SVB Financial Group Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Meghan O'Leary, Head of Investor Relations
• Greg Becker, President and Chief Executive Officer
• Daniel Beck, Chief Financial Officer
• Michael Descheneaux, President, Silicon Valley Bank

Analysts

• Ebrahim Poonawala, BofA Global Research
• Casey Haire, Jefferies Financial Group Inc.
• Kenneth Zerbe, Morgan Stanley
• Steven Alexopoulos, JPMorgan Chase & Co.
• Bill Carcache, Wolfe Research
• Christopher McGratty, Keefe, Bruyette & Woods North America
• John Pancari, Evercore ISI
• Jared Shaw, Wells Fargo Securities

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the SVB Financial Group Third Quarter 2021 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Meghan O'Leary, Head of Investor Relations.

[Meghan O'Leary, Head of Investor Relations at SVB Financial Group]

Thank you, Paula and thank you everyone for joining us today. Our President and CEO, Greg Becker; and our CFO, Dan Beck are here to talk about our third quarter 2021 financial results and will be joined by other members of our management team for the Q&A. Our current earnings release, highlight slides and CEO letter have been filed with the SEC and are available on the Investor Relations section of our website.

We'll be making forward-looking statements during this call, and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release.

And now I will turn the call over to our President and CEO, Greg Becker.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Thanks, Meghan and thanks everyone for joining us today. It's great to be here with you to talk about another quarter of exceptional growth and profitability, marked by continued strong balance sheet growth, strong net interest income, robust fee and market related income and solid credit. Our earnings release, presentation slides and CEO letter, which we filed this afternoon are available on the Investor Relations section of our website. Before we start the Q&A, I want to call out that we raised our 2021 growth outlook for the third time this year. We also introduced our preliminary 2022 outlook, which calls for continued strong growth as well as further acceleration of key investments in our business. We believe the additional net interest income generated by our larger balance sheet will more than offset this additional investment, while the investments we're making will drive increased growth and improved operating leverage.

And with that, I'll ask the operator to open up the lines for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Ebrahim Poonawala of Bank of America.

[Ebrahim Poonawala, Analyst at BofA Global Research]

Hey, good afternoon.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hey, Ebrahim.

[Ebrahim Poonawala, Analyst at BofA Global Research]

So two questions. One, Greg, your letter sounded extremely bullish. And you mentioned about the 2022 outlook being stronger than any preliminary outlook in years. I guess just unpack that for us in terms of how much of that optimism is built on what's purely happening in markets? And how much of that is tied to should be having a larger balance sheet, a larger investment bank, a more global presence? To the extent you can give us a breakdown between those two components that informs your outlook?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, it's a great question Ebrahim. So I'd break it down this way. Clearly, the growth that we've had in 2021 so far and what we'd expect to finish the year based on the guidance that we've given creates a lot of momentum into 2022. So there's a huge amount of benefit to the expansion of the balance sheet, the growth of core fee income, the investments we're making in investment banking, in headcount, private banking and wealth all that momentum clearly carries forward.

And so, there is kind of a tailwind, number one. Number two, we certainly expect the markets that we serve and innovation economy to do -- to continue to perform well, although not quite at the accelerated pace that we see right now. Nothing that we're seeing is causing that that point of view. It's more of just -- it's hard to fathom that will stay at this pace. And maybe a third category is this. I am more convinced whenever that the strategy that we've laid out over the last couple of years these four pillar businesses, the commercial bank, the private bank, SVB Capital and the Investment Bank all working together is incredibly compelling for our clients.

I'm hearing that first hand. Our teams are hearing that. And just having a broad product set just becomes really compelling and being the only player in the market, who has kind of all four of those capabilities exclusively focused on the innovation economy. So it's really -- it's a combination of those three things Ebrahim that's giving us kind of that optimistic view willing to the 2022.

[Ebrahim Poonawala, Analyst at BofA Global Research]

Got it. And I guess just a separate question and I'm trying to really get to how you're thinking about Boston Private here. When you at your loan growth guidance for next year, fee guidance, how are you thinking about the contribution, just the mix of that loan book and how that loan growth looks, looking out? And what do you -- where do you think assets under management grow in 2022?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah. I'll start and Dan may want to add some comments to it as well. I really -- I guess the most important part is it's really early days, right? We just closed the acquisition July 1 and really these last 90 days has been all about making sure that we're thinking up the teams. We have the right plans in place, because as you know, there's only so much you can do before the deal is actually close to really think up. But I will tell you what I have found, what the team has found is a lot of positive.

