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Morningstar | Silicon Valley Bank's Net Interest Margins Get Back on Track in 4Q

Silicon Valley Bank resumed its net interest margin expansion in the fourth quarter, as margins expanded 7 basis points to 3.69%. Over the past year, net interest income has grown nearly 31% to $517.4, driven by higher rates and strong loan growth, particularly within capital call lines of credit. For the quarter, the bank earned $4.96 per share, while pretax income jumped 46% from the previous year. Silicon Valley Bank has had basically no significant credit provisions over the past year despite what we view as a low-quality loan portfolio. We believe investors are valuing the bank based on a cyclical peak in profitability and growth. When management says competition for loans remains fierce, we urge investors to believe them. For now, we’ll be maintaining our fair value estimate of $98 per share. However, as we digest full-year results and update our 2019 forecast, investors should expect an increase in our fair value comparable to the increase in book value per share.

For the period, Silicon Valley Bank grew loans 3% from the previous quarter and nearly 23% from the end of 2017. A vast majority of Silicon Valley Bank’s loan growth is coming from private equity and venture capital. Though healthcare lending has still seen strong loan demand, the bank saw negative growth in its loans to software and hardware companies in the quarter. Loans in Silicon Valley’s private equity/venture capital segment now account for nearly 50% of the bank’s entire loan portfolio. To put this in perspective, just three years ago these loans accounted for about a third of the entire portfolio.

Credit quality remains strong. During the quarter, Silicon Valley Bank recorded credit provisions of $13.6 million, or 0.14% of average loans. Despite the macro uncertainty and intense competition, this is the smallest total credit provision the bank has seen in nearly three years. We doubt credit losses will remain at historic lows, though Silicon Valley Bank’s customers have defied all of our expectations for credit performance.

Deposits remain strong and it appears liquidity for Silicon Valley Bank improved as the bank repaid loans it has needed in the past for short-term liquidity needs. In addition, on-balance-sheet deposits rebounded to growth in the fourth quarter, growing 1.5% from the end of September while off-balance-sheet funds grew only 4.8%. Though deposit growth is still fairly strong, all of the bank’s growth in deposits occurred in more expensive forms of deposits. This is the second consecutive quarter that non-interest-bearing deposits declined. We have always been under the impression that Silicon Valley Bank's customers had little ability to demand much interest on their deposits. Specifically Silicon Valley Bank’s money market deposits, which have an average cost of 0.54%, drove much of the growth this quarter. If Silicon Valley Bank must rely on more expensive money market deposits, then the bank’s net interest margins will disappoint investors. Much of the bull case for Silicon Valley Bank centers around the bank’s sensitivity to higher rates.