DBRS Confirms SVB Financial Group at BBB (high); Trend Stable

DBRS has today confirmed the ratings of SVB Financial Group (SVB or the Company) and its primary banking subsidiary, including SVB’s Issuer and Senior Debt rating of BBB (high). The trend for all ratings is Stable. The ratings confirmation follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

SVB’s ratings reflect its leading market positions serving its core industries of technology and life science companies, strong liquidity and a sound balance sheet bolstered by a recent equity raise. DBRS notes that to stay the partner of choice amongst early-stage companies, SVB is developing expertise and capabilities in sectors that are likely to benefit from future funding like clean technologies, genomics and advanced materials. The ratings also consider volatile earnings, a less granular loan portfolio and a difficult, albeit improving, venture capital (VC)/private equity (PE) environment.

Given the difficult operating environment and problems at some competitors, SVB improved upon an already dominant market position within early-stage companies. While still an important part of the business model, DBRS notes that the Company now relies on more established companies for the vast majority of its revenues. However, early-stage clients remain vital, as SVB hopes to keep early-stage companies as clients even after they become established.

The established, larger companies drove the robust loan growth displayed through Q4 2008, but have made the loan portfolio much less granular. Indeed, loans over $20 million to clients comprised 18.9% of the total loan portfolio. Although down from 20.7% at the end of 2008, large loans can significantly impact levels of non-performing assets (NPAs), net charge-offs (NCOs) and profitability as evidenced earlier in the year and in Q4 2008. Fortunately, most of the large loan issues have been resolved and the overall credit outlook has improved considerably at SVB. DBRS notes that the weaker results shown before Q2 2009 highlight the risk of larger relationships and the negative impact they can have on financial results.

Earnings are sufficient for the Company’s rating category, but remain volatile. SVB reported solid net income available to common stockholders of $20.6 million for the third quarter, up from $7.8 million in the previous quarter, but down from $25.9 million in Q3 2008. On a sequential quarter basis, increased net interest income from higher securities balances, lower credit costs, good expense control and investment gains rather than losses drove the improved results. For the year, reported net income available to common shareholders increased to $16.6 million, which includes a loss of $11.8 million in the first quarter. DBRS notes that valuation changes from investments in various Company funds as well as warrants owned by the Company contribute to volatility in earnings, as evidenced by the $10.7 million swing from losses to gains in the quarter from SVB’s VC and PE securities. While financial results have improved, low interest rates, liquidity events remaining slow and reduced VC funding remain headwinds for the Company. Nonetheless, DBRS believes SVB remains well-positioned to deliver improved results. DBRS also notes that the business model has been tested twice by dramatic market downturns accompanied by low interest rates this decade and it has performed relatively well.

During the quarter, gross charge-offs more than doubled to $46.6 million primarily driven from software, private equity/venture capital and hardware clients. Even with a significant recovery from a hardware client in the quarter that was previously charged off in Q1 2009, net charge-offs increased to 2.75% of average gross loans (annualized) from 1.74% in the second quarter. The higher levels of charge-offs were mostly driven by previously impaired loans including the resolution of HRJ Capital. Positively, the various loan resolutions resulted in lower NPAs, which declined 35% to $72.2 million, or 1.54% of total gross loans. Excluding any NCOs related to impaired loans, the Company expects NCOs in Q4 2009 to be in the 1.40%-1.45% range and NPAs to be lower than 2008 levels. DBRS notes that the allowance for loan losses is sufficient at 1.85% of total gross loans, as it appears asset quality has turned the corner.

Even with balance sheet growth driven by substantial inflows of deposits, capital remains strong. While the tangible common equity to tangible assets ratio (TCE ratio) of 6.73% is lower than historically strong norms, the Company has been adding low risk securities at the expense of loans to the balance sheet. On a risk-weighted basis, this ratio improves to a robust 11.44%. DBRS notes that SVB has recently completed a common equity offering raising $286 million in net proceeds in order to repay the $235 million in preferred shares it received under the Treasury’s Capital Purchase Program. Including the $286 million capital raise and the repayment of TARP, DBRS estimates that the Company’s TCE ratio would have been approximately 8.9% at September 30, 2009. If the overallotment is fully exercised, DBRS notes that SVB could raise an additional $43 million in net proceeds further bolstering its strong balance sheet.

SVB Financial Group, a bank holding company headquartered in Santa Clara, California, reported $12.5 billion in assets at September 30, 2009.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporation (Financial Institutions) rating.