So I would say, wouldn't call them surprises, but validation of what we assumed was going to play out, both on people and technology and some of the other things. So I'm again going back to your first question, that causes me to be bullish. And what we always believed with the case the reason that we wanted to bring Boston Private onto the platform, because the opportunity was so great and that I would say has shown up in spades.

The excitement, the energy from the teams on the commercial banking side and the private banking side and basically saying what the opportunity is is truly incredible. So it's -- we haven't got to a place yet. We forecast exactly what that assets under management will be like for 2022. But you should expect to see when we get to January. We release our numbers there. There, we're going to give you a lot more details as we usually do across our guidance levels and that will be one of those things that we comment more.

But I would say, it's early, but feeling very good about where we are and definitely where we're headed. Dan, if you want to add anything?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. The only other thing to add is we are seeing some positive momentum. You'll see it in the materials. We've added 10 advisers since the closing of the deal, so already off to a good start based on the attractiveness of the platform. So that's a positive fact. And I think as we get into as Greg mentioned, the more detailed guidance, here in January, we'll start to talk more about building out the private bank, see more from a mortgage lending and some to a private stock lending perspective as a part of the growth.

It won't clearly get to a level of private equity, global funds banking. But you'll start to see the green shoots of growth in that guidance.

[Ebrahim Poonawala, Analyst at BofA Global Research]

And just remind us Dan, what's the timeline for systems conversion when you get all the tech infrastructure kind of on-board and one?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. Ebrahim, the vast majority, the systems conversions that need to occur or going to occur in 2022. So the vast majority will be done, let's call it Q3 into Q4 in terms of the transition. You have some stragglers. But the things that we need more to manage the enterprise to manage the opportunity across our businesses, Q3 is the target.

[Ebrahim Poonawala, Analyst at BofA Global Research]

And does that restrict your ability Dan to really go-to-market in terms of how you would like to penetrate that $400 million opportunity?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

No, I think it actually allows us to take a step back and understand the information that we're going to need, to understand how to manage those opportunities and to do it in the best way. So we are working, as Greg mentioned, we're working through that right now.

And then, with that can build out the platform to scale it. So I don't think that gets in the way of us making progress towards that objective.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

And I would add on to that part. Let me just add onto that part, because I actually think that the technology side is one of those areas that we are, we were pleasantly surprised how strong the technology was at Boston Private. And so, it actually doesn't slow us down at all. In fact, new clients as they are added, we're adding them on to the legacy Boston Private systems. And actually that will be the main systems client facing systems that we engage in the market.

So I feel really good. But it's not going to slow us down and in fact, I believe it's going to actually enhance our ability to add clients onto the platform.

[Ebrahim Poonawala, Analyst at BofA Global Research]

Got it. Thanks for taking my questions.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah.

[Operator]

Your next question comes from the line of Casey Haire of Jefferies.

[Casey Haire, Analyst at Jefferies Financial Group]

Yeah, thanks. Good afternoon, guys.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hi, Casey.

[Casey Haire, Analyst at Jefferies Financial Group]

Question -- hey, question on the the deposit growth guide. If I layer in '21 and '22, it looks like it's about $10 billion a quarter, which is obviously very conservative with relative to what you've seen this quarter or this past year. I'm just wondering the distributions, which happened at year end, is that something like after a banner year you're expecting an outsized distribution at the end of the year this year?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hey, Casey, it's Greg. I'll start. I'm sure Dan or Mike would want to add to it. So I would say that's a part of it. But the main part is what we've been adding this year roughly is $20 billion a quarter and what our outlook says is that we just believe that it's a reasonable assumption that it's going to be tempered from the incredible growth that we've seen quarter-over-quarter. So we're not see anything that really indicates that. Our teams are still bullish. But I would say, we've kind of sat back and said, just from our own standpoint that that pace, continue with that pace seems overly aggressive.

And so, our outlook, we brought, we brought back to the range that you just described from a deposit growth. Now, we have a high confidence in that. And is there upside? Sure, there is upside. But it's preliminary guidance and we'll clearly be able to give you a lot more color as we cross the year. And we will see if there are higher levels of distributions than we've seen in other, in prior years or anything else that would be a little bit of an anomaly.

So, I'll see if Dan or Mike wants to add anything to that.

[Michael Descheneaux, President, Silicon Valley Bank at SVB Financial Group]

Yeah. Greg, this is Mike Descheneaux here. So when Greg was describing it, you can kind of break it down into two areas, the macro features as well as what we're doing to execute. And so, when you look at the macro pictures, the fundamentals are still extraordinarily strong. And we see the flows of funds come in, you see the amount of dry powder that's out there and some accounts, it's 2 trillion, 2.5 trillion - 3 trillion. There's tremendous amount of money. The amount of money being deployed into this space from BCs continues to grow, the size of the funds are growing, multiple sources.

