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On Jul 1, we downgraded our long-term recommendation on SVB Financial Group (SIVB - Analyst Report) to Neutral from Outperform. This was based on the persistently high operating expenses witnessed by the company.

Why the Downgrade?

Rising operating expenses remain a major concern for SVB Financial. Operating expenses have been rising mainly due to higher compensation and benefits costs. We expect expenses to mount further, owing to increased regulatory compliance costs as well as the continuous hiring of personnel.

Nevertheless, SVB Financial’s first-quarter earnings marginally beat the Zacks Consensus Estimate. Results were mainly driven by growth in revenues, partially offset by a rise in operating expenses.

Over the last 90 days, the Zacks Consensus Estimate for 2013 rose 1.3% to $3.77 per share. The Zacks Consensus Estimate for 2014 fell nearly 1% to $3.97 per share, over the same time frame. Thus, SVB Financial now has a Zacks Rank #3 (Hold).

SVB Financial remains focused on its organic growth strategy, which is evident from the increase in its deposits and net interest income over the last several quarters. Further, the company aims to improve fee income as this is less susceptible to the volatility of capital markets. However, a low interest rate environment, sluggish economic recovery and stringent regulations are expected to dent the company’s profitability in the near term.

Stocks That Warrant a Look

Some banks that are performing better include Central Pacific Financial Corp. (CPF - Snapshot Report), Pacific Continental Corp. (PCBK - Snapshot Report) and Umpqua Holdings Corporation (UMPQ - Snapshot Report). All of them carry a Zacks Rank #1 (Strong Buy).

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