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Forget Goldman Sachs, SVB Financial Is a Better Bank Stock

By Nicholas Rossolillo – Updated Apr 29, 2020 at 7:27AM

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The dreaded first-quarter 2020 earnings season is here, and this long-term winner continues to shine.

Heading into a recession, bank stocks aren't the place to be invested. Highly sensitive to changes in economic activity, they're especially vulnerable to the market's panic. As of this writing, the Dow Jones U.S. Banks and Financial Services Indices are down 36% and 25%, respectively, in 2020, compared with an 11% decline for the S&P 500.  

But once a recession has started -- and more importantly, once some visibility on a recovery begins to come into focus -- banking and financial services can be some of the best stocks to capitalize on a rally. For example, investment banking giant Goldman Sachs (GS -1.03%) more than doubled in value from March 2009 (the stock market bottom during the Great Recession) to the end of the year. Since then, the banking giant's stock has done very little, but the initial surge once the economic recovery was in sight was worth taking advantage of.  

Even better than Goldman Sachs, though, was investment bank SVB Financial Group (SIVB -0.64%), better known as the parent of Silicon Valley Bank. Over the past decade, SVB's stock has roughly tripled, which includes a nearly 30% fall from recent highs this year. The regional institution is a top way to play investment banking in the tech- and start-up-rich San Francisco Bay Area, and a better bank stock in general than most of its larger peers.  

The exterior facade of a bank. The word "bank" is engraved over the door.

Image source: Getty Images.

Deep roots in the start-up community

SVB gears its banking suite to start-ups, founders, and their investors. Services include banking, investment, asset management, and brokerage services for both companies and select individuals. The company also has its own portfolio of equity investments in private and publicly traded companies, totaling $1.2 billion at the end of the first quarter.  

Focusing primarily on innovative businesses, the global start-up ecosystem is critical to SVB's success. According to SVB's "State of the Markets Q1 2020" report, global venture capital (when a start-up sells equity ownership to an investor to raise funds) deal count fell to 29,507 in 2019 from a peak of 36,697 in 2017. Total fundraising also fell from a peak of about $290 billion in 2018 to just over $250 billion in 2019. Thus, even before the coronavirus crisis hit, the global start-up ecosystem had been taking a breather.  

Nevertheless, SVB remains in good shape. Cash and equivalents on its balance were $9.56 billion at the end of Q1 (compared with $7.07 billion a year ago), and total investment securities were $27.4 billion ($22.8 billion a year ago). Overnight short-term borrowings increased to $3.1 billion on March 31, compared to zero at the end of 2019 attributable to the coronavirus crisis, and earnings per share did fall to $2.55 from $5.44 in Q1 2019 due to higher provisions for credit losses. Nevertheless, this bank runs a tight ship, so it can focus on investing and supporting new disruptive companies around the globe, and it's in position to ride out the storm.  

An efficient banking play

Many investors may scoff at SVB, as it doesn't pay a dividend like its peers, but this isn't the usual breed of banking stock. True to the customers it primarily serves, SVB reinvests much of its profit back into operations rather than doling out cash payments.

The model works. You can see it in SVB's efficiency ratio (non-interest expenses divided by total interest and non-interest income). SVB had a 48.4% efficiency ratio in this year's first quarter -- a strong mark, if slightly worse than the 46.1% it delivered in the same period last year (the lower the ratio, the more efficient a bank is at generating profit). For the sake of comparison, Goldman Sachs' efficiency ratio for the first quarter of 2020 was 73.9%, up from 66.6% for the first quarter of 2019.

SVB trades for 1.5 times tangible book value, only a slight premium over Goldman Sachs' 1.2 even though it has more growth potential and it's a more efficient profit generator. Small but growing and focused on the start-up niche, SVB Financial Group is a buy in my book as the world plans its next steps in the COVID-19 pandemic.

SVB Financial provides credit and banking services to The Motley Fool. Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends SVB Financial Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SVB Financial Group Stock Quote
SVB Financial Group
SIVB
$335.78 (-0.64%) $-2.15
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$293.05 (-1.03%) $-3.06

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