SVB Weathers Crises at Home, Moves on to China

SVB Financial Group has spent the past decade demonstrating that a small bank in California can build an international business.

The $17.5 billion-asset company's expertise with technology companies has fueled its growth in Asia, Europe, Israel and India. Next month it will make a big move into China, sending Ken Wilcox, its chief executive, to Shanghai to create a banking joint venture.

"Everybody in the U.S. who is in the technology, life sciences or venture capital space knows" SVB, said Michael Diana, a managing director in equity research at Cantor Fitzgerald. "That's how pervasive it is. The idea [for SVB] is to make that worldwide."

Though the Santa Clara company seems to lack scale (it has just 26 U.S. offices), analysts said it concentrated on the right clientele for international growth. That focus has helped SVB withstand several recessions and the end of the dot-com bubble of the late 1990s.

Until 18 months ago, "there was a question as to how the company would fare," said Jason O'Donnell, an analyst at Boenning & Scattergood Inc. SVB has "arguably come out of it stronger than ever."

Analysts largely credit Wilcox, who was teaching German studies when he became a banker 30 years ago, for converting SVB from a commercial real estate lender into a bank devoted to technology and venture capital. Wilcox will step aside as CEO Thursday to focus on China, paving the way for Greg Becker, SVB's president, to take over day-to-day operations.

Wilcox will become the chairman of Silicon Valley Bank, which is working with regulators in China to form a joint venture with Shanghai Pudong Development Bank Co. Ltd.

"Technology is an interesting sector because it is global by its very nature," Wilcox said in an interview April 14. "We need to be in those other locations to help the U.S. companies as they seek to do business in other … continents."

SVB executives have traveled overseas to meet with clients since the late 1990s. But SVB did not open its first foreign office until 2004, when it moved into London and Bangalore, India. SVB has added offices in Shanghai, Israel, Mumbai and Beijing. It has pending branch applications in the U.K. and India.

Expansion has a cost. Fourth-quarter profit was about half that of a quarter earlier, at $17.5 million, mostly due to rising noninterest expenses. The fourth quarter had about $6 million in costs tied to foreign offices. (SVB reports its first-quarter results Thursday.)

"That does come with some up-front capital costs, and there's no guarantee that the revenue will follow," said Casey Haire, an analyst at Jefferies & Co.

Soon after he became the company's CEO in April 2001, Wilcox devoted more resources to what he called "innovation space." In 2001, technology made up about 40% of SVB's business activity. Now it accounts for about 90%.

About a third of SVB's $5.5 billion loan portfolio involves software companies and 18% involves venture capital firms. "We bank well over half of the venture-backed technology companies in the U.S.," Wilcox said.

Analysts said few small banks target emerging sectors and venture capital like SVB does, largely because those sectors are viewed as nontraditional and relatively risky.

SVB has "influence way beyond" its size, Diana said. "It shows you the incredible power of focus."

The hard part about having such a singular focus is getting others to invest in the strategy.

"Risk is in eyes of beholder," Wilcox said. "Certain risks can be mitigated through knowledge."

Though based in a hard-hit state, SVB's nonperforming assets peaked at 0.9% of total assets in 2008, while falling to 0.23% last year. SVB handles its riskier business in a unique way, analysts said. Relationships with emerging technology companies typically consist of short-term loans of two to three years, O'Donnell said. "They watch cash flow like a hawk."

Becker said SVB has hit bumps along the way, but the only real worry during his 18 years at the company came during the tech bust in 2001-02. "It was a very short-lived concern," he said. Technology "is one of the fastest-growing parts of ... the global economy."

After the tech bust, SVB began being more aggressive with product meant to retain clients, rather than serving startups that might later gravitate to a bigger bank.

SVB "has done an excellent job in the last several years to broaden its product set to better serve its customers throughout the life cycle," said Joe Morford, an analyst at RBC Capital Markets.

Though well positioned globally, getting regulatory approval to launch full-service branches in China and the Europe will not be easy, observers said.

"It could take some time as the regulators here and in SVB's prospective markets scrutinize the application," Morford said. Still, he said that SVB's technology focus, a partnership with an existing Chinese bank and Wilcox's leadership should make a difference.

Haire said patience is required. "China's got the most juice, but any needle-moving impact is going to be three to five years away," he said.

Wilcox said revenues from overseas operations were "minuscule at this point" and would take time to grow. "Over the next several years we will be in a situation where revenues will be much more significant," he said. "I think we'll grow faster than we might have otherwise."