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SVB Financial Earnings: The Strong Growth Continues

By Matthew Frankel, CFP® - Jul 26, 2019 at 8:49AM

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The Silicon Valley Bank's creator had a strong second quarter, but industrywide headwinds could hurt profits.

SVB Financial Group ( SIVB 5.42% ), the company behind the wildly successful Silicon Valley Bank, has been one of the best growth stories in the banking industry in recent years. Now that we've seen the bank's second-quarter results, it doesn't look like the growth will end anytime soon. Here's a rundown of the key numbers, management's thoughts on the quarter, and what investors should keep an eye on.

SVB results: The raw numbers

Metric

Q2 2019

Q2 2018

 Change

Net interest income

$532.3 million

$466.4 million

14.1%

Noninterest income

$333.8 million

$210.1 million

58.9%

Net income

$318.0 million

$237.8 million

33.7%

Earnings per share

$6.08

$4.42

37.6%

Data source: SVB.  

View of Silicon Valley after sunset.

Image source: Getty Images.

What happened with SVB this quarter?

Looking beyond the headline numbers gives us a better idea of how well SVB Financial did for the quarter. Most of the results are pretty strong, but there are a few areas of concern investors should note.

First, the good:

  • Average loan balances increased by 3.6% from the first quarter and 18.3% year over year.
  • Total client funds, which includes both deposits and client investment funds, increased by 4% from the first quarter and 18% from the same quarter in 2018.
  • The efficiency ratio was 44.4%, down from 46.1% in the first quarter and 46.4% in the second quarter of 2018.
  • Not only are SVB Financial's return on equity (ROE) of 23.3% and return on assets (ROA) of 2.10% among the best in the banking industry, they are also a nice year-over-year improvement from 20.8% and 1.75%, respectively.
  • Book value per share was $107.72 at the end of the second quarter, a 23% year-over-year increase.

Now, the not-so-good:

There wasn't much to be disappointed about in its second-quarter earnings. That said, there are a few industrywide trouble spots that SVB was not immune to.

  • Its net interest margin fell by 13 basis points from the first quarter, which makes sense given the environment of falling interest rates. However, it is still nine basis points higher than it was a year ago.
  • Net charge-offs remain low at an annualized rate of 0.23%, but this is significantly up from a rate of 0.11% in the first quarter.

What management had to say

CEO Greg Becker was generally pleased with the results, and considering the numbers the bank produced, it's not difficult to see why. "Our outstanding second-quarter results attest to the health of our core business and our ability to execute effectively in a highly competitive environment, with robust client acquisition, solid balance sheet growth, strong credit quality, and stable expenses, topped by exceptional warrant and investment gains," Becker said in the company's press release.

Becker also acknowledged the tough interest rate environment but emphasized that the company's long-term growth strategy is working well.

Looking forward

With the exception of net interest margins, SVB Financial is generally meeting or exceeding the targets it set for 2019. To be perfectly clear, there's absolutely nothing in SVB's second-quarter report that should frighten investors, but it's certainly worth keeping an eye on interest margins and asset quality (charge-offs).

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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