SVB Financial Group, which spent much of last year mired in deposit challenges amid the downturn in the tech sector, had several good things in the fourth quarter.
Loan growth was healthy, principal fee income grew well, credit was strong and net interest income, which has come under pressure, was higher than expected, executives at the New York-based company said Thursday. Santa Clara, Calif. In addition, SVB attracted another 1,600 new business clients during the three-month period, surpassing pre-COVID levels, the company said.
But, the executives warned, the parent company of Silicon Valley Bank, which has carved a niche by itself by banking the fast-growing startup and innovation industry, it’s not out of the woods yet.
While the rate at which non-interest-bearing deposits flowed out of the company slowed during the quarter and the pace of decline in venture capital investments moderated, the shutdown of public markets investments is likely and private sector will lead to a reduction this year in deposits, net interest income and net interest margin for the company with assets of $214.7 billion, Chief Executive Officer Greg Becker told analysts on Thursday during the earnings call for the fourth quarter of SVB.
Average deposits are projected to decline year-over-year by mid-single digits, while net interest income could fall by the tens, the company said. At the same time, the net interest margin for 2023 is expected to range between 1.75% and 1.85%, down from 2.16% for the full year of 2022.
“Markets remain challenging, we admit, and are likely to remain so through 2023,” Becker said. “We don’t expect any dramatic change from where we are now and, in fact, [we anticipate] even a little more pressure in the first two quarters” of the year.
SVB, which says it accounts for about half of all the country’s venture capital-backed life sciences and technology companies, has been in a difficult situation for several months. When interest rates rose last year, startup valuations fell and the deployment of venture capital dollars ground to a halt.
Consequently, more start-ups chose to spend the cash they have on deposit with SVB rather than sell a portion of their businesses at reduced valuations. The withdrawal of those deposits has put pressure on SVB’s balance sheet and increased its funding costs, as it brings higher-cost deposits back onto the balance sheet to offset the outflow of non-interest-bearing deposits.
Still, the company’s outlook isn’t entirely bleak. The shift from non-interest-bearing to interest-bearing deposits should “level off” during the second half of the year, Becker said.
“Last quarter there was more uncertainty,” Becker said. “Even if we’re in this extended period of time for longer or even a little bit deeper, we know we’re going to get through it just fine.”
Some analysts who follow SVB detected encouraging signs in the company’s latest quarterly earnings report.
In a research note, Jefferies analyst Casey Haire noted that SVB management “provided guidance for [2023]which we consider a positive sign that the [venture capital] the recalibration cycle is maturing.”
The company, which normally offers an outlook for the coming year during its third-quarter earnings conference call, did not provide such guidance in October, citing ongoing economic uncertainty.
Autonomous Research analyst David Smith said in a research note that amid the slowdown in VC rollout, SVB “is experiencing one of the best tech lending growth environments in years” due to ” less competition from the stock markets.
The company is also positioned to experience a “significant tailwind for loans over the next six to 12 months” as loan utilization lines begin to be drawn, he added.
“Dawn hasn’t come yet,” Smith wrote. “But at least, it looks like things are getting a little less dark” for SVB.
