In times of economic recovery, bank stocks perform admirably. The banking sector as a whole is up more than 33% so far in 2021 at Friday's prices, trouncing the 11% gain for the S&P 500.
SVB Financial Group (SIVB.Q -1.96%), better known as Silicon Valley Bank, is doing even better than the average bank, with a return of 49% so far this year and 234% over the past year. A best-ever quarter in the first period of 2021 underpins the stock's performance, but this story is far from over. The future remains bright for this banker of the "innovation economy." This is a bank stock that needs to be on every investor's radar.
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A banker and an investor
Silicon Valley Bank has been propelled higher in the past year by massive growth in the digital economy. The company caters to start-ups and venture capital-backed technology, life sciences, and healthcare companies, as well as private equity and venture capital firms and their high-net worth employees and directors. It's a unique niche that is booming right now as the global economy gets a digital upgrade.
Net income in Q1 2021 was $532 million, up 37% from the fourth quarter of 2020 and up 303% from the same period a year ago. The bottom line was the result of average client funds increasing 16% from just three months ago to $262 billion and average loans up nearly 12% to $46 billion, leading to net interest income growth of nearly 12% to $665 million. Basically, even though average interest rates are far lower now than they were pre-pandemic, Silicon Valley Bank's assets and loans have grown so much they're still netting more in interest income despite the low rate environment.
But this is far more than just a bank. Silicon Valley Bank is also an investor, often getting stock warrants on the private companies it banks. Given the flourish of initial public offerings (IPOs) and special-purpose acquisition companies (SPACs) last year and in the first quarter of 2021, this has worked out exceptionally well for the company. It recorded $364 million in net gains from warrants and investment gains (like from equity gains from the IPO of Coinbase Global in April) during the first quarter alone.
Not so cheap anymore, but still plenty of potential
SVB's management said on the Q1 earnings call it doesn't expect a repeat of the record investment increases anytime soon. Growth stocks have been volatile the last couple of months, and new SPAC deals have slowed as the U.S. Securities and Exchange Commission ramps up regulation. This could put a temporary damper on equity and investment gains the rest of this year.
However, higher interest income is most certainly still in the cards as the bank's average client funds hit new records. And disruptive tech companies aren't slowing down in their quest to remake the economy -- a long-term benefit to this bank as it gets early access to equity in these businesses. Management said it will also look to expand its reach, like with the pending acquisition of Boston Private Financial Holdings that will yield it more access to private wealth management services.
Simply put, this bank is a long-term growth story well positioned to benefit alongside its tech start-up clients for many years to come. Shares trade for 19.5 times expected 2021 earnings per share -- certainly a premium to many bank stocks. But SVB Financial Group is no ordinary bank. I remain a buyer after the Q1 quarterly update.
