January 02, 2015 SVB Financial Group Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 01/02/2015 Current Price (01/01/15) $116.07 Target Price $122.00 SUMMARY DATA (SIVB-NASDAQ) SUMMARY We are downgrading our long-term recommendation on SVB Financial to Neutral driven by the company s weak third-quarter 2014 earnings, which missed the Zacks Consensus Estimate on the back of lower non-interest income. Higher expenses as well as provision for loan losses also contributed to the weak results. However, a rise in net interest income salvaged the results to some extent. Also, growth in loans and deposits continued to be strong. Robust capital position, continuous change in deposit mix and efforts to reduce long-term debt makes the company well-positioned for future growth. Also, the company s enhanced investments will likely boost top line growth going forward. Nonetheless, escalating expenses, persistent margin compression and stringent regulations are expected to dent the company s performance in the near term. Also, slow economic recovery and intensifying competition will likely keep the financials under pressure. 52-Week High $132.27 52-Week Low $96.02 One-Year Return (%) 10.69 Beta 1.66 Average Daily Volume (sh) 377,738 Shares Outstanding (mil) 51 Market Capitalization ($mil) $5,920 Short Interest Ratio (days) 2.58 Institutional Ownership (%) 91 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 24.1 Earnings Per Share (%) 39.6 Dividend (%) N/A using TTM EPS 21.2 using 2014 Estimate 21.2 using 2015 Estimate 20.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606 Below Avg., Type of Stock Large-Value Industry Banks-West Zacks Industry Rank * 69 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 210 A 218 A 218 A 244 A 890 A 2013 227 A 245 A 291 A 296 A 1,059 A 2014 329 A 263 A 305 A 364 E 1,261 E 2015 1,366 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.79 A $1.06 A $0.94 A $1.12 A $3.91 A 2013 $0.90 A $1.06 A $1.46 A $1.27 A $4.69 A 2014 $1.95 A $1.04 A $1.22 A $1.26 E $5.47 E 2015 $5.67 E Projected EPS Growth - Next 5 Years % 11
OVERVIEW Headquartered in Santa Clara, CA, SVB Financial Group is a diversified financial services company. It is also a bank holding and financial holding company. Incorporated in the state of Delaware in 1999, the company, through its primary subsidiary, Silicon Valley Bank and various other subsidiaries as well as divisions, provides a wide range of banking and financial products and services. The company operates through 28 offices in the U.S., and has offices in China, India, Israel and the U.K. as well. SVB Financial also offers non-banking products and services such as funds management, venture capital/private equity investments, business valuation and equity management. The company provides these services in the technology, life science, venture capital/private equity and premium wine industries. SVB Financial has three operating segments: Global Commercial Bank: The segment consists of Commercial Bank, SVB Specialty Lending, SVB Analytics and Debt Fund Investments divisions. Commercial Bank division offers products and services lending, deposit products, cash management services, global banking and trade products and services, and investment services to commercial clients in the technology, venture capital/private equity, and life science and cleantech industries. Moreover, SVB Specialty Lending division provides banking products and services to wine industry clients. SVB Analytics also offers equity valuation and equity management services to private companies and venture capital/private equity firms. Additionally, Debt Fund Investments include investment in debt funds Gold Hill funds and Partners for Growth funds. SVB Private Bank: This is the private banking division of Silicon Valley Bank. The segment offers a customized suite of private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, capital call lines of credit, and other secured and unsecured lending to venture capital/private equity professionals. It also fulfills private banking clients cash management needs through deposit account products and services. SVB Capital: This is the venture capital investment division of SVB Financial. The segment focuses largely on funds management, which comprises funds of funds and direct venture funds (or co-investment funds). The segment manages about $1.9 billion of funds, largely venture capital funds, primarily on the behalf of third-party limited partner investors and the company. Other Items 31% Full Year 2013 Net Revenues (By Segments) SVB Capital 5% SVB Private Bank 2% Global Commercial Bank 62% As of Sep 30, 2014, SVB Financial had total assets of $36.0 billion, investment securities of $21.7 billion, net loans of $11.9 billion, total deposits of $31.1 billion and total stockholders equity of $2.7 billion. As of the same date, the company had 1,881 employees. Equity Research SIVB Page 2
