Management can make or break a company, so when evaluating potential stocks, investors will want to take a good look at who runs the company, their track record, and any other information that can help you understand their management style. SVB Financial (SIVB -3.82%), the parent company of Silicon Valley Bank (which caters to the start-up, tech, venture capital and private equity communities), has been a strong performer in recent years. But a comment from SVB chairman and chief executive Greg Becker on the bank’s latest earnings call gave me a lot of confidence in his leadership. Here’s why.
Prepare for the unexpected
SVB Financial benefits a lot from rising interest rates because a large part of its deposit base is non-interest bearing, meaning the bank pays no interest on these deposits, which also tend to be more rigid at as rates rise. So, as the bank’s loan yields increase as the Federal Reserve raises interest rates, the bank will see its margins widen.
The bank also has a diversified product set that it has built and developed over the past few years. SVB Financial estimates that for every 0.25% rate hike by the Fed, the bank will see an additional $100-130 million in net interest income, the profits banks make on loans, securities and cash after covering the cost of financing these assets. .
Although the Fed has indicated that it plans to continue raising rates this year and next, what if inflation suddenly slows or the economy tumbles into recession sooner than expected and the Fed should stop rate hikes or even cut interest rates? Well, Becker said SVB is considering and preparing for this because as a big beneficiary of rising interest rates, it means a falling interest rate environment could hurt the bank – although SVB performed extremely well during the ultra low rate environment in 2020, and most of 2021.
During SVB’s latest earnings call, Becker said:
[We] we’re working to make sure we’re as protected as possible if the rates — I know, it’s funny that we’re talking [a] potential drop in rates when we just haven’t really seen rates go up. But, you know, you have to think that way to prepare for that. You know, and I have enormous confidence… We [will be] protected as much as we can be there.
Again, it may seem hard to imagine an upcoming interest rate cut, but Matthew Pieniazek, president and CEO of banking advisory firm Darling Consulting Group, says the latest rate cycle is a reason. for banks to think big. During a recent episode of S&P Global Market Intelligence street talk podcast, Pieniazek said:
Let’s go back to 2018, when the whole world thought that rates only had one direction and it was going up. And all the conventional wisdom was that you should lengthen passives and shorten actives. Those who did not lose sight of their biggest risk, which was falling rates, did the opposite.
Pieniazek added: “There are things that banks can do not to give up all the benefits of rising rates, to actually reap most of it, but to protect themselves against the thing that can do the trick to you. more trouble…. This is an important, important business issue with a few exceptions banks really shouldn’t lose sight of here.
While I’m sure other bank management teams think this way, SVB is the only one I’ve heard so far about being prepared for a lower rate environment on its earnings call. of the first trimester. It gives me confidence not only in SVB’s management’s ability to generate strong short-term returns as they have, but also to see the big picture and prepare for a range of results in what is currently an environment filled with uncertainty.