DBRS Comments on the Q1 2009 Preliminary Results of SVB Financial Group – Senior at BBB (high)

DBRS has today commented on the preliminary Q1 2009 financial results of SVB Financial Group (SVB or the Company). The ratings remain unchanged including SVB’s Issuer & Senior Debt at
BBB (high) with a Stable trend.

SVB expects to report a consolidated net loss applicable to shareholders for Q1 2009 in the range of $9 million to $12 million. The expected net loss is driven by higher provisions for loan losses primarily related to two specific large loans, valuation declines of venture capital/private equity investments, goodwill impairment and a significantly lower net interest margin (NIM). DBRS notes that this is the second straight quarter of at least one very large loan negatively affecting asset quality and earnings. At this point, DBRS still believes these loans to be exceptions rather than a specific trend pointing to significant asset quality issues related to the Company’s larger credits. If more large loans deteriorate and lead to higher credit costs, the ratings would likely be under pressure. Furthermore, another quarterly loss could also lead to a negative ratings action.

Of the expected $40 million to $45 million in provisions for loan losses, approximately $31 million was attributable to two shared national credits (SNCs) with the remaining provisions related to early stage clients. While the early stage client credit deterioration was expected given the operating environment, the two large SNCs were a surprise. One $23 million SNC was completely charged off, while the other has a $7 million specific reserve against it. These loans follow the large $59 million warehouse loan that went to non-accrual status in Q4 2009.

Mitigating the expected quarterly loss and large loan deterioration, the Company remains very liquid and has maintained solid capital levels. A main component of the significant NIM compression (expected to be approximately 3.95% compared to 5.42% in Q4 2008) is the success SVB has had in attracting client funds on balance sheet, most of which have been invested in overnight funds at the Federal Reserve. Indeed, SVB grew deposits by over $2.5 billion this quarter alone resulting in a strong average loan to deposits ratio of approximately 64.5%. Meanwhile, capital metrics remain solid with an expected tangible common equity to risk-weighted assets ratio of 9.98%. All regulatory capital ratios remain considerably above well-capitalized requirements.

With market valuations down, the Company’s funds management business has taken net losses recently. Net of noncontrolling interests, net losses on investment securities are expected to be $5 million in Q1 2009. Valuations tend to lag the NASDAQ by one quarter; if the NASDAQ continues to improve, SVB may have seen the worst of the valuation declines. DBRS notes that venture capital fund raising, investment, valuations and liquidity events are all down, which could pressure earnings over the coming year.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.