposits can be attributed to its foreign offices, which management said were growing faster than domestic branches.
What management had to say
Given that SVB Financial has a unique vantage point from which to observe the going ons in Silicon Valley, management's high-level commentary on the state of the technology industry is closely followed.
The bank is clearly benefiting from a surge in activity in Silicon Valley. SVB's chief executive officer, Greg Becker, noted that venture funds "invested $57.5 billion in the first half of 2018 which puts investing on pace to potentially exceed $100 billion for the first time since 2000."
He added that investment activity is helping the company corral new clients, as the bank added 1,200 new commercial clients in the second quarter alone.
SVB Financial is also heavily exposed to venture capital and private equity funds. Management highlighted that it continues to see outsized growth in loans to private equity funds. Such loans have been a boon to SVB Financial because even though they are some of the lowest-yielding loans it makes, loan losses are very few and far between.
SVB Financial publishes regular earnings guidance on a host of key metrics, updating guidance as it sees fit throughout the year. The table below shows the changes in its full-year guidance following its second quarter earnings report.
|Metric||Change in guidance|
|Average deposit balances||Increased to "low teens" from "low double digits"|
|Net interest income||Increased to "mid-thirties" from "low thirties"|
|Net interest margin||Increased to "between 3.55% and 3.65%" from "3.50% to 3.60%"|
|Net loan charge-offs||Decreased to "between 0.20% and 0.40%" from "between 0.30% and 0.50%"|
|Non-performing loans as a percentage of total gross loans||Decreased to "between 0.40% and 0.60%" from "between 0.50% and 0.70%"|
|Core fee income||Increased to "low thirties" from "high twenties"|
|Noninterest expense||Increased to "low teens" from "low double digits"|
|Effective tax rate||Decreased to "between 26% and 28%" from "between 27% and 30%"|
It's notable that of the eight changes to guidance this quarter, only one (an increase in guidance for expenses) could be interpreted as a negative for shareholders.
The value of SVB Financial's deposit franchise is starting to show through. As one of the most asset-sensitive banks on the market, shareholders should root for continued rate increases by the Federal Reserve, which would only serve to add more "oomph" to the bank's earnings power.