March 25, 2017 2:33 a.m. ET
Volume (Delayed 15m)
Rev. per Employee
is not your typical hometown banking stock.
Founded in 1983, SVB (ticker: SIVB) is the parent of Silicon Valley Bank, which has used its unique location to build long-term relationships with venture-capital and private-equity specialists, technology, life-sciences and health-care companies, and even Napa Valley wineries. It lends to these borrowers, at times taking small equity stakes, and provides money-management services to clients. It’s unusual in holding equity warrants from 1,739 companies, which in its most recent valuation at year-end 2016 were worth $131 million.
Although it’s primarily a corporate lender, its retail clientele provides a glimpse of how the bank differs from peers. “Something like getting a mortgage when all you have is illiquid founders’ shares, and other banks won’t help, makes a difference you remember,” says Jeff Richards, a managing partner at venture-capital firm GGV Capital.
From its Santa Clara, Calif., home, SVB has expanded to London, Beijing, Shanghai, Hong Kong, and Tel Aviv, following its clients and sharing its skills and knowledge with a new set of entrepreneurs and their financiers. In all, the banking operation has $45 billion in assets, and its brokerage and asset-management group runs another $45 billion. A nonbank unit, SVB Capital, invests in venture-capital and private-equity funds.
NO DOUBT INVESTORS already are enamored of SVB shares, which have risen 78% in the past year, easily outpacing the regional bank group’s 40% gain. The stock’s forward price/earnings multiple of 21 exceeds regionals’ average of 16. Yet SVB is poised for several years of rapid earnings growth that dwarfs expectations for most banks. That growth should allow the stock to move another 25% or so higher in the next year.
“We believe there’s still more to come,” says David Long, an analyst at Raymond James who has a Strong Buy on the stock and a $224 price target that’s 25% above its $178 price. “Silicon Valley is strategically positioned to grow even more from events now unfolding, such as rate hikes, lower corporate tax rates, and improvements in the initial-public-offering market.”
Let’s take rate hikes first.
SVB ranks as one of the most asset-sensitive banks in the country. That means its assets reprice more dramatically than its ultralow-interest-rate deposits. Because its business clients maintain large balances, 78% of the bank’s core deposit base is in non-interest-bearing demand deposits. The company expects each quarter-point increase in short-term rates to contribute $28 million to net income.
In its latest earnings conference call, SVB CEO Greg Becker said, “It’s widely expected that corporate tax rates will fall and uncertain regulatory requirements impacting banks may be relaxed.” At 40%, SVB has one of banking’s highest tax rates because most of its business is done in high-tax California and Massachusetts. Any changes in corporate tax rates are likely to be a big help to SVB’s bottom line.
Following a tepid market for IPOs in 2016, global markets are expected to rebound in 2017, in part because of accelerating economic growth and less-restrictive regulation. As Becker told shareholders, “We’re optimistic that 2017 will be a stronger year for venture capital investment and exits.… We believe 2017 has the potential to be the year of liquidity.” That’s good news for SVB because it could see the value of its equity in start-ups rise and the net worth of its entrepreneurial clients jump.
Mark Hantho, global head of equity capital markets at Deutsche Bank Securities, sees the potential for more than 1,000 global IPOs (see chart above) in the next two years, with 558 each in 2017 and 2018, compared with only 312 in 2016.
“We’re starting to get momentum in putting together these underwriting syndicates, whereas last year we found a fair amount of price resistance,” he says. “The majority of today’s deals are pricing at the midpoint. The buy side’s receptivity shows in a dramatic pickup in volume this year and strong aftermarket performance indicating sustainable value.”
CEO BECKER tells Barron’s he’s agnostic about which exit path venture-backed companies take. “The vast majority of companies that end up exiting have an event that happens through mergers and acquisitions. But IPOs are still important for setting a price in the market, and providing a growth engine and liquidity to shareholders who continue to invest,” he says.
These tail winds should allow SVB to enjoy sharp gains in profits. The Wall Street consensus predicts the company will earn $450 million, or $8.52 a share, on revenue of $1.79 billion in 2017, up from $390 million, or $7.31 a share, on revenue of $1.6 billion in 2016. That’s a 17% earnings-per-share gain.
From there, growth accelerates. Profit should rise 29% to $579 million, or $10.85 a share, on revenue of $2.1 billion in 2018, and then jump 31% to $760 million, or $14.18 a share, on revenue of $2.53 billion in 2019.
For sure, a bank that lends to venture capitalists and start-ups runs unusual risks, too. In the midst of the dot-com debacle in 2000-01, SVB shares fell 60%. And despite bulls’ contention that venture-capital and private-equity portfolios are more diverse these days and partially offsetting, 39% of SVB’s $19.3 billion loan portfolio still goes to lending to them or their clients.
“We all know there will be bumps along the way, but we sincerely believe we have the right team and the right strategy to best support these special high-growth clients,” Becker says. Right now, the bumps seem manageable.
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