SVB Financial's (SIVB) Q4 Earnings Improve Y/Y, Stock Down

SVB Financial Group’s (NASDAQ:SIVB) fourth-quarter 2017 adjusted earnings of $2.89 per share increased 53% year over year. The reported quarter’s figure excluded one-time net costs of $37.6 million related to the tax reform.

GAAP earnings including one-time tax charges were $2.19 per share. The Zacks Consensus Estimate was $2.60.

Results were primarily driven by higher net interest income (NII) and non-interest income. Moreover, loan and deposit balances reflected strength. However, higher non-interest expenses acted as a headwind. Also, a rise in provision for credit losses was a negative for the company. It is probably due to these negatives that the shares of the company lost 1.3% following the release.

For 2017, the company reported GAAP net income of $490.5 million or $9.20 per share, compared with $382.7 million or $7.31 per share in 2016.

Increased Revenues Offset Rise in Expenses

SVB Financial’s net revenues for the quarter were $546 million, increasing 33.1% year over year. Further, it surpassed the Zacks Consensus Estimate of $523.5 million.

For 2017, net revenues came in at $1.98 billion, increasing 23.1% from the prior year.

NII for the quarter came in at $393.7 million, increasing 32.7% year over year. Also, net interest margin (NIM), on a fully taxable equivalent basis, increased 47 basis points (bps) year over year to 3.20%.

Non-interest income of $152.3 million increased 34.2% year over year.

Non-interest expenses increased 12.2% year over year to $264 million. A rise in all expense components except other expenses led to this increase.

Non-GAAP operating efficiency ratio was 48.85%, decreasing from 57.87% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.

Strong Balance Sheet

As of Dec 31, 2017, SVB Financial’s net loans amounted to $22.9 billion, increasing 4.2% from the prior quarter, while total deposits declined 1.2% sequentially to $44.3 billion.

Credit Quality: Mixed Bag

The ratio of allowance for loan losses to total gross loans came in at 1.10%, down 3 bps year over year. Also, the ratio of net charge-offs to average gross loans came in at 0.23%, down from 0.44% registered in the year-ago quarter.

However, provision for credit losses increased 34.5% year over year to $22.2 million.

Capital Ratios Deteriorated, Profitability Ratios Enhanced

As of Dec 31, 2017, CET 1 risk-based capital ratio came in at 12.78% compared with 12.80% as of Dec 31, 2016. Total risk-based capital ratio came in at 13.96% compared with 14.21% as of Dec 31, 2016.

Non-GAAP return on average assets on an annualized basis improved to 0.92% from 0.88% in the year-ago quarter. Also, non-GAAP return on average equity was 11.09%, increasing from 10.77% in the prior-year quarter.

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2018 Outlook

SVB Financial provided the updated 2018 guidance based on the assumption of no further change in interest rate during the year. Average loan balance is expected to increase at a percentage rate in the mid-teens. Further, average deposit balance is projected to rise in the mid-single digits rate.

Further, NII is expected to rise at a percentage rate in the high teens, while NIM is anticipated in the range of 3.35-3.45%.

Moreover, the company anticipates core fee income, including foreign exchange fees, deposit service charges, credit card fees, lending related fees, client investment fees as well as letters of credit fees, to increase at a percentage rate in the high teens.

Further, non-interest expense, net of non-controlling interests, is projected to increase at a percentage rate in the low double digits rate.

On the credit quality front, net loan charge-offs are expected in the range of 0.30-0.50% of average total gross loans. Allowance for loan losses for total gross performing loans, as a percentage of total gross performing loans, is expected to remain flat year over year.

Non-performing loans, as a percentage of total gross loans, are anticipated in the range of 0.50-0.70%.

Effective tax rate is anticipated in the range of 27.0%-30.0%.

Our Viewpoint

The company remains well-positioned to capitalize on future opportunities on the back of its sturdy capital position and consistent growth in loans and deposits. Moreover, its focus on improving non-interest income is expected to support top-line growth. Also, it remains well-positioned to benefit from an improved rate scenario. However, mounting operating expenses are likely to weigh on the company’s performance in the near term.