SVB Financial Reports Earnings—What's the Catch?

01/26/2016 10:40 am EST

Focus: FINANCIALS

Michael Berger

President & Founder, Technical420.com

While he recommends waiting for global market volatility to level off before buying shares, Michael Berger, of Technical420.com, thinks this financial services company is attractive at current levels and recent concerns are overblown.

Global market volatility has been a headache for companies all over the world. Since the start of 2016, many companies have seen the price of their stock plummet, even after a positive announcement. One of such companies is SVB Financial Group (SIVB).

SIVB operates in one of the hottest economic markets in the United States (Silicon Valley) and is focused on booming industries (technology, life sciences, venture capital, and private equity). On Friday, SIVB reported its financial results for the fourth quarter of 2015. Although the company beat on earnings, loan growth, and net interest income, shares have traded down since the announcement.

Investment Thesis

While we recommend waiting for global market volatility to level off before buying shares, SIVB is attractive at current levels and recent concerns are overblown. SVB Financial is poised to continue to produce best-in-class loan growth when compared to its peers and we expect SIVB to report more than 20% loan growth during 2016.

Much of this growth will come from the company's expansion into international markets and we expect SIVB's experience to transition smoothly into these markets. As SIVB continues to penetrate international markets, non-domestic operations will become a bigger part of the bottom line.

Another Beat-and-Raise Quarter

During the fourth quarter, SIVB reported earnings per share of $1.68 which was much higher than Wall Street's $1.53 estimate. The beat was driven by booming loan growth, higher than expected net interest income, core fee income gains, as well as a lower than expected tax rate.

SIVB saw loan growth accelerate 9.2% from the third quarter. This growth was the result of a 20% increase in loans from venture capital and private equity firms. Management expects to see this trend continue during 2016 and pointed to its continued strong client activity.

During the quarter, core fee income increased by 6.3% when compared to the third quarter. This exceeded Wall Street expectations and was primarily the result of higher credit card and foreign exchange fee growth.

Management Expects 2016 to Be a Banner Year

The basis of our investment thesis for SIVB was a bright spot in the earnings report and pertained to 2016 guidance. Management's guidance for 2016 excludes the impact of any additional rate hikes. During the quarter, management increased loan, net interest income, and core fee income guidance for 2016. Management also provided favorite credit quality guidance and we believe investor fears of escalating credit problems are overblown.

During the last month, SIVB has seen shares plummet more than 20% and is on the verge of entering oversold territory. We believe SIVB's best-in-class loan and EPS growth, coupled with its asset sensitivity make the company an attractive investment opportunity.

Michael Berger, Founder and President, Technical420.com

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