The Long and Short
Compensation for idiosyncrasy in SVB
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.
SVB Financial is one of the more unique large regional banks in the investment grade universe. The bank is best known for its niche banking franchise in the private equity and venture capital lending that services the technology and life science industries. The bank’s debt trades wide to its regional bank peers, and the spread looks more than enough to compensate for SVB’s idiosyncratic risks.
SIVB is headquartered in Santa Clara, California, with 26 branches—15 in the Silicon Valley area, five in Massachusetts and the remainder in Beijing, Shanghai, Hong Kong, London, Frankfurt and Herzliya, as part of the bank’s global expansion. The bank has more than $214 billion in total assets, $188 billion in total deposits and $71 billion in total loans and leases, resulting in a very low loan-to-deposit funding ratio of less than 40% as of June 2022. They have more than doubled in size by total assets since 2020.
Exhibit 1. Regional Banks – A/BBB rated
Source: Amherst Pierpont, Bloomberg/TRACE Indications
SIVB 4.345% 04/29/28 @ +186/10YR; G+183; 4.85%; $97.89
SVB Financial Group (SIVB)
Holding Company to Silicon Valley Bank
CUSIP: 78486QAR2
Amount outstanding: $350 million
Senior HoldCo Ratings: A3/BBB
Global Issue
The bank has a very unique loan mix relative to the regional banking peer group: 25% C&I loans, 12% residential mortgages, with the bulk of the portfolio, or roughly 57%, falling under the regulatory umbrella of “other non-real estate loans.” The vast majority of those loans are capital call lines of credit to private equity and venture capital funds. SIVB has also expanded its offerings in advisory, wealth management, trust services and private banking through recent acquisitions. According to S&P, fee income has increased in the past several years and now accounts for more than 50% of total revenue.
SIVB’s Tier 1 Common (CET1) ratio is conservative at 11.98% as of June 2022. The total risk-based capital ratio is 16.22%.
SIVB has very limited reliance on wholesale funding or short-term money markets as a source of funding for its loan book, instead relying mostly on deposits However, those 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.
The bank boasts very conservative credit quality for its loan book. Non-performing Assets (NPAs) make up an extremely small portion of total assets (0.06%), for which they hold over 400% reserves as of the second quarter of 2022. NPAs peaked at roughly only 0.87% of assets at the height of the Global 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 less than 1% as of June 2022. The measure is a good indicator of all-in loan book risk versus liquid capital; results anywhere below 20% are typically considered manageable in most cases for small- to mid-sized regional banks.
SIVB generates high Return on Average Equity (ROAE) relative to typical regional banks in the peer group. While the current year is down (LTM roughly 11%), the prior four-year period produced returns mostly in the 15-20% range. The Bank’s Efficiency Ratio (operating expenses vs operating revenue) remains impressive in the mid-40% to low-50% range over the past several years, demonstrating consistent expense management. While net interest margins (NIM) have tapered off in the past two years, SIVB more typically in the high-2% to mid-3% range.
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