SVB Financial (SIVB.Q 8.25%) has been the best-performing large-bank stock of 2018 so far, fueled by a strong private equity market and improved efficiency. In this Industry Focus: Financials clip, host Shannon Jones and Motley Fool contributor Matt Frankel discuss SVB's business model, why the stock has performed so well, and what investors need to know about the company.
A full transcript follows the video.
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This video was recorded on Sept. 10, 2018.
Shannon Jones: Let's turn our attention to the last of the top three high flyers, and that's SVB Financial, ticker SVB. This is the parent company for Silicon Valley Bank, which specializes in banking services to entrepreneurs and private equity firms. Matt, this company, on the flip side from where we just came from, has really been able to outperform because it's really been firing on all cylinders. What can you tell us about that?
Matt Frankel: Like you mentioned, they focus on private equity and entrepreneurs. Private equity valuations have just been going through the roof over the past couple of years. That has fueled a lot of their gains. They have a lot of venture capital funds. They make a lot of private equity investments. The valuations of those have just been going through the roof and driving their gains.
They were also a big beneficiary of the deregulation that I mentioned. One of the key provisions of the deregulation that passed is that the threshold for what's considered to be a systematically important financial institution, or SIFI, which is the too big to fail definition, was raised from $50 billion to $250 billion in assets. Well, SVB has $54 billion in assets. Now, it doesn't have to worry about the excessive regulation that comes with being a huge financial institution. That was a big beneficiary there.
Interest rates have also panned out better for SVB than a lot of its peers. The bank has done a great job overall of becoming much more efficient, cutting costs, raising profitability. Just to throw some numbers out there, SVB has a return on assets of 1.75%. 1% is considered good for a bank, and this bank was at 1.04% a year ago. Return on equity, 20.8%. 10% is considered good. They're generating more than twice the return on equity that is expected. It's up almost over 700 basis points from a year ago. The bank is operating right now at a 46% efficiency ratio. Most banks with a brick and mortar presence are happy to be under 60%.
Not only has private equity been going the right way, regulation has been going the right way for them, interest rates have panned out for them, and they're just on top of that. They're doing a really good job of controlling expenses and becoming a more profitable and efficient institution over the past year or so.
Jones: Absolutely. Really, all in all, this is a really good time to be backing many of the start-ups and funds, investing in the tech space in general. Interestingly, one statistic, two-thirds of VC-backed tech and science companies that debuted in the public space this year were actually SVB clients. A very well-known, very popular backer for many of these start-up companies. You've got that going for the stock.
Also, just like you mentioned, Matt, this is also a really good bank. They've been capitalizing on all the key catalysts that have been driving the sector forward. And, too, I think there's a lot more room for them to grow in the long-term. You've got a really solid bank, capitalizing on those key sector catalysts, and business is booming.