It's been a tough year so far amid fears of economic slowdown, inflation, and the Federal Reserve's promise of higher interest rates. Even the financial services and banking sector, which tends to benefit when interest rates go up (since it makes its money off interest-bearing loans) has been struggling. The Dow Jones U.S. Banks Index is down 17% so far in 2022 and down over 20% from its all-time high.
SVB Financial Group (SIVB.Q -69.98%) is no exception to the recent stock market pain. Shares of the "innovation economy" financial services company are down 26% so far this year, and off 33% from all-time highs reached in late 2021. Nevertheless, first-quarter 2022 earnings handily beat expectations despite market turmoil. This remains my top bank stock to buy for 2022.
A fantastic start to 2022
SVB, better known as Silicon Valley Bank, reported net interest income of $1.09 billion in the first quarter, a 64% year-over-year increase. SVB Securities and investment gains did decline as expected as the investment bank laps a record year in 2021. However, client funds are flowing into SVB as start-up and private company activity remains very healthy, and a higher interest rate environment helped push SVB's interest income to new records.
In response to the knockout quarter, management raised its full-year outlook once again. Net interest income is now expected to grow somewhere in the low-50% range compared to 2021 (a high-30% range was forecast before). Client fee income (investment and wealth management, foreign exchange rates, credit cards, etc.) is now expected to be up in the mid-40% range (a mid-20% range was forecast before).
In all, the Q1 report obliterated expectations and tees up an epic year of core business growth for SVB in 2022.
Venture capital is insulated from the market at large
As mentioned, though, it wasn't a perfect quarter for the SVB family of businesses. The bank's investment arm, which caters to start-ups and venture capital firms, is lapping a record year of IPO activity in 2021. Add stock market volatility to the mix -- SVB reported some soft results among some of the later-stage start-ups that might be interested in going public soon. Basically, no one wants to go public if investor sentiment is weak (as reflected by declines in the stock market in recent months). As a result, SVB Securities revenue declined 19% from fourth-quarter 2021 alone.
There's reason for optimism, though. SVB Group CEO Greg Becker had this to say in his quarterly letter:
While we do not provide an outlook for warrant and investment gains, we expect continued moderation in these gains, especially while public markets remain volatile. At the same time, we expect to be relatively insulated from material valuation declines in these portfolios for several reasons: 1) we have limited direct exposure to public equities; 2) private valuations are driven by fundraising events, and many companies have substantial liquidity and are not pressured to raise equity at lower valuations; and 3) our positions are largely granular and well diversified.
Becker explained further on the earnings call that, while late-stage start-up valuations have been hurt in recent months, earlier stage venture capital activity remains "incredibly strong." SVB added 1,700 new clients in Q1, one of the biggest quarters for new client adds ever for the bank.
In other words, stock market volatility isn't going to keep this investment bank down for long.
After the Q1 report, SVB Financial Group trades for 17 times trailing-12-month earnings, but only 11 times one-year forward expected earnings. This investment banker to innovative tech and healthcare start-ups is in an incredibly strong position and is a fantastic long-term value right now.