The tech and venture capital bank SVB Financial Group (SIVB.Q), the parent company of Silicon Valley Bank, reported earnings in the fourth quarter of 2021 that missed consensus estimates. The stock is also down about 19% year to date after rising about 75% in 2021 and running up to a very high valuation. With this dip, I do see a buying opportunity as Silicon Valley Bank (SVB) is one of the best banks in the industry. Here's why.
Strong momentum in its sector
SVB is different than most traditional banks in that it caters to the tech, venture capital (VC), and private equity (PE) sectors. It makes short-term loans to VC and PE companies so they can execute on investments quickly, and it backs early stage start-ups, which often give the bank equity warrants in return for taking on the risk.
SVB has also been growing its investment bank tremendously in recent years, and it serves many of the high-net-worth individuals from these businesses with more-traditional banking products like mortgages and wealth management.
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In 2021, the bank saw its efforts come to fruition. Total assets grew more than $95 billion during the year and reached more than $211 billion at the end of 2021. Earnings per share of $31.25 in 2021 were up 37% after a strong year in 2020, on the back of strong gains in investment banking, income from loans, and equity warrants and investments. Tangible book value (TBV) per share, a measure of what a bank would be worth if it were liquidated, grew a very impressive 39%. Banks tend to trade relative to their TBV, so when TBV grows, so does the stock price.
SVB also spent the year building out its product suite. In 2021, the bank completed its acquisition of Boston Private Financial Holdings, which significantly bolstered its assets under management, and added to SVB's lending capabilities and presence in attractive start-up markets like Boston.
SVB also continued to build out its investment bank, hiring more than 100 investment bankers; acquiring the equity research firm MoffettNathanson; and expanding its capabilities into leveraged finance, private placement, and structured finance.
The bank's guidance for this year continues to be quite strong. At the end of the third quarter of 2021, management said to expect average loan growth in the mid 20% range and average deposits to grow in the low 40% range for 2022. It also guided for core fee income to rise in the mid 20% range as well. On its most recent earnings call, not only did management reiterate that guidance, but it also raised expectations for loan growth and said loan losses are expected to come in lower than initially anticipated as well.
Dealing with market conditions
Some of the dip in the stock this year could be attributed to what's going on with falling tech valuations in the public markets, because SVB is heavily involved in this sector. But CEO Greg Becker said on the earnings call that temporary volatility wouldn't materially affect the bank's business.
Becker acknowledged there could be a little bit of a slowdown in VC activity or valuation corrections on tech companies, but he also told analysts to remember that VC and PE companies raised a record amount of capital in 2021 and still have loads of dry powder they need to put to work. According to the company, global VC and PE dry powder at the end of 2021 was $438 billion and $1.8 trillion, respectively, both of which grew at a strong pace from 2020.
And management did not incorporate expected increases to the Federal Reserve's benchmark overnight lending rate (the federal funds rate) into its outlook for the year. However, the Fed looks like it will begin raising rates in March, and these hikes will help SVB's business because the bank is asset sensitive, meaning the yields on more of its loans reprice higher than those on its deposits. Management noted that for each 25-basis-point (0.25 of a percentage point) increase to the federal funds rate, net interest income -- the profits banks make on loans and securities -- would grow by $100 million to $130 million. Client investment fees would grow by as much as $235 million on the first 25-basis-point move and then by $20 million to $50 million for each move after.
A good buying opportunity
Even after the dip this year, Silicon Valley Bank trades at about 17.7 times earnings and 270% tangible book value, but for a bank growing earnings and TBV in the high 30% range over the last year, I don't see this as a crazy valuation. The bank continues to build out its business in areas such as wealth management and investment banking that present attractive growth opportunities, and there are record levels of dry powder among its clients.
All of this leads me to believe that the funk the stock has been in recently presents a buying opportunity.
