For years, SVB Financial Group has reaped the rewards of banking the innovation industry.
Fueled by fast-growing startups and deep ties to the venture capital market, the parent company of Silicon Valley Bank spent several years
But 2022 has not been a great year for the technology sector or SVB, where balance sheet growth is under pressure amid deposit challenges, and near-term profit margins are cloudy at best.
Last month, during SVB's third-quarter earnings call, executives delivered bad news to investors. Net interest income and the net interest margin have likely peaked for the current rate cycle, while average deposits — which have been falling as startups spend down more venture capital investment dollars than they are taking in — are projected to decline again in the fourth quarter.
At the same time, the bank's cost of deposits is expected to rise as SVB brings higher-cost funding back onto its balance sheet to compensate for the outflow of noninterest-bearing deposits.
Citing economic uncertainty, SVB executives did not give 2023 guidance during the earnings call.
It's a far different scenario than what was expected just 11 months ago. Heading into 2022, the Santa Clara, California-based bank, where average total assets have more than quadrupled since 2017 to $216.1 billion, was viewed as one of the most asset-sensitive banks in the country.
Now SVB is tipping toward being liability-sensitive — with liabilities such as deposits repricing faster than loans and other assets — which isn't ideal in a rising rate environment.
In an interview with American Banker last week, SVB President and CEO Greg Becker said the company's fundamentals remain intact, but he warned that there will be more short-term headwinds.
Investors are now asking when the rate of venture capital deployment will better align with the amount of cash that startups are withdrawing, Becker said.
"Is it the first half of 2023 or the second half of 2023? When will we get a healthy level of venture capital with reduced cash burn rates?" he asked.
It's a good question that depends almost entirely on the decisions of venture capital firms.
Last year, there was incredible growth in technology and healthcare companies and record levels of venture capital investment. According to PitchBook, U.S. venture capital-backed companies
But as interest rates surged this year, startup valuations have declined, and the deployment of those venture capital dollars has slowed. As a result, more startups are opting to spend the cash they have on hand at SVB rather than sell a stake of their businesses at lower valuations.
The so-called "cash burn" rate is more than twice as high at SVB as it was before 2021, and it's expected to remain high, the company noted in third-quarter earnings materials. For the fourth quarter, SVB said it is expecting average deposits to total somewhere between $168 billion and $172 billion, which would reflect year-over-year growth of mid-20s% growth, not the high-20s% growth that the company projected in July.
The rate at which startups keep spending their cash has been unexpected, some analysts say.
If deposits keep flowing out, "the biggest risk is lower earnings," said Jared Shaw, analyst at Wells Fargo Securities. "If we see continued deposit outflow, the bank will have to reduce its securities portfolio, which will reduce the opportunity for spread income. Really what we're looking at in that scenario is maybe slow growth or negative growth with declining revenue."
The good news is that the stalled venture capital investments should start moving again. Venture capital firms are loaded with money they want to invest, said D.A. Davison analyst Gary Tenner.
"They're sitting on capital and not getting paid to invest it, so at some point there will be a meeting of the minds as it relates to valuations," Tenner said. "You've got to think at some point next year that trend will improve, but it's pretty difficult to pinpoint much beyond that."
Despite recent turbulence, Becker said he's confident in SVB's business model and the niche it has carved within the innovation economy. The company has diversified its revenue by making two acquisitions — the investment bank
SVB's news for the quarter wasn't all gloomy. The company attracted nearly 1,800 new commercial clients, setting a record, and said loan growth remained solid at 17.3% year over year.
Becker pointed to the innovation economy's growing share of the nation's gross domestic product as proof that SVB is well positioned to ride the tech wave when it returns.
"Every industry is being impacted by it, disrupted by it and supported by it," he said. "And that's what we're banking on."
