This growth action is exploding its industry
Most investors don’t see the banking industry as a high growth industry, especially when it comes to large cap banks which tend to grow slowly and steadily. But a large bank that has clearly stood out as a growth stock is SVB Financial Group (NASDAQ: SIVB), which has $ 191 billion in assets and is the parent company of Silicon Valley Bank. The stock has collapsed since the start of the pandemic in early 2020 and has increased by more than 150% from last year. After its latest third quarter results, I’m confident to say that this is a growth stock that is at the top of its industry. Here’s why.
Incredible growth and profitability
It is not always easy for a bank to grow and achieve good profitability – usually one comes at the expense of the other. But since the pandemic, SVB has made superb returns and is growing the bank at an incredibly rapid rate. SVB is a niche bank that caters to start-up, venture capital and private equity communities through four divisions: commercial banking, private banking and wealth management, investment banking and fund management. Businesses complement each other well and create a lot of cross-selling opportunities.
After the pandemic started in March 2020, private markets loaded themselves with dry powder and simply took off, and they haven’t slowed down since. Global private equity and venture capital investments in the first nine months of 2021 have already exceeded total investment every year since 2017. There have also been more initial public offerings funded by venture capital in the past. during the third trimester than any year since 2017.
This has translated into significant growth and profitability for SVB, which over the past year has more than doubled its balance sheet to approximately $ 191 billion in assets. Suddenly, a niche bank quickly becomes one of the largest regional banks in the country. With all the venture capital and private equity investments, SVB has been able to increase lending at a much faster rate than the industry, as it provides these companies with short-term lines of credit so that ‘they can quickly execute their investments.
While SVB’s third quarter results were affected by some one-time acquisition costs, in the first nine months of the year the bank generated a return of almost 1% on assets and a return of 19 , 4% on average equity, despite the massive growth in its leaf balance.
Develop an excellent suite of products
SVB has also banked a large number of start-ups since their inception, and when it agrees to bank a business that is generally too risky for a bank, it often receives warrants in exchange for taking the risk. If this start-up eventually goes public or perhaps is acquired, these warrants or other agreements turn into great rewards for SVB.
The SVB Leerink investment banking division also performed very well, benefiting from all of the recent IPO and M&A activity. Working with start-ups and banking them from the start clearly gives SVB a great foray into when the time comes for investment banking to get involved. Management is also investing heavily in this division, having hired 87 new investment bankers in 2021 alone, more than doubling the unit and adding new capacity.
The final piece of the puzzle is in wealth management and private banking, which are great deals to have when working with all of these high net worth individuals. Earlier this year, SVB announced the acquisition of Boston Private Financial Holdings, which catapulted its private banking assets under management (AUM) from $ 1.6 billion to nearly $ 20 billion. Management has previously said that Boston Private presents a cross-selling opportunity among the bank’s existing clients of approximately $ 400 billion when considering the wealth management opportunity, as well as the lending and deposit capabilities. that Boston Private brings.
Orientation is exciting
As it has done throughout the year to the delight of investors, SVB management has raised its forecasts for 2022. The bank expects average loan balances to increase by the order of by 20%, while average deposits are expected to increase by another 40%. after having already increased by around 78% since the end of 2020. Meanwhile, management expects net interest income, the money the bank earns on loans and securities after covering its cost of financing , are expected to grow in the order of 30% and basic costs. revenues are also expected to grow by around 20%. All of this bodes well for profitability in 2022.
Management has even gone so far as to say that in the long term and in a low interest rate environment, where the fed funds rate is between 0% and 2.5%, they believe that SVB can generate a return on equity. constant of about 15%. and annual growth in earnings per share of 10% on an annualized basis. SVB is trading at a high premium – and rightly so – but the bank is growing like a gangbuster and the company has never been better positioned, in my opinion.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.