So that -- those things just have not changed. And then, on the execution front, I mean, if you look at our client acquisition count when we go into the deck that we have here. We continue to bring those on, increase the record numbers of client. And what happens is, it takes some time for them to get funded and so you're seeing the accumulating effect. So we all believe that the fundamentals are in place. But as Greg said, I mean, what we've been growing at and it's just such an extraordinary high pace.

But I'll tell you, I'm really, really happy with kind of what you implied there in terms of, if we can grow $10 billion -- $11 billion per quarter. I think that's just sensational growth this will do so. Again, nothing fundamentally changed in our outlook.

[Casey Haire, Analyst at Jefferies Financial Group]

Great, thanks. And on the liquidity deployment, the slide 24, looks like you guys are expecting new purchase yields around the 150 level. I'm just curious what is the -- what kind of the tenure up, 20 bps in the last week. I'm just wondering how, how up to date that number is and what kind of rate backdrop you guys are assuming on reinvestment rates?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. Casey, it's Dan. Those reinvestment rates were based on forward curve at 930. So you're right. We've obviously sold off from there. I think the way to look at it is in the 3 to 5-year part of the curve for every -- let's call it 15 basis points. On an annualized basis, we should get about another percentage point annualized of net interest income. So that's just our rule of thumb.

If we see that 3 to 5-year part of the curve increased by 15 basis points, that's about a percentage point of pretax net interest income. So since September 30th, you've seen the sell-off in that and a 15 basis point range.

Now, let's see how that sustained again that's annualized and as upside to the guidance.

[Casey Haire, Analyst at Jefferies Financial Group]

Okay, great. Good rule of thumb. Last one for me. So capital management, when you guys have lived at the bank Tier 1 leverage ratio at 7%-8% forever as you guys get bigger and hit that that $250 billion mark, what -- do you have any, what's your confidence level that you'll be able to continue to live at that capital floor going forward?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. Casey, as I think we'd look at the requirements of capital planning and stress testing for a category 4, Category 3 bank. We fashioned those original capital targets based on what we'd anticipate. So I think number one way to ready built the structure based on that. Number 2, if we then just look at the overall risk in the balance sheet, we have to -- more than half of the balance sheet is being investment securities.

And then, we've got a substantial amount of high credit quality lending. How that translate into the stress test is to some degree, lower credit losses. So we don't see incremental pressure to that Tier 1 leverage target, as a part of moving into the category for Category 3 from a capital perspective.

[Casey Haire, Analyst at Jefferies Financial Group]

Great, thanks.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Thanks, Casey.

[Operator]

Your next question comes from Ken Zerbe of Morgan Stanley.

[Kenneth Zerbe, Analyst at Morgan Stanley]

All right, great, thanks. Definitely no question, your guidance was incredibly strong, so I'll definitely give you kudos for that. But just let's flip it over to the other side. If things do go awry, like where is the biggest risk factors to your guidance? Like what could be that there is where we see the most potential downside volatility if things don't go as planned?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Ken, this is Greg. I'll start. I think valuations and just of flow, the flows of venture capital and some disruption occurring, where things have a dramatic slowdown. But that's quite a biggest ripple effect that you would see. You could see at that point investment values, warrant values drop, credit quality may be challenged. But if you see an economic, the true economic change that's really the biggest, the biggest driver now. So that's the risk. But let's talk about what are the -- and Mike did a great job of describing the things that are kind of pushed against that risk.

The one place that is we're out in the market and it's both in the United States and it's also international. If you go to the UK and Europe and you're in South America or you're in Asia, there is such momentum around the innovation economy in every market. And that to me, what we've seen even when there is a slowdown.

So even when you go back to '15 or '16 when there was a temporary slowdown, when you saw at the beginning of the COVID, COVID crisis last year. You saw a quick downturn. But the return was incredibly fast. And people looked at it as an opportunity to say, gosh, I was hesitant to jump in at these valuations and now I want to come in, because I want to be in the innovation economy.

So there is -- that's the risk. But there is so many things that are tailwinds to offset that risk that we certainly see on a daily basis.

[Kenneth Zerbe, Analyst at Morgan Stanley]

Definitely, I understand it. So the tailwinds are -- they are very positive, I agree. I guess, I wish several questions. In terms of expenses, you guys have done I must say a great job of investing, you're sort of -- let's say excess revenues into growing the business.

