A month has gone by since the last earnings report for SVB Financial (SIVB). Shares have lost about 16.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is SVB due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
SVB Financial Beats on Q2 Earnings, Cuts Margin View
SVB Financial’s second-quarter 2019 earnings of $6.08 per share easily outpaced the Zacks Consensus Estimate of $4.98. Moreover, the figure compared favorably with the prior-year quarter’s earnings of $4.42 per share.
Results were primarily driven by an increase in revenues and a decline in provisions, partly offset by higher expenses. Moreover, the balance sheet position was strong. Notably, the acquisition of Leerink Holdings (SVB Leerink) supported the results as well.
Net income available to common shareholders was $318 million, up 33.7% from the prior-year quarter.
Revenues Grow, Expenses Rise
Net revenues were $863.2 million, increasing 31% year over year. Further, the top line beat the Zacks Consensus Estimate of $787.4 million.
Net interest income (NII) was $529.4 million, increasing 13.5% year over year. Also, net interest margin (NIM), on a fully-taxable equivalent basis, grew 9 basis points (bps) to 3.68%.
Non-interest income of $333.8 million jumped 73.2% year over year. All fee income components witnessed a rise.
Non-interest expenses rose 25.4% to $383.5 million. Rise in all expense components except for FDIC and state assessments costs, and professional services charges led to this increase.
Non-GAAP core operating efficiency ratio was 45.49%, decreasing from 50.40% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.
Loans and Deposit Balances Increase
As of Jun 30, 2019, SVB Financial’s loans, net of unearned income amounted to $29.2 billion, increasing 1.2% from the prior quarter while total deposits grew 6.3% to $55.6 billion.
Credit Quality: A Mixed Bag
The ratio of allowance for loan losses to total gross loans was 1.03%, down 7 bps year over year. Further, provision for credit losses declined 17.9% to $23.9 million.
However, the ratio of net charge-offs to average gross loans was 0.23%, up 1 bp.
Strong Capital & Profitability Ratios
As of Jun 30, 2019, CET 1 risk-based capital ratio was 12.92% on par with the prior-year quarter level. Total risk-based capital ratio was 13.97%, down from 14.03%.
Return on average assets on an annualized basis improved to 2.10% from 1.75% in the year-ago quarter. Also, return on average equity was 23.29%, increasing from 20.82%.
During the reported quarter, SVB Financial repurchased 1 million shares for $230.8 million.
Management provided 2019 guidance based on expectations of no further changes in Federal Funds rates.
The company projects average loan balance growth in the mid-teens while average deposit balance growth is expected to be in the low double digits, up from prior outlook of high single digits.
Additionally, NII is anticipated to increase in the low-teens (down from previous outlook of mid- teens) and NIM is projected to be in the range of 3.60-3.70% (down from previous range of 3.70-3.80%). Decline in guidance for both indicates that deposit mix and lower market rates are not fully offset by stronger balance sheet growth.
Further, core fee income is expected to grow at the rate of low-20s. Including the expected results of the SVB Leerink acquisition, it is expected to increase at the rate of low-70s.
Non-GAAP non-interest expenses (excluding expenses related to non-controlling interests) are projected to increase at the rate of low teens. Including the impact of the SVB Leerink acquisition, it is projected to rise at the rate of mid-30s.
Notably, net loan charge-offs are projected to be between 0.20% and 0.40% of average total gross loans. Non-performing loans as a percentage of total gross loans will likely be 0.30-0.50%.
The effective tax rate is expected to be in the range of 26-28%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, SVB has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, SVB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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