Silicon Valley Bank’s $ 97 billion in assets are on a run it won’t forget. The share price of its parent company, SVB Financial Group (NASDAQ: SIVB), fell from a low of around $ 130 in March to over $ 350 at Wednesday’s close. The stock is reaching new all-time highs during a period when the banking sector has not lacked challenges.
Silicon Valley Bank, which caters heavily to startup, venture capital, and private equity communities, has a lot to offer. But I believe he has one attribute that really sets him apart from the industry right now.
Capital call credit lines
One of the biggest challenges facing banks today is revenue. Ultra-low interest rates have reduced the amount of interest that banks receive on many of their loans, which is known as net interest income. Additionally, unlike most low-throughput environments, banks are not experiencing a high demand for loans from the business side as the coronavirus has severely affected many business sectors, such as hotels, retail, offices, etc. Many companies are still equally concerned about the uncertain economic outlook and therefore are not investing in themselves. Most banks have seen their total net interest income keep falling in the third quarter, and the profit margin on loans is now at its lowest level since the Great Recession, according to data company Trepp.
Silicon Valley Bank also saw its net interest margin drop significantly in the third quarter, but the bank was rare in the sense that it managed to increase its net interest income from the second quarter and from a year over year. Indeed, unlike most players in the industry, Silicon Valley Bank has made enough loans in its niche credit segments to compensate for the lower margins.
And that’s where we come to the attribute that I think sets this bank apart right now.
Silicon Valley Bank lends heavily to the venture capital community through loans called capital call lines of credit, which make up nearly half of its total loan portfolio. Capital call lines are short-term loans to venture capital and private equity firms that attempt to quickly execute their investments in start-ups or businesses. So Silicon Valley Bank provides a line of credit until the venture capital or private equity firm can secure the funding that has already been promised by its own investors. This product carries an interest rate of around 3%, and Silicon Valley Bank has not suffered any net loss in this segment of credit since it began lending in the 1990s.
This is a big deal because, as I mentioned earlier, most traditional banks struggle to get commercial loans, which usually have higher interest rates. While there are other banks that provide call-up loans, this is not common in your traditional commercial bank, and Silicon Valley Bank has been making this type of loan longer than anyone else. other. Banks have also been inundated with deposits this year, but have nowhere to deploy that capital. The low interest rate environment weighed on bond market yields, and invest in commercial real estate is also not super attractive at the moment. When banks find themselves with too much money on their books and not generating any meaningful return, it can hurt their performance indicators. While net interest income and margins may start to bottom out soon, it is unclear whether banks will be able to bring net interest income back to pre-pandemic levels.
Meanwhile, Silicon Valley Bank is in a much different position. Silicon Valley Bank chairman Michael Descheneaux said during the company’s third quarter earnings call that there are “record levels of dry powder for VC.” Not only are the private markets one of the few places where investors can find a significant return right now, but entrepreneurship and start-ups tend to increase after a recession. With the acceleration of digital adoption, I think entrepreneurial activity could resurface.
This will provide good lending activity for Silicon Valley Bank, and at attractive rates. Perhaps this is one of the reasons why Silicon Valley Bank is forecasting net interest income growth at a high percentage in 2021, and remember that is after continuing to increase revenue from net interest in the third quarter despite the low interest rate environment.
Bright prospects for 2021
Silicon Valley Bank has never allocated much of its assets to loans. It has a ton of excess cash to deal with and is trading well above tangible book value. But even with all of this in mind, I still see this bank producing better and more consistent profits than most of the banking industry in 2021. The bank also has a lot to offer, including a top notch efficiency ratio and a growing investment banking division. But with net interest income such a struggle right now for the banking industry and Silicon Valley Bank in such a strong position with its call capital loan product and experience, it’s an attribute that to my opinion, really separates it from the rest of the industry.
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