Over the past four months, the consumer price index (CPI), a measure of price changes for a basket of consumer goods and services, has been running above 5%. The longer inflation runs hot, the more concerns grow that higher prices may not be as temporary as originally thought. While Federal Reserve officials say inflation is transitory, the central bank's latest economic forecast indicates interest rates could rise as soon as next year, with more increases close behind.
This level of uncertainty can make it difficult to invest. Should you keep stocks that performed well during a period of lower interest rates or look toward stocks that will benefit if rates rise? Finding stocks that can perform in either environment can be tricky, but one stock I like that fits the bill is SVB Financial Group (SIVB.Q -1.96%).
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Impressive growth in 2021 despite low rates
SVB Financial Group is a diversified financial-services company and the parent of Silicon Valley Bank. The bank has built a strong and lucrative niche providing capital to entrepreneurs and start-ups, with a focus on areas like technology, life science, healthcare, private equity, and venture capital. And over the past 20 years, it has crushed the broader market. While the S&P 500 index has given investors returns of more than 310% over the past two decades, SVB has delivered returns of better than 3,100%.
Strong stock performance over such a long period only comes for companies that deliver -- and SVB has certainly done that. From 2000 through 2020, SVB delivered consistent earnings performance for investors, growing its net interest income at a 9.8% compound annual growth rate (CAGR), its non-interest income at a 12% CAGR, and its net income at a 10.6% CAGR.
SVB continues to deliver strong performance for investors. This year, the company has seen its net interest income (after provisions for credit losses) increase 83.5% from the first half of last year, bringing its total to $1.3 billion.
Meanwhile, noninterest income has increased nearly 125% to $1.5 billion, driven by strong gains on investments and equity warrants held by the bank. As a result, diluted earnings per share (EPS) are up 174% to $19.20 per share. As CEO Greg Becker said, "The innovation markets continued to generate robust liquidity, through strong fundraising, investment and exit activity, all of which contributed to healthy client activity and another exceptional quarter of balance sheet growth and revenues for SVB."
Rising rates could add hundreds of millions in added interest revenue
SVB has navigated the low interest rate environment skillfully, growing its balance sheet and the top and bottom lines on its income statement. During the low-interest rate period, the bank used tools like interest rate swaps and interest rate floors on loans to protect its net interest income from getting hit too hard. Becker went on to talk about how the bank's growth on its balance sheet -- which has doubled in the past year -- has more than offset pressures from lower interest rates.
The bank has positioned itself well for a rising interest rate environment, setting up its portfolio to give it flexibility and help mitigate risks of rising long-term interest rates. According to Becker, each federal funds rate increase of a quarter of a percentage point would generate about $300 million in added interest and fee income based on the bank's current balance sheet.
SVB has been a stellar long-term performer and has done a great job of being more than a typical bank. It's a solid growth stock because of how well it serves its entrepreneurial clients and has rewarded investors handsomely despite a low interest rate environment. Now, with uncertainty around inflation and rising interest rates, SVB looks like a solid option that can deliver results no matter what's thrown at it.
