SVB Financial: The Moat Has Formed

Jan. 26, 2022 4:30 AM ETSVB Financial Group (SIVB)DDOG, SIVBP, SNOW13 Comments
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Summary

  • Silicon Valley Bank has developed deep relationships with VC/PE/Start-up communities over the years.
  • Acquisition of Leerink bolstered investment banking fee generation capabilities.
  • Acquisition of Boston Private improved private wealth franchise.
  • SVB is becoming a one-stop solution for innovative businesses throughout various life stage.

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Overview

What is a good way to gain exposure to the growing sector of the economy without having to be concerned about paying nose-bleeding multiples? Silicon Valley Bank (NASDAQ:SIVB) may be a solution. Silicon Valley Bank started as a traditional commercial bank that services the high-growth sectors (technology and healthcare). Two transformative acquisitions changed the bank’s trajectory. The first one was the acquisition of Leerink, a healthcare-focused elite boutique investment bank. The acquisition of Leerink allows Silicon Valley Bank to not only bolster its fee generation but increase the capital market and financial advisory capabilities. The revenue synergies between the group will likely be accretive, allowing Leerink to explore relationships with healthcare clients throughout various life stages that SIVB has already onboarded. Lately, SVB Leerink has expanded into technology service platforms, bringing in top-tier UBS bankers to lead the group. Going forward, investors should continue to see increasing activities in the technology services space as Silicon Valley Bank has a long roster of clients that Leerink can work with and generate fee revenues.

The second transformative acquisition was related to Boston Private. Silicon Valley Bank owned a private wealth practice, but the scale, capabilities and roster of private bankers were nowhere close to what Boston Private has to offer. To a certain extent, Silicon Valley’s strategy is to be the business banker, investment banker, and personal banker to entrepreneurs of leading healthcare and technology companies. The cross-functional, relationship-driven approach will likely be highly effective as a one-stop solution, providing much-needed centralized management for entrepreneurs’ financial situations.

On December 13, 2021, Silicon Valley Bank announced the acquisition of MoffettNathanson, a boutique independent sell-side research platform that is known for its coverage of high-growth, disruptive companies in the Media, Communications, and Technology sectors. The acquisition will bolster SVB Leerink’s capabilities in the IPO market for technology banking practice. We continue to expect SVB to build around the Leerink technology investment banking practice by bringing in experienced bankers and research analysts on top of strategic acquisitions.

With the two strategic deals and a well-executed tuck-in of MoffettNathanson underway, Silicon Valley Bank put itself on the map. Over the years, the bank has built a roster of clients across various life stages of high-growth companies, and now, the bank begins to monetize these relationships. The depth of the client roster, the completeness of banking service throughout business banking, investment banking, and personal banking has made SVB a player to be respected in the market.

Q4 Review

The Company recently released strong earnings results and in the CEO's newsletter, Greg Becker outlined the progress made on the bank. The bank expects to generates ~20% growth, anticipating strong balance sheet, core fee income, investment banking revenue growth. Leerink's core fee outpacing expected growth in expenses by more than 2.5x. The most recent pullback is likely a highly attractive entry point given the strong pipeline expectation and cheaper valuation.

Review of Operations

From a profitability perspective, ROA and ROE have been trending positively prior to COVID-19. The efficiency ratio has been improving over time as the platform grows.

The credit quality of the loan portfolio is very strong, showing less than 30 basis points of non-performing loans.

The contribution from non-interest income has consistently increased over time, with the inclusion of investment banking revenues. Moreover, with the addition of Boston Private, the bank should see more consistent fee generation from the wealth management side to compensate for the cyclical nature of investment banking fees.

Operating Matrix

CapIQ

Valuation

The bank has been able to significantly grow the loan book. P/E is trading at ~18x while P/TBV is trading at ~2.8x. The premium valuation signals market enthusiasm around SIVB's ability in building a strong innovative business-oriented full-service bank. The combination of platforms will continue to drive revenue synergies across business banking, capital market, and private wealth space.

Valuation

CapIQ, 10K

Risk/Reward

From a risk perspective, the risk of loan growth slowing is unlikely as investors pour capital into a high-growth economy. The current market focus on the cyclical-oriented business in this economic cycle can be short-lived and eventually capital will flow back to innovative businesses that SIVB will serve.

From a reward perspective, the previous acquisitions have made Silicon Valley Bank a more respected name serving the high-growth economy. The future potential is attractive given the amount of capital poured into the growing part of the economy.

Conclusion

To sum up, we view Silicon Valley Bank as a highly attractive risk-reward situation. Although investors are paying for a premium valuation for a bank, the bank is generating tangible cash flow and is significantly more attractive, from a valuation perspective, than high growth names such as Datadog (DDOG) or Snowflake (SNOW). The disruptive economy will continue to be the economic driver going forward, regardless of the economic policy and presidential election. As such, we expect Silicon Valley Bank to continue to be a winner going forward.

This article was written by

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Curious student of the market.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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