REASONS TO BUY SVB Financial is focused on its organic growth strategy, which is evident from the growth in its deposits and increase in its net interest income (NII) over the last several quarters. The company recorded a consistent rise in NII at a CAGR of 16.2% over the last 5 years (2009 2013), with the trend continuing in the first nine months of 2014 as well. Moreover, as of Sep 30, 2014, the company witnessed improved average total deposits (up 41.6% year over year) and average loans, net of unearned income (up 22.1%). Further, a consistent change in deposit mix backed by rising average non-interest-bearing demand deposits (up 43.6%) will drive the company s organic growth going forward. Moreover, SVB Financial remains focused on improving non-interest income as these are less susceptible to the volatility of capital markets. In the first nine months of 2014, non-interest income (net of non-controlling interests), as a percentage of net revenues, was 28.5%. Further, the financial reform measures are mostly directed toward capital market-related businesses. As the company has less exposure to such markets, we expect overall impact of these reforms to be less visible on the revenues in comparison to its peers. Also, SVB Financial has been continuously lowering its long-term debt level. As of Sep 30, 2014, the company s long-term debt totaled $453.8 million, down from $455.7 million as of Sep 30, 2013. Reducing debt level will aid in procuring additional finance for working capital, capital expenditures, acquisitions, debt-service requirements or other purposes. The company has been able to reduce its long-term debt through redemptions and maturities of senior notes. Reduction in long-term debt will lead to lower interest expenses, which in turn, would result in an improved bottom line. SVB Financial is in a good shape from the capital perspective owing to its earnings power. In the first nine months of 2014, the company remained well capitalized, as its capital ratios were well above the regulatory requirements. We expect the company to continue building capital over the next couple of years, resulting in a better financial position that will help meet the stringent capital requirements. REASONS TO SELL A low interest rate environment is putting pressure on SVB Financial s net interest margin (NIM), which in turn, is creating headwinds for the company s revenues. Over the last five quarters, NIM has been witnessing a declining trend. Until the economic recovery gains momentum and interest rates increase significantly, the company will continue to experience pressure on NIM. Further, persistently rising operating expenses remain another major cause of concern for SVB Financial. Over the last 5 years (2009-2013), non-interest expenses, excluding impairment of goodwill, have recorded a CAGR of 16.3%, largely due to a rise in compensation and benefits costs. This trend continued in the first nine months of 2014 as well. We believe that expenses will further mount owing to the increased regulatory compliance costs, expenditure on technology and continuous hiring of personnel. Minimal international exposure is another concern. SVB Financial derives less than 10% of its total revenue from foreign clients. Though it has operations in a few other countries, these are not substantial compared with the U.S. Consequently, the sluggish economic recovery and interestrate environment in the U.S. could hurt its top line going forward. Equity Research SIVB Page 3
Moreover, SVB Financial s profitability will likely be adversely impacted by increased costs and fee restrictions due to various financial reform laws. A stricter regulatory environment, along with higher capital requirements, would considerably affect the lending as well as the investment ability of SVB Financial. RECENT NEWS SVB Financial s Q3 Earnings Lag Estimates Oct 23, 2014 SVB Financial reported third-quarter 2014 earnings per share of $1.22, which missed the Zacks Consensus Estimate of $1.24. Notably, this marks a break after fourteen consecutive quarters of earnings beat. Further, the bottom line came in 16.4% lower than the year-ago quarter figure. Results were primarily affected by lower non-interest income, a rise in operating expenses as well as provision for loan losses. These were partly offset by increased net interest income. The quarter also witnessed strong growth in loans and deposits. However, while asset quality and capital ratios were a mixed bag, profitability ratios deteriorated. Non-GAAP net income available to shareholders was $63.0 million, reflecting a year-over-year decline of 6.8%. Performance Details SVB Financial s total revenue, net of non-controlling interests, came in at $304.6 million, reflecting a rise of 4.7% from the prior-year quarter. Also, it was ahead of the Zacks Consensus Estimate of $287.0 million. NII rose 24.6% year over year to $220.6 