SVB (SIVB) Up 10.8% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for SVB Financial (SIVB). Shares have added about 10.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is SVB due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

SVB Financial Q1 Earnings Miss, Provisions & Costs Rise

SVB Financial’s first-quarter 2020 earnings of $2.55 per share lagged the Zacks Consensus Estimate of $3.07. Also, the bottom line was 53.1% lower than the year-ago quarter’s reported figure.

Results were primarily hurt by a significant increase in provisions along with higher expenses. Moreover, contracting net interest margin (NIM) was a headwind. Nevertheless, the company recorded higher revenues as well as an improvement in loan balances.

Net income available to common shareholders was $132.3 million, down 54.2% from the prior-year quarter.

Revenues Improve, Expenses Rise

Net revenues were $826.1 million, increasing 4.1% year over year. Further, the top line surpassed the Zacks Consensus Estimate of $770.9 million.

Net interest income (NII) was $524.1 million, increasing 2.2% year over year. However, NIM, on a fully-taxable equivalent basis, contracted 69 basis points (bps) to 3.12%.

Non-interest income was $301.9 million, up 7.7% year over year. The upswing resulted from an increase in net gains on investment securities, foreign exchange fees, credit card fees, deposit service charges, letters of credit and standby letters of credit fees, and commissions.

Non-interest expenses rose 9.3% to $399.6 million. Increase in all expense components, except for business development and travel costs, resulted in the upside.

Non-GAAP core operating efficiency ratio was 47.71%, up from the prior-year quarter’s 44.71%. A rise in efficiency ratio indicates lower profitability.

Loans and Deposit Balances Increase

As of Mar 31, 2020, SVB Financial’s net loans amounted to $35.4 billion, increasing 7.8% from the prior quarter, while total deposits grew marginally to $61.9 billion.

Credit Quality Deteriorates

The ratio of net charge-offs to average loans was 0.35%, up 24 bps year over year. Also, the ratio of allowance for loan losses to total loans was 1.53%, up 50 bps year over year.

Provision for credit losses increased significantly from $28.6 million to $243.5 million.

Capital Ratios Mixed, Profitability Ratios Worsen

As of the end of the first quarter, CET 1 risk-based capital ratio was 12.36% compared with 12.89% at the end of the prior-year quarter. Total risk-based capital ratio was 14.44% as of Mar 31, 2020, up from 13.94% on Mar 31, 2019.

Return on average assets on an annualized basis was 0.73%, down from 2.04% recorded in the year-ago quarter. Also, return on average equity was 8.17%, decreasing from 22.16%.

Second-Quarter 2020 Outlook

Given the uncertainties related to the impact of the coronavirus outbreak, management withdrew its 2020 guidance that it provided earlier. Now, the company has provided an outlook for the second quarter.

Both average loans and deposit balances are expected to be stable or slightly down sequentially.

NII is anticipated to be between $490 million and $520 million. NIM is projected to be 2.90-3.05%.

Non-GAAP non-interest expenses (excluding expenses related to non-controlling interests) are projected to range between $390 million and $410 million.

The effective tax rate is expected to be 27-29%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -8.28% due to these changes.

VGM Scores

Currently, SVB has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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.

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