Management can make or break a company, so when evaluating potential stocks investors will want to take a good look at who's running the company, their background, and any other information that can help you understand their management style. SVB Financial (SIVB.Q 2.00%), the parent company of Silicon Valley Bank (which caters to the start-up, tech, venture capital, and private equity communities), has been a tremendous performer in recent years. But one comment from the SVB's president and CEO Greg Becker on the bank's most recent earnings call gave me a lot of confidence in its management. Here's why.
Preparing for the unpredictable
SVB Financial benefits a lot from rising interest rates because a huge amount of its deposit base is non-interest-bearing, meaning the bank doesn't pay any interest for those deposits, which also tend to be stickier as rates rise. So, as yields on the bank's loans rise as the Federal Reserve raises interest rates, the bank will see its margins widen.
The bank also has a diversified product set that it has built out and ramped up in recent years. SVB Financial estimates that for every 0.25% rate hike by the Fed, the bank will see an additional $100 million to $130 million of additional net interest income, the profits banks make on loans, securities, and cash after covering the cost to fund those assets.
Image source: Getty Images.
While the Fed has indicated that it expects to keep raising rates this year and next, what if inflation suddenly slows or the economy tips into a recession sooner than expected and the Fed has to halt rate hikes or even bring interest rates down? Well, Becker said SVB is considering and preparing for this situation because as a huge beneficiary of rising interest rates, that means a falling interest rate environment could hurt the bank -- although SVB did perform extremely well during the ultra-low-rate environment in 2020, and most of 2021.
On SVB's most recent earnings call, Becker said:
[We] are working on ensuring that we're as protected as we can be if rates -- I know, it's funny we're talking about [a] potential rate decline when we're just not having really seen the rate increases. But, you know, you have to think that way being prepared for that. You know, and I have a huge amount of confidence .... We [will be] protected as much as we can be there.
Again, it may seem hard to picture interest rates going down any time soon, but Matthew Pieniazek, president and CEO of bank consulting firm Darling Consulting Group, points to the last rate cycle as a reason for banks to think big picture. On a recent episode of S&P Global Market Intelligence's Street Talk podcast, Pieniazek said:
Let's go back to 2018 when the entire world thought rates only had one direction and that was up. And all the conventional wisdom was you should be lengthening liabilities and shortening assets. The ones who didn't lose sight of their greatest risk, which was falling rates, did the opposite.
Pieniazek added, "There are things banks can do to not give up all of the benefit of rising rates, to in fact harvest most of it, but to protect against the thing that can hurt you most. ... That's an important, important business issue with few exceptions banks need to really not lose sight of here.
Prudent management
While I'm sure other bank management teams do think this way, SVB is the only one I've heard so far speak about being prepared for a falling-rate environment on its first-quarter earnings call. This gives me confidence not only in SVB management's ability to generate strong returns in the near term like it has been, but to also think big picture and prepare for a range of outcomes in what is currently an environment filled with uncertainty.
