SVB Financial 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Highest quarterly amount of VC activity since 2001

“In the first quarter of 2014, venture capitalists invested $9.5 billion in 951 deals, the highest quarterly dollar amount since the second quarter of 2001. ”

Corporate VCs

“corporate venture funds and investors, which pulled back significantly during the economic crisis, have been reemerging to support new company formation. These corporate funds essentially provide research and development arms for mature companies trying to avoid disruption by startups with new technologies and delivery mechanisms. And in a testament to how pervasive technology has become, corporate venture funds are sponsored not just by technology companies, but by entertainment, auto, apparel, retail, financial and consumer product companies.”

Environment weighs on earnings power

“Although higher rates are a long-term opportunity, they remain one of our major challenges in the short term. While we have demonstrated that we are able to deliver strong organic growth without help from rates, our earnings power is nevertheless constrained by the current rate environment.”

competition remains intense

“Competition remains intense and shows no signs of letting up. Some lenders appear to be stretching for growth at any cost, and we’re seeing more situations where we have to decide whether it makes sense to sharpen our pencils or walk away.”

Markets are hot, frothiness expected, but better than 15 years ago

“Finally, we’re keeping a close eye on valuations. The markets are hot. In our experience, a certain amount of frothiness is expected to be in any hot market. We take some comfort in the fact that the lessons of the dot-com era have significantly raised the bar in business models and IPO readiness. We believe the pre-IPO companies in the market today generally have much stronger business models than the pre-IPO companies we saw 15 years ago, and many of the valuations are justified. While we have a long history of working with hot markets and we have taken the lessons we’ve learned to heart, in particular, we had learned to take a measured approach when things are heating up.”

This seems very low compared to the rest of the banking system

“our bank level Tier 1 leverage ratio declined 32 basis points to 6.72%. As we have said in the past, our target Tier 1 leverage ratio is generally around the 7% to 8% range. ”

Low tier one because of huge deposit growth

“Tier 1 leverage could continue to trend down if the extraordinary deposit growth continues and if we do not take action. We have grown deposits $6.8 billion or 36% over the last 3 quarters”

Deposit growth coming from clients getting big funding rounds

“What’s been happening in the market is these companies are performing at a very strong level, and they’re getting this preemptive rounds that are substantial; $50 million, $60 million, $75 million. We thought that, that would be potentially temporary, and we thought that would slow down some time in the first quarter. We’re not seeing that.”

You do see people pushing the envelope

“clearly, there are more competitors: It’s large banks; it’s small banks; it’s venture debt funds. And as we’ve seen in other markets — or other cycles, I should say, you do see people pushing the envelope. So we do see some companies looking for non-warrant deals in situations where we think there should be one. When that happens, clearly, we think it’s temporary, and we think that, that isn’t priced effectively, not being priced effectively for the risk that they’re taking. And we’ve seen people cycle in and out of the markets when they go down that path.”

Business models are much better today than 15 years ago

“I think it’s really important, first and foremost, to talk about why this is different than the dot-com bubble back in — 15 years ago. And back at that time period, there were really 2 things going on: one is the business models themselves were — weak business model is probably the simple way to describe it and then you had high valuations on top of that. And so you have a recipe, when one fell, they both collapsed kind of at the same time. Today, what you see is incredibly sound business models. I — when I talk to venture capitalists I look in our own portfolio, you meet with CEOs, there’s more disruption going on in traditional businesses than any of us have ever seen. Now, the question is what’s the value of these disruptive businesses and these growth rates? And so the valuations that we’re seeing, which are, in some cases, billions of dollars in a private basis, I would argue, are justified. Now, the question is when you see multiples of these companies in similar industries, all getting high valuations, they can’t all be successful. So it’s hard for us to predict which ones are going to be successful and which ones aren’t going to be successful. But it is kind of just a general frothiness that we’re looking at. But again, the business models themselves are much more sound. So what happens there? From a credit perspective, I look at it and say the valuations are less of an issue than the business models themselves. Because it just means they’ll still be able to raise money, but the valuation may not be at $1 billion dollars, maybe they raise money at $300 million or $400 million or maybe $200 million.”