Most investors don't view the banking sector as a high-growth industry, especially when it comes to large-cap banks that tend to go slow and steady. But one large bank that has clearly distinguished itself as a growth stock is SVB Financial Group (SIVB.Q), which has $191 billion in assets and is the parent company of Silicon Valley Bank. The stock has been absolutely ripping ever since the pandemic began in early 2020 and is up more than 150% over the last year. After its latest third-quarter earnings results, I feel confident in saying this is one growth stock that is at the top of its industry. Here's why.
Incredible growth and profitability
It's not always easy for a bank to grow and put up good profitability -- usually one comes at the expense of the other. But since the pandemic, SVB has been putting up superb returns and growing the bank at an incredibly fast clip. SVB is a niche bank that caters to the start-up, venture capital, and private equity communities through four divisions: commercial banking, private banking and wealth management, investment banking, and fund management. The businesses complement each other nicely and create a lot of cross-selling opportunities.
After the beginning of the pandemic in March 2020, the private markets loaded up with dry powder and just took off, and they haven't slowed since. Global private equity and venture capital investment through the first nine months of 2021 have already exceeded total investment in every year since 2017. There have also been more venture capital-backed initial public offerings through Q3 than any year going back to 2017.
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This has translated into tremendous growth and profitability for SVB, which over the last year has more than doubled its balance sheet to roughly $191 billion in assets. Suddenly, a niche bank is fast becoming one of the largest regional banks in the country. With all of the venture capital and private equity investment, SVB has been able to grow loans at a much faster rate than the industry because it provides these firms with short-term lines of credit so they can execute quickly on investments.
While SVB's Q3 results were impacted by some one-time costs from acquisitions, through the first nine months of the year the bank has generated a nearly 1% return on assets and a 19.4% return on average equity, despite the massive growth in its balance sheet.
Developing a great product suite
SVB has also banked a lot of start-ups from their early days, and when it agrees to bank a company that is typically too risky for a bank, it often receives warrants in return for taking on the risk. If that start-up eventually goes public or maybe gets acquired, these warrants or other agreements turn into nice payouts for SVB.
The investment banking division SVB Leerink has also done extraordinarily well taking advantage of all of the recent IPO and mergers and acquisitions activity. Working with start-ups and banking them early on clearly gives SVB a nice inroad when it comes time for the investment bank to get involved. Management is heavily investing in this division as well, having hired 87 new investment bankers in 2021 alone, more than doubling the unit and adding new capabilities.
The last piece of the puzzle is in wealth management and the private bank, which are nice offerings to have when working with all of these high-net-worth individuals. Earlier this year, SVB announced the acquisition of Boston Private Financial Holdings, which catapulted its private bank assets under management (AUM) from $1.6 billion to nearly $20 billion. Management has previously stated that Boston Private presents a cross-selling opportunity among the bank's existing clients of roughly $400 billion when you consider the opportunity in wealth management AUM, as well as the lending and deposit capabilities Boston Private brings.
Guidance is exciting
As it has been doing all year to the delight of investors, SVB management raised its guidance heading into 2022. The bank expects average loan balances to grow in the mid-20% range, while average deposits are expected to grow another 40%-plus after already growing roughly 78% since the end of 2020. Meanwhile, management is guiding for net interest income, the money the bank makes on loans and securities after covering its cost of funding, to grow in the mid-30% range and core fee income to grow in the mid-20% range as well. All of this bodes very well for profitability in 2022.
Management even went as far as to say that on a long-term basis and in a low-rate environment, where the federal funds rate is between 0% and 2.5%, it thinks SVB can generate a consistent return on equity of roughly 15% and annual earnings-per-share growth of 10% on an annualized basis. SVB trades at a high premium -- and rightfully so -- but the bank is growing like gangbusters and the business has never been better positioned, in my mind.