And I don't want to imply that 20% expense growth is not reinvesting in the business. But it feels like there is a lot of revenue growth coming over the next couple of years. And you are flowing the expense growth, is that just a function of not having I must say additional opportunities to invest in new verticals or I'm trying to make sure I understood why revenue growth so vastly outpaces expense growth, because presumably there's still opportunities for you to grow or reinvest in the business, if that makes sense. Thanks.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

So can I take it on 56 straight earnings calls and that's the first time I've ever heard somebody say that your expenses may not be growing as fast as I'd like them to. But let me take a stat at it. As we look at this and there is a couple of slides in here, there Slide 12. I want to say, it's slide 35. And what they talked about is where we are investing, in investments across the platform. And you can look at breaking down the expense growth. And so, I would say, we feel good about those numbers. But clearly, if we see, as we roll into next year, if the numbers start to play out as good and maybe even better than what you see, we're certainly going to look at putting more money into those investments, because I agree with you. And I know the team agrees that we have lots of opportunity.

So we're trying to balance as you would expect us to always do. What's that operating leverage, what's the right investment level for the growth. And we've done a good job with that historically and we'll take that same approach as we go into 2022.

And so, if we feel good about the revenue and the growth and the outlook or even better than what we have in our forecast, don't be surprised if we continue to add more to the investment portfolio.

[Kenneth Zerbe, Analyst at Morgan Stanley]

All right, thank you very much.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, thanks.

[Operator]

Your next question comes from Steven Alexopoulos of JPMorgan.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Hi, everyone.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hey, Steve.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Not to be the dead horse on the preliminary '22 guidance. One thing I wanted to flesh out with you, I know it's not the situation that X dollars of VC investment equals Y dollars of financial results. But from a big picture view, it's still not clear to me what type of year you're assuming with this guidance? Is it a more normal year or that $100 billion, much better than that, because I'm trying to get a sense of things do continuously then, what does that mean for the outlook?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah. Here's how I would describe it. And Dan or Mike may want to add. Prior to I would say 2020 and 2021 where we've seen a truly incredible growth. And I would say, the second half of '20 which has kind of start there. We have as you know had incredibly strong growth. It's just been outsized the last really five quarters. So what I view is the outlook we have for next year is being somewhere in between the 2. So at a faster pace than what you would historically see from an average, but not quite as fast as you would see this year. And Mike went through and describe the reasons why it could be at the same pace. We're trying to be I would say a little tempered in a sense of -- it's been so incredibly strong again this quarter $80 billion of venture capital flows.

And if it stays at that pace or accelerates. You can clearly see higher deposits in total client funds growth. So I would -- wouldn't call it conservatism. I would say it is a -- what our crystal ball says just based on how long that period of exceptional growth to continue at that pace and just a belief that it will tempered.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. So said another way. You are assuming a fairly material step-down in what we're seeing right now with the preliminary side of it.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, I think an earlier comment, and a question is, if you go back and look at the last several quarters, we were at about a $20 billion deposit growth rate and now it's in that range that was articulated roughly $10 billion. So if we stay at the pace we are, clearly, there is going to be material upside to what you'd see in the forecast.

So we haven't seen anything that would cause us to say I just would say the belief. I've been doing this a long time. And so as Mike and others that it rarely stays at that pace for an indefinite period of time, usually it's four or five quarters and then it goes back to what I'd say is more than normalized growth rate. But certainly hoping that it stays at this pace.

[Michael Descheneaux, President, Silicon Valley Bank at SVB Financial Group]

Maybe one thing to add consider Steve, I mean, look at some of the numbers coming out here, like venture capital did what about $83 billion in capital deployed in Q3, huge amount, it's just one quarter. When you look at exits, right, its just massive excess of something like a $187 billion in Q3. The fundraising, I think this is a really important point to kind of digest in the fundraising. We're already at VC very at $96 billion year-to-date, which is a record for a full year. It's already exceeding, just the 9 months to-date its already exceeded a record that we already have.

So when we look at, again coming back, we talked about earlier, the fundamentals and the sources of capital going there. They're going to -- those are going to get deployed. And so, the -- are certainly there. So again, as Greg said, I mean, I think we're being very sensible at this moment, because again, it should revert back to me. But we're still an extraordinary levels here for sure.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Yeah, yeah. Okay. Greg, regarding the line in the CEO letter, where you say the balance sheet has reached the size, where you can generate strong sustainable NII growth without to help from rates. Typically a larger balance sheet stands growth potential of the bank. It doesn't make it better and this is create a more sustainable NII growth outlook?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, it's a great question and maybe that should have been awarded. The growth rate of the balance sheet and that's what's driving it. So to your point, if you just have a static sized balance sheet and it doesn't grow in a low rate environment, you're not or a flat rate environment, you're not going to get a lot of lift out of it. But I think the point is, we've seen, and that's what's equated the massive tailwind going into 2022 for net interest income.

