DBRS Confirms SVB Financial Group at A (low); Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of SVB Financial Group (SVB or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Silicon Valley Bank (the Bank). With the exception of the Company’s short-term ratings, the trend on all other ratings has been revised to Positive from Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The confirmation and Positive trend reflect SVB’s defensible niche business model that primarily caters to companies in the innovation space and continues to deliver above-peer financial results, while maintaining strong balance sheet fundamentals. The ratings also consider SVB’s less granular loan portfolio, earnings volatility associated with gains and losses on investment securities and warrants, as well as managing the Company’s growth both domestically and internationally.

RATING DRIVERS
DBRS views SVB as being in the top quartile of its rating category. If SVB is able to maintain similar financial results and credit fundamentals, while successfully integrating the Leerink Partners acquisition and deliver on its transaction assumptions, the ratings could be upgraded. Conversely, deteriorating credit fundamentals, sustained negative operating leverage or operational/execution missteps resulting in a weaker franchise could have negative ratings implications.

RATING RATIONALE
With more than half of all venture capital-backed companies in the U.S. as clients, SVB remains the dominant player in the innovation space, despite more competition entering the Company’s attractive niche markets. DBRS expects that SVB’s dominant competitive position will continue, considering its 35-year history of serving the innovation space, which has produced considerable market expertise and deep industry relationships. Indeed, the Company continues to grow its client base, having added another 1,200 new core commercial clients in 3Q18.

For 9M18, SVB reported materially improved bottom line results, with $708 million of net income (up 90% from 9M17), representing a ROA of 1.74% and a ROE of 20.6%. The improved results were driven by very strong balance sheet growth, higher interest rates, significantly improved core fee income, equity warrant gains and a lower tax rate, partially offset by higher expenses, which was largely attributable to incentive compensation. Moreover, average loans were up 6% from 2Q18, primarily due to growth in private equity capital call lines. Additionally, the net interest margin expanded by 54 basis points (to 3.53%) in 9M18 versus the prior year period, while total noninterest income increased 38%, reflecting improved foreign exchange, credit card and lending related fees, as well as higher equity warrant gains.

On November 13, 2018, the Company announced its acquisition of Leerink Partners (Leerink), a life science and healthcare investment bank, for $280 million in cash and is expected to close during 1Q19. The addition of Leerink, which will be rebranded as SVB Leerink, will enable the Company to offer a full suite of financial services and products to global life science and healthcare companies by adding equity capital markets, M&A and convertibles businesses to the SVB platform. Additionally, the combined entities are expected to increase SVB’s overall fee income contribution by roughly 700 basis points to more than 35% of total revenues. DBRS generally views the transaction favorably given the expanded product offering capabilities and the increased fee contribution. At the same time, DBRS recognizes the potential for more volatile revenue trends given the inherent nature of investment banking activities and the Company’s previous experience with SVB Alliant, the Company’s investment banking arm that ceased operations in 2007.

Concurrently, the Company also announced a stock repurchase authorization for up to $500 million. With the completion of the acquisition and stock repurchase, SVB expects its pro forma capital ratios will be lower by approximately 35 to 60 basis points. Positively, the Company’s current capital ratios remain very strong, with a CET1 ratio of 13.3% and TCE ratio of 8.5% at the end of 3Q18. Additionally, the Bank’s leverage ratio, which is its most restrictive metric, will not be impacted by these transactions and stood at 7.8%, well within its targeted range of 7% to 8%.

SVB’s asset quality metrics remain strong, consistent with recent period results. Specifically, the Company’s NPL ratio was 0.42% and quarterly NCO ratio was 0.30% at the end of 3Q18. DBRS notes that the Company’s loan portfolio is comprised of a considerable amount of large loans, as customers with gross loans equal to or greater than $20 million (individually or in the aggregate) totaled $13.9 billion, or 50% of total loans at the end of 3Q18. However, the vast majority of these loans are private equity/venture capital call lines, which have a history of virtually no credit losses, including none during the financial crisis. SVB’s early-stage portfolio remains its riskiest asset class by far, but comprises just 6% of total loans and net warrant gains have more than offset early-stage losses over time.

SVB’s funding and liquidity profile remains strong, underpinning the ratings. Supporting this view, at the end of 3Q18, the Company’s cash and securities comprised 52% of total assets and its loans/deposits ratio was 54%. In addition, deposits represented 92% of total liabilities, of which, 83% were noninterest-bearing. As a result, the Company’s cost of funds (0.16% in 3Q18) remains among the lowest in the industry. During 3Q18, average total client funds, which comprises on balance sheet deposits and off-balance sheet investment funds, increased 8% sequentially, reflecting solid funding and exit activity.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $58 billion in assets at September 30, 2018.

The Grid Summary Scores for SVB are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile – Good; Funding & Liquidity – Very Strong/Strong; Capitalisation – Strong/Good.

Notes:

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 31 May 2006
Last Rating Date: 15 November 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.