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Why SVB Financial (SIVB) Stock Fell Despite Q2 Earnings Beat

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SVB Financial Group reported second-quarter 2016 earnings per share of $1.78, which comfortably surpassed the Zacks Consensus Estimate of $1.69. Further, the bottom line compared favorably with the year-ago figure of $1.66.

Better-than-expected results were primarily driven by a rise in net interest income (NII). Loan balances showed a decent improvement. However, the company witnessed a fall in non-interest income, higher non-interest expense and increased provision for loan losses – which perhaps led to the stock declining 1.32% in after-market trading.

Net income available to stockholders amounted to $93 million, up 8% year over year.
 

Growth in Revenues Offsets Expenses Pressure

SVB Financial’s net revenue was $396.1 million, up over 7% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $387 million.

NII increased 16.2% year over year to $283.3 million. Moreover, net interest margin (NIM), on a fully taxable equivalent basis, inched up 15 basis points (bps) year over year to 2.73%.

Non-interest income summed $112.8 million, reflecting a year-over-year decrease of 10.7%. The drop was mainly due to a decline in net gains on investment securities as well as derivative instruments along with a fall in lending related fees and other income. These were, however, partly offset by higher foreign exchange fees, credit card fees, client investment fees, deposit service charges and letters of credit & standby letters of credit fees.

Non-interest expense rose 3.2% year over year to $200.4 million, primarily led by an increase in professional services, premises & equipment, net occupancy and provision for unfunded credit commitments. These were partially offset by a fall in compensation & benefits, business development & travel and correspondent bank fees.

Non-GAAP operating efficiency ratio declined to 50.69% from 53.57% in the prior-year quarter. A decrease in efficiency ratio indicates an improvement in profitability.

Strong Balance Sheet

As of Jun 30, 2016, SVB Financial’s net loans amounted to $18.6 billion, up 6.2% from the prior quarter; while total deposits declined 3% to $37.6 billion.

Asset Quality: A Mixed Bag

The ratio of allowance for loan losses to total gross loans came in at 1.29%, down 5 bps year over year.


Further, the ratio of net charge-offs to average gross loans came in at 0.43%, up 38 bps year over year. Also, provision for loan losses increased 37% year over year to $36.3 million.

Profitability and Capital Ratios Show Deterioration

As of Jun 30, 2016, Tier 1 risk-based capital ratio came in at 12.89% compared with 13.15% as of Jun 30, 2015. Total risk-based capital ratio came in at 13.92% compared with 14.15% as of Jun 30, 2015.

However, tangible equity to tangible assets ratio stood at 8.13%, up from 7.58% as of Mar 31, 2015.

Further, non-GAAP return on average assets on an annualized basis declined 2 bps year over year to 0.86%. Non-GAAP return on average equity stood at 10.83%, down from 11.40% in the prior-year quarter.

A Mixed Outlook for 2016

SVB Financial revised its guidance for the year 2016 on a GAAP basis. The company broadened the outlook for average loan balances. It changed to growth at a percentage rate in the mid-twenties from the previous outlook of growth at a percentage rate in the low twenties. Further, the outlook for net interest margin was widened from a percentage rate between 2.50% and 2.70% to a percentage rate between 2.60% and 2.80%.

However, the company narrowed the outlook for average deposit balances. It changed to an increase at a percentage rate in the mid-single digits from the previous outlook of growth at a percentage rate in the low-double digits. Moreover, the outlook for core fee income was lowered to grow at a percentage rate in the low twenties from the outlook of increment at a percentage rate in the mid-twenties.

The rest of the outlook remained unchanged. NII is expected to rise at a percentage rate in the mid teens, while NIM is anticipated in a range of 2.50–2.70%. Further, non-interest expense, net of non-controlling interests, is projected to increase at a high-single digits percentage rate.

Moreover, 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, is estimated to increase at a percentage rate in the mid-twenties. Average deposit balances are predicted to witness a low double-digit percentage increase.

On the credit quality front, net loan charge-offs are expected within 0.30–0.50% of average total gross loans. Nonperforming loans, as a percentage of total gross loans, are anticipated within 0.60–1.00%. 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.

Our Viewpoint

Escalating expenses and stringent regulations are anticipated to dent the company’s performance in the near term. Also, domestic concentration and intensifying competition will likely keep financials under pressure.

Nonetheless, continuous change in deposit mix and efforts to reduce long-term debt position will make SVB Financial well positioned for future growth. In addition, the company’s enhanced investments will likely boost top-line growth.

SVB FINL GP Price, Consensus and EPS Surprise

SVB FINL GP Price, Consensus and EPS Surprise | SVB FINL GP Quote

SVB Financial currently carries a Zacks Rank #4 (Sell).

Among other Western banks, Bank of Hawaii Corporation (BOH - Free Report) is scheduled to report its results on Jul 25, Zions Bancorporation (ZION - Free Report) on Jul 26 and BofI Holding, Inc. on Aug 2.

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