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Is SVB Financial a Buy?

By Dave Kovaleski – Jul 28, 2020 at 6:00AM

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This top-performing bank stock should continue to outperform.

SVB Financial Group (SIVB.Q -7.73%), the holding company for Silicon Valley Bank, has been about as good a bank stock as you could want over the past decade. For the 10-year period that ended June 30, SVB has had an annualized return of about 17%, which was the best among the 40 largest U.S. banks.

As the disclaimer goes, past performance is no guarantee of future results -- but there are a lot of reasons to believe that SVB will continue to be successful. It has stood out for the past 10 years, and it stands out now as a stock to consider adding to your portfolio.

A red flag on a map of the San Francisco area that says Silicon Valley.

Image source: Getty Images.

Carving out a successful niche

SVB was the 34th-largest bank in the U.S. as of March 31, according to the Federal Reserve's latest rankings, and it had $78 billion in assets as of June 30. So SVB is by no means a major bank -- but it doesn't try to be.

What it does try to do is occupy a specific niche within the banking world as a premier lender to start-ups in the start-up capital of the world, Silicon Valley. About half of SVB's loans go to private equity and venture capital firms, with many of them being bridge loans that are repaid after the borrowers secure capital from limited partners. Overall, SVB has provided loans to more than 30,000 start-ups.

While most of the bank's clients are in Silicon Valley, SVB also focused on lending in other "innovation centers" in the U.S., Europe, and Asia. SVB's customers make up about 50% of all venture capital-backed technology and life sciences firms in the country, many of which are thought to be too risky by traditional banks. But this risk has paid off for SVB due to its intimate knowledge of the space, its connections, its customer service, and its sole focus on the niche.

Lower credit losses

SVB's performance over the past 10 years speaks for itself, but it has also outperformed its banking industry peers through the pandemic. Through Monday's close, the stock is down just 10% this year -- far better than the average bank stock, which is down about 34%.

In the second quarter, SVB beat earnings estimates with net income of $229 million, or $4.42 per share, which was well above analysts' expectations. Earnings were down about 38% compared to the second quarter of 2019, but showed marked improvement over the first quarter when net income was $132 million. The big difference between this quarter and last quarter was a much smaller provision for credit losses of $66 million, compared to $243 million in the first quarter. Net loan charge-offs were down to $11 million in the quarter, down from $29 million in the first quarter.

On the second-quarter earnings call, Marc Cadieux, chief credit officer at Silicon Valley Bank, explained why credit losses were lower:

"Generally speaking, coming into this downturn, venture-backed investor-dependent companies had on average more liquidity, and we're, I think, in a better position to weather a storm. And then a number of things have happened to make that liquidity situation better still, right, PPP [Paycheck Protection Program] loans, our programmatic deferrals, payment deferrals companies were pretty quick to reduce expenses, that helps as well. And then finally, investor support has been much stronger, frankly, than I recall seeing in the last downturn, and the combination of those things have, I think, on average put quite a bit of runway in front of the average investor dependent company, and you see that of course reflected in the lower losses that we experienced in the second quarter."

New client growth

Also in the second quarter, net interest income was only down 3% year over year, while non-interest income was up 10% to $368 million year over year. Non-interest income was buoyed by record revenue in investment banking through SVB Leerink, the company's Boston-based investment banking arm that focuses on the healthcare sector.

Overall, SVB added a record number of new clients, most of them at the early stage, where the company has made a sizable investment. As President and CEO Greg Becker explained on the second-quarter earnings call, particularly during an economic downturn, companies tend to turn to a trusted, experienced banking partner. SVB will continue to invest in this practice, and it should continue to generate revenue for the bank during the downturn.

Liquidity is also strong, with $14.3 million in cash and cash equivalents, up from $9 million year over year, with another $32.5 million in investment securities, up from $23.8 million.

The stock is trading at about 12 times earnings, so it is a good value with a good balance sheet and solid potential for growth. SVB will continue to outperform in the sector and should definitely be near the top of your list of bank stocks to buy.

SVB Financial provides credit and banking services to The Motley Fool. Dave Kovaleski has 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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