17 Sep SVB Financial Group (SIVB)
Silicon Valley Bank isn’t your typical bank. Initially conceived over a poker game between its two creators Bill Biggerstaff and Robert Medearis in 1983, its intent was to provide credit and banking services to the burgeoning number of technology startups in Silicon Valley who were mostly being ignored by the main banking fraternity. Today SVB has become the go-to financial services provider for the US technology sector providing venture capital, private equity, private banking, merger and acquisition, and international expansion services.
Back in the 1980s, prospective tech companies couldn’t just come up with any harebrained scheme and have millionaires and billionaires throw senseless money at them in the hope that their idea would stick. Nobody understood the industry and certainly didn’t trust them with their hard-earned money. They had to go to the bank to get a loan, but the banking industry didn’t trust them either. If you had no assets, no profits, and no prospects who was going to lend you money?
Well, Silicon Valley Bank realised this was a major problem and set about establishing itself as the middle man between the entrepreneurs and the banking system. They started by taking deposits from businesses financed through venture capital, moved into financing startups, into financing the venture capitalists themselves, and then continued adding services to keep these companies as clients as they matured into fully grown businesses.
Being in close proximity they also found themselves as the main banking service for the Napa Valley wine industry, in which there has always been a shared history with nearby tech companies. SVB say they have made loans of more than $4 billion to their premium wine banking clients since they began servicing the industry in the mid-nineties. Helping companies build their brands, financing acquisitions and developments, and going public with an IPO.
They are the 34th largest bank in the US. Which, let’s be honest, sounds tiny. But we need to remember that the American banking system works differently to here in Australia where we have a few big banks and a handful of smaller players. In the US there are more than 8000 banks across the country, all servicing different sectors and communities. So being the 34th largest actually puts SVB in the top 2% of all US banks. They have 29 offices in the US, focussing on areas known for a strong technology sector. You can also find them globally in London, Hong Kong, China, Israel, Germany, and Canada where they service US companies going global, and invest in local tech companies as well.
Starting a bank in a niche market that would prove to become one of the worlds biggest turned out to be a shrewd move. Taking risks that the bigger banks wouldn’t helped them consolidate their position in technology and grow expertise in an industry that the others didn’t have. When it comes to startups they know what works and what doesn’t. According to CEO Greg Baker ” We really understand what drives success and failure around these industries. Sometimes you’ve got to hang in there when companies are having a harder time and really understand who their investors are, what their business model is, and being comfortable with that.”
It’s why they are the preferred banker for technology companies and the closely aligned healthcare industry. So far in 2021 more than two-thirds of companies in these industries that have gone public have done so through SVB. Importantly, these companies will continue using the services of SVB as they grow, which will keep revenue flowing in for years to come. This is one of the main reasons why SVB doesn’t pay a dividend like most of its banking competitors. They prefer to reinvest the money in new ventures because they know it will continue to bring in more capital in the years ahead.
These ongoing services for companies they have brought through are now crucial to its business model. Not just for the companies themselves but as private banking for their often wealthy owners and employees. SVB recently completed a takeover of wealth management firm Boston Private for $1.2 billion which will see it becoming a major player in the space. The bank is no longer content with just being a venture capitalist and private banker. It wants to take on the big boys at their own game.
Over the last ten years, SVB’s share performance has surpassed all other banks in the top 40, bringing in approximately 17% annually. This year, while the banks are up around 30% on average, SVB is up more than 50%. Past performance doesn’t predict future performance of course, but it certainly tells us that this bank is heading in the right direction. Its first-quarter in 2021 was its most successful quarter ever. Revenue was up by 37% from the previous month to $532 million, and up a whopping 303% from the same period a year ago. In an era of record investment, SVB has flourished.
Acquisitions and mergers are expected to slow in the coming months with the SEC introducing new regulations which could hamper prospective deals. However, SVB’s funds under management continue to hit new records, as does the money earned from interest income and from the warrants it receives from investments (reaching $364 million in the last quarter). In this way, the bank continues to benefit from the success of its clients for many years to come.
Now it’s a bit more expensive than your normal banks. It has a PE of around 17 and is trading at 19 times earnings per share for 2021. However, it is not your normal bank. I see plenty of more room to the upside here, with technology stocks continuing to benefit from the new work from home revolution, and with the Federal Reserve set to introduce interest rate rises in the near future. Keep this one on your radar and when the market dips, or SVB’s stock price dips, have a good think about picking some up for the future.