Shares of SVB Financial Group (SIVB) rallied 1.5% in the aftermarket trading in response to first-quarter 2021 results. Earnings per share of $10.03 comfortably outpaced the Zacks Consensus Estimate of $6.94. Also, the bottom line reflected substantial improvement from $2.55 earned in the year-ago quarter.

Results largely benefited from higher revenues, and improving loan and deposit balances. Also, lower provision acted as a tailwind. However, increase in operating expenses and lower net interest margin (NIM) were the undermining factors.

Net income available to common shareholders was $532.2 million, up significantly from $132.3 million in the prior-year quarter.

Revenues & Expenses Jump

Net revenues were $1.40 billion, jumping 69.9% year over year. Also, the top line beat the Zacks Consensus Estimate of $1.24 billion.

Net interest income (NII) was $659.6 million, which grew 25.8%. However, NIM (on a fully-taxable equivalent basis) contracted 83 basis points (bps) to 2.29%.

Non-interest income was $744.2 million, which soared significantly from $301.9 million in the prior-year quarter. The upswing primarily resulted from a drastic improvement in investment banking revenues, net gains on investment securities and net gains on equity warrant assets.

Non-interest expenses increased 59.2% to $636 million. Increase in all expense components, except for net occupancy, and business development and travel costs resulted in the rise.

Non-GAAP core operating efficiency ratio was 58.52%, up from 47.71% in the prior-year quarter. A rise in efficiency ratio indicates lower profitability.

Loans and Deposit Balances Increase

As of Mar 31, 2021, SVB Financial’s total loans amounted to $47.7 billion, increasing 5.5% from the prior quarter, while total deposits jumped 21.7% to $124.2 billion.

Credit Quality: Mixed Bag

Provision for credit losses was $18.7 million, plunging substantially from $243.5 million in the year-ago quarter. Also, the ratio of allowance for loan losses to total loans was 0.82%, down 71 bps year over year.

However, the ratio of net charge-offs to average loans was 0.79%, up 44 bps year over year.

Capital Ratios Mixed, Profitability Ratios Improve

At the first quarter end, common equity tier 1 risk-based capital ratio was 12.19% compared with 12.35% at the end of the prior-year quarter. Total risk-based capital ratio was 14.63% as of Mar 31, 2021, up from 14.45%.

Return on average assets on an annualized basis was 1.73%, up from 0.73% recorded in the year-ago quarter. However, return on average equity was 27.04%, which increased from 8.17%.

Upbeat 2021 Outlook

The company raised 2021 outlook as business activity and the economic environment improved with vaccine distributions and re-openings, and its overall credit trends remained stable.

Average loans are expected to grow in the mid-30s range, up from prior expectation of rise in mid-20s range. Moreover, average deposit balances are projected to grow in the mid-60s range, higher than previous guidance of growing in the mid-40s range.

NII is anticipated to grow in the low-30s range, up from earlier expectation of growth in low-20s range. NIM is projected to be 2.10-2.20%, a change from 2.20-2.30%.

Core fee income (including client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending-related fees and letters of credit fees) is expected to increase at a percentage rate in the mid-single digits, an improvement from prior projection of remaining stable year over year.

SVB Leerink revenues are projected to be in the $420-$450 million range, up from prior guidance of $320-$360 million.

Non-interest expenses (excluding costs related to non-controlling interests) are projected to increase in high-teens compared with the previous expectation of increase in low-single digits.

Net loan charge-offs are expected to be 0.20-0.40% of average total loans.

The effective tax rate is expected to be 26-28%.

Our Take

SVB Financial remains well poised to continue benefiting from growth in loans and deposits along with global diversification. However, continuously increasing expenses and declining NIM due to lower interest rates are major near-term concerns.

SVB Financial Group Price, Consensus and EPS Surprise

SVB Financial currently sports a Zacks Rank #1 (Strong Buy).