A lot has changed since SVB Financial Group (SIVB.Q 20.00%) -- better known as Silicon Valley Bank -- released its first takes on the brewing stock market turmoil this past spring. 2022 has turned into an all-out bear market. The private equity and venture capital markets were holding up well early on, but Silicon Valley Bank's most recent update for Q2 2022 indicates some of the public stock market pain is now spilling over into the "innovation economy," or the small upstart businesses and their private investors aiming to disrupt established industries.
SVB is holding up well considering the chaos going on out there, and its long-term prospects remain bright. But it could be a longer road getting back to growth than I expected earlier this year.
Still lapping last year's hot IPO market
A number of factors conspired against SVB's Q2 2022 financial results. The investment bank was lapping what was still a hot IPO market in the spring of 2021 (global IPO proceeds were down 58% year over year in the first half of 2022, according to research group EY). That reduces the fee income SVB takes from clients that are planning to raise capital via public stock markets.
SVB also had to set aside a substantial sum of cash for credit losses arising from small private businesses undergoing financial distress. The total? $196 million, compared to just $11 million in Q1 2022 for credit losses and just $35 million in Q2 of last year.
On the client investment management side (this is where SVB's acquisition of Boston Private last summer comes in), average client investment funds also took a leg down during the quarter. Not completely surprising given the current bear market in public securities, but it still contributed to SVB's big 38% year-over-year tumble in earnings per share during the quarter.
As a result of the widening downturn in private company funding, SVB lowered its outlook for full-year 2022 expectations just three months after it upgraded its guidance.
Business strength hiding under the surface
Here's the upshot to all of this: Despite a sizable chunk of change set aside for credit losses and lower fee income, SVB's core business is still growing. The upgraded 2022 guidance is lower than expected, but management still sees average client loan and deposit balances increasing by high 20s and high 30s percentages, respectively, over 2021. And core fee income (investment and wealth management, foreign currency exchange fees, credit card fees, and the like) actually got upgraded to mid-50% year-over-year growth (from mid-40% growth).
All of this isn't to say we shareholders should expect a quick rebound in earnings per share. On the contrary, at this point, I'd say we shouldn't expect that until 2023. Expect more turbulence ahead for this bank stock.
But if you're looking longer-term, this remains a fantastic play on the "innovation economy." In fact, despite deal size and pacing hitting the brakes so far this year, SVB is still reporting near-record levels of cash waiting to be deployed among venture capital and private equity firms. As far as we can tell right now, private funding of high-growth small businesses will continue to grow, albeit at a more modest pace than in 2020 and 2021.
Given all this, I'm personally still in accumulation mode of SVB Financial Group stock. Just to reiterate, I fully expect this will be a highly volatile stock this year -- certainly not what you'd expect from a typical bank. Valuation (shares presently trade for 14 times trailing 12-month earnings) is also likely to get worse as the company reports a year-over-year cool off in earnings stemming from the record number of IPOs last year and credit losses. But shares could be a fantastic long-term value at this juncture. If you decide to invest, do so patiently and build up a position in this bank stock over time.
