The Long and Short
SVB Financial Group provides name diversity in narrow regional bank peer group
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The high-quality, large regional banking segment is a narrow subgroup within the broader domestic banking sector—and may become increasingly so with ongoing consolidation pressures within the industry. The recent new 10-year issue from SVB Financial (SIVB) provides the opportunity for investors to gain access to the subgroup, while expanding from the group of typical names that make up the highly sought-after bonds within the cohort. The SIVB 31s appear attractively priced relative to peers and are currently available to trade below the par launch level from earlier this week.
Exhibit 1. Regional Banks A/BBB+
Source: Amherst Pierpont Securities, Bloomberg/TRACE Indications
Bond recommendation
SIVB 1.80% 02/02/31 @ +79/10YR; G+78; 1.856%; $99.49
SVB Financial Group (SIVB)
Holding Company to Silicon Valley Bank
CUSIP: 78486QAF8
Amount outstanding: $500 million
Senior Holding Company Ratings: A3/BBB
Global Issue
- Description: SIVB is one of the more unique large regional banks in the investment grade universe. As the name indicates, the bank is most known for its niche banking franchise in the private equity and venture capital backed lending that services the technology and life science industries. SIVB is headquartered in Santa Clara, CA, with 12 branches – 6 in the Silicon Valley regions, and the remainder spread out globally in Beijing, Shanghai, Hong Kong, London, Frankfurt and Herzliya, as part of the bank’s global expansion efforts. The bank has over $97 billion in total assets, $85 billion in total deposits and $38 billion in total loans and leases, resulting in a very low loan/deposit funding ratio of less than 50% as of the third quarter of 2020.
- Loan Mix: SIVB has a very unique loan mix relative to the regional banking peer group. They have 37% C&I loans, 10% residential, while the bulk of the portfolio falls under the regulatory umbrella of “other non-real estate loans.” The bulk of those loans are capital call lines of credit to private equity and venture capital funds. According to S&P, non-US lending represents about 14% of loans and 20% of deposits.
- Funding: SIVB has very limited reliance on wholesale or short-term money markets as a source funding for its loan book, as they are mostly deposit funded. However, the deposits come almost exclusively from its commercial clients. The bank does not collect retail deposits the way a typical regional bank does, which creates industry and concentration risk to their funding model.
- Credit Quality: SIVB boasts very conservative credit quality for its loan book. Non-performing assets (NPAs) make up an extremely small portion of total assets (0.12%), for which they hold over 400% reserves as of the third quarter of 2020. NPAs peaked at roughly only 0.87% of assets at the height of the financial crisis, demonstrating the bank’s unique risk profile relative to the rest of the domestic banking industry. The bank’s Texas ratio—which measures adjusted NPAs plus 90-day past-due loans as a percentage of common equity and loan loss reserves—is extremely low at 1.49% as of 3Q20. We consider the measure a good indicator of all-in loan book risk versus liquid capital, and typically we see results anywhere below <20% as being manageable (in most cases) for small-to-mid sized regional banks.
Capitalization: SIVB’s Tier 1 Common (CET1) ratio is very conservative at 12.31% as of the third quarter of 2020. The total risk-based capital ratio is 14.19%.
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