DBRS Comments on SVB Financial Group’s 4Q11 Earnings – Senior at BBB (high)
DBRS, Inc. (DBRS) has today commented on the 4Q11 financial results of SVB Financial Group (SVB or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (high) with a Positive trend. SVB reported net income available to common stockholders of $35.6 million for the quarter, down from $37.6 million in the previous quarter, but up from $17.5 million in 4Q10.
In DBRS’s view, the Company had a very good quarter highlighted by solid loan and deposit growth, strong warrant gains and maintenance of excellent credit quality, as SVB’s clients continue to perform well. While expenses, net of noncontrolling interests, increased a high $7.3 million, or 6%, to $132.0 million, DBRS notes much of the increase was related to investing in the Company, which bodes well for future earnings growth. Additionally, record 2011 earnings of $171.9 million led to higher incentive compensation.
Net interest income (FTE) increased $4.6 million to $140.6 million, reflecting higher loan balances that overcame margin compression. Specifically, average loans increased $338.2 million to $6.4 billion during the quarter with growth coming from all client industry segments. However, the vast majority of loan growth is coming from larger, more established companies. DBRS notes that while these clients are less risky, the loan portfolio has become considerably less granular. Loans equal to or greater than $20 million to any single client now account for $2.2 billion, or 31.2%, of the total loan portfolio.
As a result of significant growth of later stage clients that carry lower loan yields, the margin declined 3 basis points during the fourth quarter to 3.10%. Going forward, the Company can use cash flows from the securities portfolio to fund loan growth, which should help the margin. Also, with the Fed pushing out a potential rate hike until 2014, the Company is likely to modestly extend the duration of its securities portfolio. At December 31, 2011, the average duration of the securities portfolio was only 1.8 years, which DBRS considers quite conservative. Overall, SVB expects its margin to increase to between 3.20% and 3.30% for 2012.
Overall, noninterest income, net of noncontrolling interests increased $7.7 million sequentially to $62.1 million. Net gains on equity warrant assets totaled $14.1 million, an increase of $8.6 million driven by considerable M&A activity in 4Q11 within the technology and innovation industry. Management noted that it would be difficult to achieve this level of warrant gains in 2012, given that 2011 warrant gains were the highest in over a decade. Meanwhile, gains on investment securities, net of noncontrolling interests, were $7.5 million, down from $9.3 million in 3Q11.
Asset quality remains strong. The provision for loan losses was $8.2 million for 4Q11 compared to just $0.8 million in 3Q11. The increase was primarily driven by new loans, not deteriorating credit. Gross charge-offs were $7.0 million, primarily from software clients, while net recoveries were $3.5 million, primarily from life science and software clients. As a result, net charge-offs were $3.5 million, or 0.22% of average loans (annualized). Meanwhile, nonperforming loans declined to $36.6 million from $40.5 million in 3Q11.
The significant growth of the Company has at times pressured the leverage ratio, which contracted six basis points to 6.87% during the quarter, which was slightly below management’s long-term target ratio between 7% and 8% at the Bank. If needed, SVB could sell securities, downstream cash from the holding company, and/or issue debt or equity to bolster capital.
Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 28 February 2011
For additional information on this rating, please refer to the linking document under Related Research.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.