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SVB Financial (SIVB) Earnings Lag, Costs & Provisions Rise

SVB Financial Group SIVB reported first-quarter 2016 earnings per share of $1.52, widely missing the Zacks Consensus Estimate of $1.69. Further, the bottom line compared unfavorably with the year-ago figure of $1.71 per share.


Results exhibited a fall in non-interest income and a rise in expenses as well as provisions, partly offset by higher net interest income (NII). Growth in loans and deposits continued to be impressive. Also, while capital ratios showed improvement, profitability ratios and asset quality represented weakness.

Net income available to stockholders amounted to $79.2 million, down 11% year over year.

Performance Details

SVB Financial’s net revenue was $367.5 million, up over 1% year over year. However, it lagged the Zacks Consensus Estimate of $382.1 million.

NII increased 18% year over year to $281.4 million. Moreover, net interest margin (NIM), on a fully taxable equivalent basis, inched up 2 basis points (bps) year over year to 2.67%.

Non-interest income summed $86.1 million, reflecting a year-over-year decrease of 30%. The decline was mainly due to net losses on investment securities as well as derivative instruments along with a fall in lending related fees. These were, however, partly offset by higher foreign exchange fees, credit card fees, client investment fees and other income.

Non-interest expense rose 7% year over year to $204.0 million, primarily led by an increase in all the expense components except provision for unfunded credit commitments.

Non-GAAP operating efficiency ratio rose to 55.09% from 54.56% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.

As of Mar 31, 2016, SVB Financial’s net loans amounted to $17.5 billion, up 23% year over year; while total deposits grew 14% to $38.8 billion.

Asset Quality

Asset quality displayed weakness during the quarter. The ratio of allowance for loan losses to total gross loans came in at 1.29%, up 14 bps year over year. Further, the ratio of net charge-offs to average gross loans came in at 0.49%, up 38 bps year over year.

Also, provision for loan losses increased substantially year over year to $33.3 million.

Profitability and Capital Ratios

SVB Financial’s capital ratios reflected improvement, while profitability ratios deteriorated. As of Mar 31, 2016, Tier 1 risk-based capital ratio came in at 12.86% compared with 12.53% as of Mar 31, 2015. Total risk-based capital ratio came in at 13.90% compared with 13.46% as of Mar 31, 2015.

Also, tangible equity to tangible assets ratio stood at 7.76%, up from 7.70% as of Mar 31, 2015.

Further, non-GAAP return on average assets on an annualized basis descended 22 bps year over year to 0.72%. Non-GAAP return on average equity stood at 9.58%, down from 12.38% in the prior-year quarter.

Outlook for 2016

SVB Financial revised its guidance for the year 2016 on a GAAP basis. The company narrowed the outlook for average loan balances to grow at a percentage rate in the low twenties from the previous outlook of growth at a percentage rate in the high-teens to low-twenties range.

The rest of the outlook remained the same. NII is expected to rise at a percentage rate in the mid teens, while NIM is anticipated in a range of 2.50–2.70%. Further, non-interest expense, net of noncontrolling interests, is projected to increase at a high-single digits percentage rate.

Moreover, core fee income, including foreign exchange fees, deposit service charges, credit card fees, lending related fees, client investment fees as well as letters of credit fees, is estimated to increase at a percentage rate in the mid-twenties. Average deposit balances are predicted to witness low double-digit percentage increase.

On the credit quality front, net loan charge-offs are expected within 0.30–0.50% of average total gross loans. Nonperforming loans, as a percentage of total gross loans, are anticipated within 0.60–1.00%. Allowance for loan losses for total gross performing loans, as a percentage of total gross performing loans, is expected to remain flat year over year.

Our Viewpoint

Robust capital position, continuous change in deposit mix and efforts to reduce long-term debt makes SVB Financial well positioned for future growth. In addition, the company’s enhanced investments will likely boost top-line growth, going forward.

Nonetheless, escalating expenses, persistent margin compression and stringent regulations are anticipated to dent the company’s performance in the near term. Also, domestic concentration and intensifying competition will likely keep financials under pressure.

SVB Financial currently carries a Zacks Rank #4 (Sell).

Among other Western banks, Zions Bancorporation ZION and Bank of Hawaii Corporation BOH are scheduled to report results on Apr 25, while BofI Holding, Inc. BOFI is slated to report on Apr 28.

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ZIONS BANCORP (ZION): Free Stock Analysis Report
BANK OF HAWAII (BOH): Free Stock Analysis Report
SVB FINL GP (SIVB): Free Stock Analysis Report
BOFI HLDG INC (BOFI): Free Stock Analysis Report
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