This bank is a real growth value
If you’re looking for real growth value in the banking industry, look no further than $ 163 billion in assets. SVB Financial Group (NASDAQ: SIVB), the parent company of Silicon Valley Bank. The Santa Clara, California-based bank pioneered startup banking in the 1980s, and it also caters heavily to the private equity and venture capital communities.
Growth stocks generate income and earnings that grow at a faster rate than the industry average, and SVB definitely fits that definition. Over the past four quarters, the bank has generated no less than 20% return on equity each quarter, the technical rate of return a company makes on its capital to shareholders.
SVB stock should continue to perform well, despite its already high valuation. Here’s why.
Whether you are looking at loans, deposits, fee income, or profits, this business is growing at a ridiculous rate. SVB’s total assets have almost doubled over the past year. This is largely due to the growth of deposits. The bank has increased its end-of-period deposits by over $ 70 billion over the past year, and many of them are zero-cost, sticky, interest-free deposits that the bank does not pay. no interest. SVB benefits from the strong performance of the innovation sector and the massive amount of liquidity in the private equity and venture capital space. The bank now predicts that the average growth of deposits for the whole of 2021 will exceed 80% compared to 2020, not counting its recent acquisition of Boston Private Financial Holdings.
Additionally, SVB continues to increase lending at a time when much of the industry is not seeing significant lending growth at all. Average loan balances are up almost 8% from the first quarter of the year and 36% from the second quarter of 2020. As I mentioned earlier, SVB is a niche lender in the world. field of private equity and venture capital, providing these companies with a niche loan product called capital call lines of credit. These are short-term loans to venture capital and private equity firms that try to quickly execute the investments they make in start-ups or businesses. These lines carry a more attractive interest rate than investment securities and which, moreover, have hardly suffered any losses since the product was created.
The results really speak for themselves. Net interest income, which is primarily profits on loans and securities, increased 10% from the first quarter. This happened despite the fact that the bank’s net interest margin, the difference between what the bank does on interest-bearing assets such as loans and securities, and pays out on interest-bearing liabilities. such as deposits, fell from 2.29% in the first quarter to 2.06%. at T2. This shows that even in a low interest rate environment, SVB is able to secure sufficient loan volume and buy enough securities to keep lower margins under control. The bank expects average loan growth for the full year to be in the 30% range from 2020, while net interest income is expected to rise in the 40% range.
SVB also has an incredibly powerful commission income stream that has generated more revenue than the bank’s lending business over the past four quarters. The bank has a solid core fee income that encompasses most of the typical bank fees and then other expense income lines such as currency exchange fees and credit card fees. Silicon Valley Bank has also developed a strong investment bank specializing in the health and life sciences sector and continues to perform well. The bank also makes a ton of money from the warrants and equity investments it earns when it banks start-up businesses that most banks won’t serve. When some of these start-ups go public or are acquired later, the bank collects these warrants and investments. For example, the bank sold stocks it obtained from a mandate in the crypto exchange Global Coinbase for $ 166 million.
Well positioned for the future
While the tech sector tends to thrive in low-rate environments, with a lot of technology investments from venture capital and private equity firms, as well as initial public offerings for tech companies, SVB is still well positioned to succeed in a rising interest rate environment. On the one hand, its balance sheet is asset sensitive, which means that more of its assets are revalued with interest rates than its liabilities such as deposits. Every time the Federal Reserve raises its federal funds rate by 0.25%, SVB will realize an additional $ 110 million in net interest income.
The bank’s recent acquisition of Boston Private is helping SVB grow instantly in the wealth management business, and management believes this represents a $ 400 billion opportunity over time. Boston Private will also help SVB grow in the mortgage and specialty lending segments.
Finally, the tech industry has really benefited from the pandemic in that it has forced new digital adoption into many other facets of people’s daily lives. Management believes that the tech industry is more than ever the place to invest, and with the development of investment banking and now the acquisition of Boston Private, management also believes they have the range. comprehensive of products to fully meet its customers and target market.
When you look at the earnings power of the business, the outlook for this year, and the dynamics of the business, it’s easy to see that SVB is a real growth stock that is expected to deliver disproportionate returns going forward.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.