Large banks such as SVB Financial Group (NASDAQ:SIVB), with a market capitalisation of US$13b, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk SVB Financial Group takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. The level of risky assets a bank holds on its accounts affects the attractiveness of the company as an investment. So today we will focus on three important metrics that are insightful proxies for risk.
What Is An Appropriate Level Of Risk?
SVB Financial Group is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from SVB Financial Group’s profit. The bank’s bad debt only makes up a very small 0.42% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Does SVB Financial Group Understand Its Own Risks?
The ability for SVB Financial Group to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 247.75%, SVB Financial Group excessively over-provisioned by 147.75% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
Is There Enough Safe Form Of Borrowing?
SVB Financial Group profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since SVB Financial Group’s total deposit to total liabilities is very high at 92% which is well-above the prudent level of 50% for banks, SVB Financial Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
SIVB’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked SIVB’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for SIVB’s future growth? Take a look at our free research report of analyst consensus for SIVB’s outlook.
- Valuation: What is SIVB worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether SIVB is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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