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SVB Financial Looks Undervalued Relative To Its Unusually High Quality

May 07, 2020 11:26 AM ETSVB Financial Group (SIVBQ) Stock14 Comments
Stephen Simpson profile picture
Stephen Simpson


  • VC and private equity investment activity is likely to slow, and client companies are likely to slow expansion plans, but any slowdown in lending growth is likely to be brief.
  • Asset sensitivity is a challenge and spreads are going to be under pressure as more deposits are directed into lower-yielding securities.
  • Every cycle is different, but SVB's lending has historically looked and sounded more risky than the actual credit losses.
  • A long-term core earnings growth rate in the mid-single-digits can support a substantially higher share price.

If you’re new to the banking sector, I’m not so sure SVB Financial (SIVB) is a good place to start. That’s not because SVB Financial is a bad bank (it’s far from that), but because it’s just so atypical of most bank companies. Instead of taking deposits from retail customers and smaller businesses and lending them out as mortgage, CRE, and “regular” business loans (typical “branch banking”), SVB Financial focuses on capital call loans to venture capital and private equity funds, as well as business loans to emerging/less-established companies in sectors like technology and health care.

While SVB Financial is a different sort of bank, I believe it has proven itself over the years and currently trades at a meaningful discount to fair value.

A Generally Healthy First Quarter

Like many banks, SVB came up a little short in fee income this quarter, but otherwise it was a very solid quarter on balance. Revenue was basically as expected, as slightly better net interest income offset weaker fee income, but lower expenses drove a nice double-digit beat at the pre-provision line. While higher provisioning erased that benefit, SVB Financial’s reserve position looks pretty good at this point.

Revenue rose 2% yoy and down 6% qoq by my methodology. Net interest income (FTE basis) rose 2% and fell 2% qoq, with a weaker net interest margin (3.12% vs. 3.81% a year ago and 3.26% last quarter) partly offset by stronger earning asset growth.

Fee income merits a discussion of methodology; some analysts (including myself) exclude investment securities gains and losses, others don’t. You can certainly argue this is an ongoing part of the income mix and I won’t really disagree, and likewise you can argue that volatile businesses like mortgage banking are typically included with most other banks. I should note, though, that management’s definition of “core” fee income excludes those.

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (14)

Bhughes7918 profile picture
cheap OPY and TMP
If you want to: go long all the companies without balance sheet or access to capital markets with little to no collateral; have a disproportionate and levered exposure to lumpy (>50% over 20 million) commercial loans (86% vs. JPM's 48%) and MBS (62% vs. JPM's 12%); and think non conforming Residential Jumbo Loans you keep on balance sheet in the bay area is a solid bet in this market, buy SIVB!!!

Perhaps the definition of Moral Hazard, p0nzi and violating volcker:
1) they take fdic insured deposits and speculate/lend to companies below junk-those that don't have access to the capital markets (MH), to help grow the deposit base;
2) they then offer capital introductions to the next round of investors who take them out of their original investments, oh and by the way, Funds, we will lend you the money to do so (P) and
3) they rarely make these loans without warrant coverage... ....a long dated option on a credit. they then MTM these warrants, but volcker doesn't allow banks to speculate (hold positions) for more than a set time period when taking FDIC insured deposits.

Capital Markets, let's wake up to the reality that this is a ticking time bomb: regulators, please don't make us bail them out, especially their vineyard consulting and capital business.

If you want a bargain bank at a low multiple with solid balancesheets and mgt; pls look at canadian, scandinavian and heck even argentine banks
Well, they have been highly successful doing what they have been doing for the last forty years. They easily survived the 2007-2009 financial crisis, so I have a feeling they will do the same here.
There have always been people who have avoided them because they felt like you do; those people have left a lot of money on the table by doing so.
Fair points

So far it appears that the only time bomb bank investments have been other traditional banks for whom these rules were written. And they have low multiples for a reason. But hey maybe believe that you’ve been right and the market wrong for 2 or more investing lifetimes. Maybe if you never change your mind you think you’ve never been wrong.
If you like volatility, you will love SIVB.
A great company, though.
Stephen Simpson profile picture
Fair point
ConservativeOutperformer profile picture
Traded around its BV during the downturn. That would have been a great spot to pick up shares.... Good article about a good bank. As someone that works in the technology industry I'm a little too levered to the customers, but if we get down there again I'll nibble.

Good luck!
Bhughes7918 profile picture
yes, but it ran already and is now fairly valued I think.
PCSB and OPY two smaller banks are much cheaper today.
Stephen Simpson profile picture
Fairly valued based on what?
In my Calculation any price below 200 is still under valued for me
Bhughes7918 profile picture
recent price movement alone since other banks in there space like avbh have not moved back up at all and do the same thing either avbh is forgotten or sivb is way ahead of itself. There are always comps for all kinds of banks even in their nich market, avbh is way way cheaper if you are right today about sivb, I would rather own something like PCSB or OPY that has not moved back up at all and are way below tangible book hence much less downside risk and the same upside I feel!
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