Growth stocks, by their very definition, are those that generate earnings at a faster rate than most in their respective industries. Not only has SVB Financial Group (SIVB.Q 9.46%), the parent company of Silicon Valley Bank, achieved this growth quarter after quarter, but it has now raised its outlook in five straight quarters.
Generally speaking, good things tend to happen to companies when this occurs. Let's take a look at how SVB has been able to do this and if this impressive trend can continue.
A lift from the innovation economy
SVB is a niche bank that caters to the innovation economy -- start-ups, tech, venture capital, and private equity. Companies in this arena did very well during the pandemic.
Social distancing and lockdowns accelerated the need for digital payments and technology. The investors SVB caters to piled into venture capital and private equity, which resulted in rising client funds and investment flows, surging tech valuations, and lots of initial public offerings. This occurred in the healthcare, life sciences, and tech sectors, and SVB was able to take advantage. All of this helped the bank grow its balance sheet incredibly fast and see profits surge.
Through all of this, SVB has been expanding its products. It hired 100 investment bankers in 2021 and also acquired the equity research firm MoffettNathanson. Additionally, it acquired the wealth manager and private bank Boston Private to further build out its suite of products and tech platforms in that arena. The bank has been building wealth exponentially, and all of this has enabled SVB to continually boost its outlook.
Most recently, SVB increased its full-year 2022 outlook for loan growth, core fee income, and net interest income (NII), which is the profit banks make on loans, securities, and cash after funding those assets. The bank now expects to grow average loan balances in the mid-30% range from 2021 levels. (Previously, the expectation was for low-30% growth.)
Core fee income is expected to grow in the mid-40% range, while previous expectations were in the mid-20% range. NII is now expected to grow in the low-50% range and was previously forecast to grow in the high-30% range.
SVB anticipates that expenses will come in higher than initially anticipated and investment banking revenue will take a hit, due to an industrywide slowdown. However, the bump in NII and core fee income should more than offset these headwinds.
Dealing with the macro outlook
What's also great about SVB's guidance is that CFO Dan Beck confirmed on the company's recent earnings call that the bank's NII guidance doesn't factor in the Federal Reserve's expected hikes to its benchmark overnight lending rate, the federal funds rate.
SVB benefits tremendously from rising interest rates, and the Fed is projected to potentially raise the federal funds rate at all of its remaining meetings this year. Beck said that for each quarter-point interest-rate hike by the Fed, SVB will realize $100 million of NII over the next year. The rate hikes also will help core fee income, which is why management raised expectations there, as well.
Because SVB has so many clients in the start-up, tech, and venture-capital communities, there has been some concern among investors that rising interest rates or the potential of a recession may slow some of the incredible activity seen in these markets. But SVB CEO Greg Becker said there's so much liquidity and dry powder among clients that it essentially provides a nice cushion.
If volatility in the public markets continues and if there's some kind of pullback in the tech sector, Becker doesn't expect it to last very long because of this liquidity. Long term, he's extremely bullish on the innovation economy. It has really benefited from the pandemic, which has accelerated digital trends.
Expect a strong year
It's pretty reassuring that even as the volatility in the public markets threatens to spill over to SVB's clients in the private markets, the bank is still able to raise its full-year guidance significantly, even without factoring in future rate hikes. This gives me confidence in SVB as a strong growth stock. I'm expecting a strong year from the bank, even with everything going on in the world, the markets, and the economy.