SVB Financial Group (NASDAQ: SIVB) is diversified across several segments of investment and commercial banking, capital markets and wealth management. With roots in Silicon Valley, the group specializes in working with technology and life science companies as its core customer base. Indeed, this exposure has driven strong growth over the past few years, culminating in a record year 2021 where total client funds nearly doubled. Fast forward, this year’s story has been a stock selloff amid broader market volatility and lending slowdown.
The company just released its latest quarterly results which fell short of expectations, while management also cut its full-year guidance. That being said, the stock is already down over 40% year-to-date and looks attractive at the current level for a potential rebound. The long-term growth story remains in place, and despite short-term headwinds, the overall fundamentals are strong with compelling underlying value.
Summary of SIVB gains
Q2 EPS of $5.60 representing net income of $330 million, was down from EPS of $9.09 in the year-ago period and also $2.08 below estimates of the market. Much of the lack of earnings consensus was based on greater Provision for credit losses, with SIVB billing $196 million versus $35 million for the year-ago period, citing the tougher economic outlook. Revenue of $1.5 billion was up 2.7% year over year and was also weaker than expected.
Management explains the financial market environment, including rising interest rates and economic uncertainty, limiting activity in areas such as venture capital investments and IPOs. With private technology companies being an important customer category, this group faced liquidity challenges with increased burn rates which further translated into pressure on the growth of the bank’s balance sheet.
The trends were reflected in weaker key operational and financial metrics. Average total client funds, as a measure of on-balance sheet deposits and off-balance sheet client investment funds, fell -2.6% year-on-year to $386 billion. The loan balance at the end of the period at $71 billion was down -3.3% compared to the second quarter of last year. Non-interest revenue of $362 million was down from $517 million in the first quarter, highlighting the challenges.
A highlight was the upward trend in net interest income which reached $1.2 billion in the second quarter, compared to $0.7 billion in the second quarter of 2021. Here, the SIVB benefits from both the increase in the deposit base as well as the upward trend in rates which at least helps to mitigate some of the other weaknesses. Separately, “core fees” reflecting revenue from more basic financial services and wealth management businesses rose to $286 million from $149 million last year. This also includes the business boost 2021 acquisition of Boston Private Financial.
Overall, it is important to put some of these results in the context of the exceptional year 2021. Conditions have slowed, but the conclusion is that the underlying growth and profitability are there.
The other development this quarter was an update to the guidance for the full year. SVB Financial Group is revising down its growth targets for average loan balances and average deposit balances in the “high 20s”, compared to previous guidance in the “mid-30s” and “lower 40s” for each metric respectively. The most significant impact is weaker growth in net interest income in the “mid 40s” compared to the “low 50s” released at the time of the first quarter earnings report. Again, the changes reflect an acknowledgment of the economic landscape relative to the stronger outlook at the start of the year.
Is the SIVB a good deed?
SIVB’s appeal lies in its distinctive profile as a bank specializing in the technology and life sciences industries. Simply put, SIVB has built a reputation for understanding the unique needs of this segment and companies specifically choose to partner with the bank. The SIVB notes that it worked with nearly half of all venture capital-backed technology and healthcare IPOs in the United States in 2021, highlighting its market reach.
By this metric, it’s clear that everything from record inflation to the Fed’s tightening cycle and global growth concerns have been a major headwind for the bank this year, given that high-growth tech was the most volatile market segment.
The way we look at the stock is that the bullish case will need both macroeconomic conditions to stabilize and sentiment towards the “innovation economy” to improve. The SIVB points out that secular trends in technology have held up over the past 30 years, indications are that high profile trends such as digitalization, cloud computing, next-gen communications and fintech are still in the early stages. of global adoption. The point here is to say that we expect conditions to recover eventually.
Based on consensus estimates, SIVB is expected to reach EPS of $30.21 this year, which represents a decline of 3% compared to 2021. Going forward, revenue growth forecasts of 14% on average through 2024 could generate a rebound in EPS up 25%. next year and 15% in 2024. The basic assumption here is that market conditions will at least stabilize, with the US economy avoiding any deep recession scenario.
On valuation, it’s worth noting that SIVB trades at a forward P/E of 13.5x, comparable to mega-cap investment banking leaders like Morgan Stanley (MS) at 12.8x or JPMorgan Chase & Co (JPM) at 10.4X. The distinction here is SIVB’s significantly stronger long-term growth outlook over the next few years which, in our view, warrants a premium.
SIVB stock price prediction
Favorably, the market action over the past few weeks has turned significantly more positive based on what we consider to be a shifting market narrative. Compared to the major macro disruptions in the first half of the year, indications of a downward trend in inflation would provide some confidence that the Fed’s strategy is working. As long as economic conditions remain stable, with continued labor market strength, a “soft landing” scenario materializing would support business lending activity and consumer confidence as a tailwind for the broader picture. economy.
The Nasdaq-100 (QQQ), the benchmark for technology and growth companies, is up more than 16% from its lows, while ETF Financial Select Sector SPDR (XLF) is up 9% over the period. With the SIVB lagging so far with a gain of only 5%, we believe that the SIVB has room to outperform going forward as a higher beta trade capturing trends in both sectors finance and technology.
We rate SIVB as a buy with a price target for the year ahead of $525, representing a forward P/E of 17.5x on the current 2022 EPS consensus. This is a case where despite conditions more difficult operating conditions, we feel that the market has gone too far in discounting this innovative banking leader. With an upbeat macro outlook, the upside here is that SVB Financial Group is well positioned to regain operational momentum alongside a recovery in the tech sector, which could open the door for a higher earnings rebound.
The main risk to consider would be a scenario where the economic forecasts deteriorate further. We also want some stability in long-term bond yields to support credit markets. The follow-up points over the next few quarters include the evolution of the net interest margin as well as the growth of loan balances.