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Why SVB Financial (SIVB) Is Out of Favor for Investors

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SVB Financial Group is turning out to be one of the worst-performing S&P 500 stocks in the Finance sector. So far this year, shares of this bank have plunged 67.2% compared with the industry’s decline of 31.2%. Likewise, the stock is trading way below the Zacks Finance sector and the S&P 500, which have lost 11.8% and 16.8%, respectively.

SVB Financial had a dream run over the last two years, despite the coronavirus-related mayhem and resultant unfavorable operating backdrop. The company’s earnings jumped to $31.25 per share in 2021 from the pre-pandemic amount of $21.73 per share in 2019.

This was largely driven by the tremendous rise in demand for loans. SIVB largely caters to start-ups, venture capital and private equity communities. Amid near-zero interest rates (the Federal Reserve slashed the rates in March 2020 to minimize the impact of COVID-19 disruptions on the economy), the company saw huge loan demand from this niche sector. Its net loan balance almost doubled from 2019 level to $65.9 billion last year.

Nonetheless, since the start of 2022, the U.S. economy has been in the grip of 40-year high inflation. To combat this, the central bank began raising interest rates beginning in March. At present, the Fed Funds rate stands in the 3.75-4.00% range. As the loan demand slowed, SVB Financial’s top line started getting affected adversely. Also, the company witnessed a decline in non-interest-bearing demand deposits. As of Sep 30, 2022, almost 53% of total deposits were non-interest-bearing, down from more than 65% in 2020-end. This put additional pressure on the company’s net interest margin.

These developments led to bearish investor sentiments and resulted in investor apathy toward the SIVB stock.

Year-to-Date Price Performance

Zacks Investment Research
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Though the inflation number has come down a bit in October, the Fed is unlikely to stop rising rates. The pace of interest rate hikes is expected to slow down when the Fed officials meet for a two-day FOMC meeting next month. The market participants are now projecting the forward Fed rates to be near 5% before the central bank stops raising rates sometime next year.

These macroeconomic developments have raised the recession risk in the next six-nine months. Thus, it’s going to be tough times ahead for SVB Financial.

Further, the company management warned that several macroeconomic and geopolitical headwinds will continue to weigh on the market liquidity flows for “the foreseeable future.” Management lowered its 2022 average deposit balance and net interest income (NII) guidance. The company also noted that its NII has peaked for this rising-rate cycle. These downbeat expectations and management comments turned the investors all the more pessimistic toward the SIVB stock.

Analysts are also bearish on this Zacks Rank #5 (Strong Sell) company’s performance. Over the past month, the Zacks Consensus Estimate for the company’s 2022 and 2023 earnings has moved 1.3% and 7.1% lower, respectively.

Bank Stocks Worth Considering

A couple of bank stocks worth a look are Hancock Whitney Corp. (HWC - Free Report) and F.N.B. Corp. (FNB - Free Report) . At present, both HWC and FNB carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Hancock Whitney’s 2022 earnings has moved marginally upward over the past 30 days. So far this year, HWC’s shares have gained 8.3%.

The Zacks Consensus Estimate for F.N.B. Corp’s 2022 has remained unchanged over the past 30 days. FNB’s shares have rallied 15.5% in the year-to-date period.

See More Zacks Research for These Tickers

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F.N.B. Corporation (FNB) - free report >>

Hancock Whitney Corporation (HWC) - free report >>

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