SVB Financial (SIVB) Beats On Q3 Earnings, Revenues Up

SVB Financial Group (NASDAQ:SIVB) reported third-quarter 2016 earnings per share of $2.12, which comfortably surpassed the Zacks Consensus Estimate of $1.75. Further, the bottom line compared favorably with the year-ago figure of $1.57.

Better-than-expected results were primarily driven by a rise in net interest income (NII) and fee income. Further, a decline in provisions for loan losses supported the results. Also, loan and deposit balances showed decent strength, while credit quality witnessed improvement. However, higher non-interest expense remained a headwind.

Net income available to stockholders amounted to $111.1 million, up 36% year over year.

Growth in Revenues Offset Expenses Pressure

SVB Financial’s net revenue was $433.3 million, up 19% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $398.2 million.

NII grew 14% year over year to $289.2 million. Also, net interest margin (NIM), on a fully taxable equivalent basis, increased 25 basis points (bps) year over year to 2.75%.

Non-interest income was $144.1 million, reflecting a year-over-year rise of 33%. The increase reflected a rise in all non-interest income components.

Non-interest expense rose 20% year over year to $221.8 million. A rise in all expense components led to this increase.

Non-GAAP operating efficiency ratio declined to 51.69%, in line with in the prior-year quarter level.

Strong Balance Sheet

As of Jun 30, 2016, SVB Financial’s net loans amounted to $19.1 billion, up 1% from the prior quarter; while total deposits rose 2% to $38.2 billion.

Improved Asset Quality

The ratio of allowance for loan losses to total gross loans came in at 1.25%, down 3 bps year over year.

Further, the ratio of net charge-offs to average gross loans came in at 0.48%, down 27 bps year over year. Also, provision for loan losses plunged 43% year over year to $19 million.

Profitability and Capital Ratios Show Strength

As of Sep 30, 2016, Tier 1 risk-based capital ratio came in at 12.75% compared with 12.48% as of Sep 30, 2015. Total risk-based capital ratio came in at 14.22% compared with 14.05% as of Sep 30, 2015.

Further, non-GAAP return on average assets on an annualized basis improved to 1.02% from 0.77% in the year-ago quarter. Also, non-GAAP return on average equity was 12.32%, up from 10.35% in the prior-year quarter.

2016 Outlook

SVB Financial revised its guidance on a GAAP basis for certain line items. Non-performing loans, as a percentage of total gross loans, are anticipated within 0.40–0.60%, down from the prior outlook of 0.60–1.00%.

Moreover, the company now expects 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 high teens. Earlier, it had guided for core fee income growth at a percentage rate in the mid twenties.

The rest of the outlook remains the same. Average loans are project ted to grow at a percentage rate in the mid twenties, while average deposit balances are expected to increase at a percentage rate in the mid-single digits.

Further, NII is expected to rise at a percentage rate in the mid teens, while NIM is anticipated in a range of 2.60–2.80%. Further, non-interest expense, net of non-controlling interests, is projected to increase at a high-single digits percentage rate.

On the credit quality front, net loan charge-offs are expected within 0.30–0.50% of average total gross loans. 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.

Preliminary 2017 Outlook

Management provided preliminary 2017 outlook for selected items based on various management assumptions, including no increase in market interest rates and no material deterioration in the overall economy. For 2017, the company currently expects the following percentage rate increases:

• Average loan balance growth in the high teens,
• Average deposit balance growth in the mid- to high-single digits,
• Net interest income growth in the low-double digits (assuming no Federal Reserve rate increases),
• Net loan charge-offs between 0.30% and 0.50% of average total gross loans,
• Non-GAAP core fee income growth in the mid to high teens, and
• Non-GAAP noninterest expense growth (excluding expenses related to non-controlling interests) in the high single digits.

Our Viewpoint

Escalating expenses 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.

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

SVB Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Among other Western banks, Bank of Hawaii Corporation (NYSE:BOH) and Zions Bancorporation (NASDAQ:ZION) are scheduled to report results on Oct 24 and BofI Holding, Inc. (NASDAQ:BOFI) on Oct 27.

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