million. However, NIM decreased 59 basis points (bps) from the prior-year quarter to 2.73%. Non-GAAP non-interest income, net of noncontrolling interests, was $75.3 million, reflecting a year-overyear decline of 28.8%. Non-GAAP non-interest expense, net of noncontrolling interests, rose 12.7% year over year to $177.2 million, driven by an increase in all items, except provision for unfunded credit commitments. Non-GAAP operating efficiency ratio increased to 59.83% from 55.50% in the prior-year quarter. An increase in efficiency ratio indicates deterioration in profitability. As of Sep 30, 2014, SVB Financial s net loans were $11.9 billion, up 22.6% year over year, while total deposits rose 55.6% to $31.1 billion. Asset Quality Asset quality was a mixed bag during the reported quarter. The ratio of allowance for loan losses to total gross loans was 1.07%, down 19 bps from the prior-year quarter. However, the ratio of net charge-offs to average gross loans came in at 0.28%, up 5 bps year over year. Further, provision for loan losses increased to $16.6 million from $10.6 million in the prior-year quarter. Equity Research SIVB Page 4
Profitability and Capital Ratios SVB Financial s capital ratios were a mixed bag, while profitability ratios deteriorated. As of Sep 30, 2014, Tier 1 risk-based capital ratio was 14.03%, up from 12.95% as of Sep 30, 2013. Total risk-based capital ratio came in at 14.97%, increasing from 14.16% as of Sep 30, 2013. Tangible equity to tangible assets ratio was 7.55%, down from 8.19% as of Sep 30, 2013. Non-GAAP return on average assets on an annualized basis was down 44 bps year over year to 0.72%. Non-GAAP return on average equity came in at 9.16%, down 489 bps from the prior-year quarter. Guidance for 2014 and 2015 For 2014, management changed its previous outlook for average deposit balances as well as operating expenses (non-gaap). The average deposit balances is expected to rise at a percentage rate in mid forties while operating expenses (non-gaap) are likely to increase in the low teens, driven by consistent investment in professional services and compensation expenses to facilitate growth. Rest of the outlook for 2014 was reiterated by the company. Management anticipates NII growth in low twenties and NIM in the range of 2.75% 2.85%. Moreover, core fee income (non-gaap) growth rate is expected in the high teens. Further, average loan growth is expected to rise in the high teens to low twenties. Net loan charge-offs are also expected in the range of 0.30% 0.50% of average total gross loans. Both nonperforming loans as a percentage of total gross loans and allowance for loan losses as a percentage of total gross performing loans will be consistent with the 2013 levels. For 2015, management expects average loan growth to be in the low double digits and average deposit balance growth to be in high twenties. Additionally, management projects NII growth in low double digits and operating expenses (non-gaap) growth in mid-single digits. Moreover, net loan charge-offs are estimated to be in the range of 0.30% 0.50% of average total gross loans. Core fee income (non-gaap) growth rate is expected in the mid teens. Equity Research SIVB Page 5
VALUATION SVB Financial currently trades at 21.2x the Zacks Consensus Estimate for 2014, a 1% discount to the 21.4x for the industry average. On a price-to-book basis, it trades at 1.4x, at 6.7% discount to the 1.5x for the industry average. Hence, the valuation, on both price-to-earnings and price-to-book basis looks attractive. Our six-month target price of $122.00 per share equates to about 22.3x the Zacks Consensus Estimate for 2014. This target price implies an expected total return of 5.1% over that period, which is consistent with our Neutral recommendation on the shares. SVB Financial currently carries a Zacks Rank #3 (Hold). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low SVB Financial Group (SIVB) 21.2 20.5 11.0 22.7 21.2 64.6 10.5 Industry Average 21.4 16.1 9.3 13.6 20.2 75.8 10.2 S&P 500 17.5 16.4 10.7 16.1 18.9 19.4 12.0 First Republic Bank (FRC) 17.0 17.1 11.5 16.1 18.0 20.7 9.0 Zions Bancorporation (ZION) 15.7 16.3 9.0 8.8 16.1 24.1 15.2 City National Corporation (CYN) 18.9 18.2 9.3 16.1 19.4 N/A 12.1 East West Bancorp, Inc. (EWBC) 16.2 14.7 8.0 35.4 16.6 60.8 10.7 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA SVB Financial Group (SIVB) 1.4 1.9 0.7 7.4 0.2 0.0 6.9 Industry Average 1.5 1.5 1.5 9.4 0.3 1.5 9.1 S&P 500 7.2 9.8 3.2 23.3 1.9 Equity Research SIVB Page 6
Earnings Surprise and Estimate Revision History Equity Research SIVB Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SIVB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1141 companies covered: Outperform - 15.5%, Neutral - 78.4%, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11A Kalyan Nandy Swayta D. Shah Suchi Agarwal Ishani Mukherjee Swayta D. Shah Equity Research SIVB Page 8