SVB Financial Banks On China

By Will Ashworth | November 22, 2011 AAA
Silicon Valley is heading to China; Silicon Valley Bank, that is. SVB Financial Group (NASDAQ:SIVB) announced on Oct. 20, 2011, that the China Banking Regulatory Commission has granted it permission to form a joint venture with Shanghai Pudong Development Bank. The two banks will work together to provide banking services for Chinese technology and life science companies. SVB Financial has done the same thing in the U.S., for 28 years. This is just one of the many reasons I believe the Santa Clara holding company is a great bank to invest in.

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Unique Business

SVB Financial Group comprises five business segments, including commercial banking, global commercial banking, private banking, analytics and venture capital fund management. Everything it does is geared to the technology and life sciences firm. Of its $6.3 billion loan portfolio, 56% involves those two sectors. With more than 12,000 clients around the world, if you're an innovative company, you likely know who they are. (To know more about venture capital, read: Georges Doriot And The Birth Of Venture Capital.)

Third Quarter

Highlights of Q3 include an 8.6% increase to $6 billion, in average loan balances from the second quarter. Net interest income grew 3.8% to $135.9 million, its allowance for loan losses as a percentage of loans, decreased two basis points to 1.34% and its gains on investment securities were $9.3 million, $1.4 million higher than in the second quarter. In the first nine months of the year, diluted earnings per share were $3.12, a 70.5% increase over the same period last year. Average total deposits grew 32.8% to $15.8 billion. Its return on average assets on an annualized basis improved from 0.72% in 2010, to 0.99% in 2011. Lastly, its operating efficiency ratio declined from 62.53 to 52.50%. By every standard possible, 2011 is a big success. (To know more about earning per share, read: The 5 Types Of Earnings Per Share.)

SVB Financial Group and Peers

Company

SVB Financial Group

1.25

City National (NYSE:CYN)

1.02

Bank of Hawaii (NYSE:BOH)

1.91

Umpqua Holdings (NASDAQ:UMPQ)

0.81

Loan Portfolio

In just one year the composition of SVB Financial Group's loan portfolio has changed drastically, but for the better. In September 2010, it had 36 clients with loans of $20 million or more, representing 22.7% of its total loans. By June of this year, the number of clients with loans over $20 million had grown to 51 and 26.1% of the loan portfolio. At the end of September, it was up to 60 clients and 28.2% of the overall loan portfolio. Of the clients with loans outstanding greater than $20 million, more than half are with software developers and venture capital or private equity firms. At a time when many banks aren't lending, SVB Financial is putting money in the hands of some of this country's biggest job creators. In fact, its loans are at an all-time high. On this alone, investors ought to be intrigued. I'm sure Howard Schultz, CEO of Starbucks (NASDAQ:SBUX) and the man behind the "Create Jobs for USA" program, is aware of SVB Financial Group.

Preferred Shares

SIVB doesn't pay a dividend and it never has. Therefore, investors looking for income probably aren't interested in its common stocks. However, it does have a preferred share that trades on Nasdaq. SVB Capital II (Nasdaq:SIVBO) was created by Silicon Valley Bancshares, as a special-purpose trust in Oct. 2003. The trust issued 2 million preferred shares at $25 each. It then turned around and bought $50 million in 7% junior subordinated debentures, issued by SVB Financial Group and due Oct. 15, 2033. If you buy an equal amount of the common and preferred shares, you effectively get a current yield of 2.5%, plus any upside on the common. It's not perfect, but given its stock has handily outperformed its regional bank peers over every time period in the past 15 years, it should be more than satisfactory.

The Bottom Line

Banks haven't had an easy time in 2011, or over the past five years, for that matter. When banks finally revert to the mean, this is a bank stock you'll want to be holding.

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At the time of writing,Will Ashworth did not own shares in any of the companies mentioned in this article.

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