SVB Financial Group (SIVB.Q -1.96%), the holding company of Silicon Valley Bank, capped off a tremendous year with a great fourth quarter, continuing the momentum the company rode throughout 2020. The stock grew about 55% during the year and is currently trading around $440 per share, or almost 300% of tangible book value. Diluted earnings per share for the full year came in at $22.87, up more than 5% from record earnings in 2019.
While the bank trades at a rich valuation compared to the industry, it's uniquely situated to continue to thrive in the current environment. Let's take a look at what led to the success and what to expect from the bank in 2021.
Strong loan growth
Silicon Valley Bank is a niche bank catering to the start-up, venture capital, and private equity communities, which are very good sectors to be in right now. The bank has always had great expense management and excellent credit quality. But growth in its various business lines in 2020 powered the bank through higher credit costs and the low-rate environment stemming from the coronavirus pandemic.
Image source: Silicon Valley Bank.
During 2020, Silicon Valley Bank saw its balance sheet balloon from $71 billion in total assets at the start of the year to more than $115 billion at the end. As with most banks, a big part of this growth can be attributed to the massive amount of deposits that flooded into the banking system. But unlike most of the industry, Silicon Valley Bank also experienced robust loan growth of more than 36% in 2020, finding the ability to grow loans outside of those originated in the Paycheck Protection Program (PPP). Despite pressure from the low-rate environment on the bank's net interest margin, the difference between what the bank makes on interest-earning assets such as loans and pays out on interest-bearing liabilities such as deposits, the bank grew net interest income in 2020.
The big driver of the loan growth came from Silicon Valley Bank's global funds banking division, which provides banking products such as short-term lines of credit to private equity and venture capital funds. That group saw close to $8 billion of loan growth in 2020 due to record levels of dry powder in the private markets, as investors, starved for returns, had limited areas to turn to.
Fee income surged
Although the bank's net interest income growth in 2020 impressed, fee income growth surpassed it, growing by more than 50% in 2020 compared to 2019 and reaching more than $1.8 billion on the year.
At the very beginning of January of 2019, Silicon Valley Bank acquired the Boston investment bank Leerink, which specializes in innovation industries including healthcare, biotechnology, pharmaceuticals, medical devices, diagnostic and life science tools, healthcare services, and digital health. The move has paid dividends, as the division benefited from lots of initial public offerings in 2020 and generated nearly $414 million of revenue, up roughly 112% from 2019.
Additionally, because it interacts so much with the start-up and venture capital communities, Silicon Valley Bank has its own venture capital arm, through which it invests money from mostly third-party investors in start-ups and funds that essentially invest in other venture capital funds. This business generates non-interest income through investment returns, carried interest, and management fees.
In 2020, the venture capital arm generated more than $237 million in net gains, up about 72% from 2019. The main boosts to this business were start-ups or companies in which Silicon Valley Bank had an interest going public or getting acquired, resulting in gains on investment securities or warrants.
Another strong year ahead in 2021
After such a strong year in 2020, you might be wondering if the bank can continue the momentum in 2021. All signs would indicate that it can. Management previously projected that net interest income is expected to grow in the high-single-digit percentages this year, which would be strong in the low-rate environment. The bank also added 1,500 more clients in the fourth quarter, ranging from individuals to private equity and venture capital firms to start-ups. This provides more customers for the bank's loans and other banking products.
Additionally, Silicon Valley Bank recently acquired Boston Private Financial Holdings. The acquisition is immediately beneficial to earnings and tangible book value, and it will help build out the bank's wealth management business. Boston Private comes with more than $16 billion in assets under management and an advanced technology platform that should help Silicon Valley Bank cross-sell banking products to its huge and wealthy client base. The continued loan growth and expansion of the private bank are just two of the reasons to be excited about Silicon Valley Bank this year.
