A month has gone by since the last earnings report for SVB Financial (SIVB - Free Report) . Shares have lost about 9.2% 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 Q1 Earnings as Revenues Rise
SVB Financial’s first-quarter 2019 earnings of $5.44 per share easily outpaced the Zacks Consensus Estimate of $4.73. Moreover, the figure compared favorably with the prior-year quarter’s earnings of $3.63 per share.
Results were primarily driven by increase in revenues, partly offset by higher expenses and rise in provisions. Moreover, the balance sheet position remained strong. Notably, the impact of the acquisition of Leerink Holdings (now SVB Leerink) has been included within the results.
Net income available to common shareholders was $288.7 million, up from $195 million in the prior-year quarter.
Revenues Improve, Expenses Rise
Net revenues were $793.3 million, increasing 37.9% year over year. Further, the top line beat the Zacks Consensus Estimate of $744.5 million.
Net interest income was $512.9 million, increasing 22.2% year over year. Also, net interest margin, on a fully-taxable equivalent basis, expanded 43 basis points (bps) to 3.81%.
Non-interest income of $280.4 million increased 80.3% year over year. All fee income components except for other income witnessed a rise.
Non-interest expenses rose 37.8% to $365.7 million. Rise in all expense components except for FDIC and state assessments costs led to this increase.
Non-GAAP core operating efficiency ratio was 44.71%, decreasing from 48.41% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.
Loans and Deposit Balances Increase
As of Mar 31, 2019, SVB Financial’s loans, net of unearned income amounted to $28.9 billion, increasing 1.8% from the prior quarter while total deposits grew 6.1% sequentially to $52.3 billion.
Credit Quality: A Mixed Bag
The ratio of allowance for loan losses to total gross loans was 1.03%, down 8 bps year over year. Further, the ratio of net charge-offs to average gross loans was 0.11%, down 4 bps from the year-ago quarter.
However, provision for credit losses increased 2.1% year over year to $28.6 million.
Capital Ratios Deteriorate, Profitability Ratios Improve
As of Mar 31, 2019, CET 1 risk-based capital ratio was 12.77% compared with 12.87% as of Mar 31, 2018. Total risk-based capital ratio was 13.81%, down from 13.99% a year ago.
Return on average assets on an annualized basis improved to 2.04% from 1.51% in the year-ago quarter. Also, return on average equity was 22.16%, increasing from 18.12% in the prior-year quarter.
During the reported quarter, SVB Financial repurchased 0.49 million shares for $116 million.
Upbeat 2019 Outlook
Management provided 2019 guidance based on expectations of no further rise in interest rates.
The company projects average loan balance growth in the mid-teens while average deposit balance growth is expected to be in the high single digits.
Additionally, NII is anticipated to increase in the mid-teens (down from previous outlook of high teens) and NIM is projected to be in the range of 3.70-3.80% (down from previous range of 3.80-3.90%).
Further, core fee income is expected to grow at the rate of low-20s, up from the prior guidance of growth in high-teens. Including the expected results of the SVB Leerink acquisition, it is now expected to grow at the rate of low-70s, up from the prior guidance of growth in high-60s.
Non-GAAP non-interest expenses (excluding expenses related to non-controlling interests) are projected to increase at the rate of low teens, down from previous guidance of mid-teens. Including the impact of the SVB Leerink acquisition, it is now projected to increase 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. Nonperforming 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 fresh estimates.
At this time, SVB has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. 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 indicates a downward shift. Notably, SVB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.