It is the acceleration of the growth of the balance sheet that we've seen. So it's really a combination. It's really that -- if the way it should have been awarded. Now, what you didn't ask and but I will answer is this, which is what we're really excited about is at some point, we certainly believe that there will be some rate increases.

And we have a slide in the deck that goes through and talks about how spring-loaded the balance sheet actually is for additional NII if we do see rate increases. In Slide 19, and you can go through that and look at every quarter percent increase in the balance sheet, the way it is right now is $106 million again modeled in on an annualized pretax basis for each 25 basis point increase.

But in addition to that, with the first 25 basis point increase, we also expect somewhere between $195 million and $225 million of increased core fee income generated from the large off-balance sheet funds that we have. So again 125 basis point increase, you could see revenue growth of roughly $311 million to I'm sorry -- yeah, $311 million to roughly $325 million or $330 million. So the normalized after this when the second rate increase happens. But the balance sheet is clearly spring-loaded.

So we're happy that we can continue to grow NII in a low rate environment. But we're even more bullish. We do start to see some rate increases.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. Final question, the inclusion of the long-term targets in the CEO letter including 10% EPS growth in the low rate environment, there's definitely quite some attention. I think we last saw that in 2019.

What was your motivation to reintroduce that at this point?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Well, a lot, a lot has changed Steven. I think one of the things we wanted to go back to is kind of how we think about what we're driving to over the long run. And as we set back and looked at where we are with rates, looked at where we are with the size of the balance sheet, looked at kind of a bunch of different things and building these kind of four pillars together, we wanted to give some long-term guidance.

I think everybody is very focused on the next quarter or the next few quarters. What we want to do is say what we're driving to our with the long run. And that's why we put them in place years ago and we just felt it was time to kind of bring them back. So that everyone knew what we were headed to, where we're headed over the long term.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. Fair enough. Thanks for taking my question.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

I think Dan want to add something under that as well. Go ahead.

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah, Steve. The other, the other thing I think about as we had a larger balance sheet, we're growing net interest income, we wanted to reinforce the fact that profitability is really important over the long term. You see the addition of the businesses in SVB Leerink, in Boston Private and the investments there. We believe that's going to continue even at the size and scale of the balance sheet to generate that strong return and both a flat rate environment as well as a higher rate environment. So we just thought it was time to reinforce that profitable growth and strong growth is important to us.

[Steven Alexopoulos, Analyst at JPMorgan Chase & Co.]

Okay. Thanks for the follow-up Dan.

[Operator]

Your next question comes from Bill Carcache of Wolfe Research.

[Bill Carcache, Analyst at Wolfe Research]

Hi everyone. Thank you for taking my question. I wanted to ask a clarification on the long-term financial targets for growth and profitability that you laid out. Do those ROE targets contemplate core fee income only or do they also include non-core fee income as well? I was curious sort to think about that.

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. Bill, this is Dan. That incorporates really all of our revenues, including some of the non-core items. And I think the reason for that as we move forward and go ahead, Private Bank Wealth Management, what we're doing in SVB Leerink, plus some of the benefits that we continue to see in investments and warrant gains are really a part of the story. So it's meant to be a more inclusive measure on a go-forward basis.

[Bill Carcache, Analyst at Wolfe Research]

Understood. That's a helpful clarification. Completely separate topic, on the plan announcements. Can you frame what client pain points you're addressing through that partnership? What's the key value add for your client? And should we think of that as an incremental service that just enhances the stickiness of the relationship or is there also a notable revenue opportunity?

[Michael Descheneaux, President, Silicon Valley Bank at SVB Financial Group]

I'll take that. This is Mike Descheneaux. So it's a limit of everything, right? And so, the partnership arrangement or utilization that enables our clients to be able to use this service there and connect into a system again connecting with us is really, really important. And clearly once you're able to do that and capture that information together, then, there's certainly can build some revenue opportunities that will work.

But again, still very, very early. But again we are very, very proud of our ability to partner with plans.

[Bill Carcache, Analyst at Wolfe Research]

Understood. And I guess maybe as an extension of that. Can we expect to see you guys just see more broadly in the payment space through the addition of the technology investment banking team. Would that be sort of under their umbrella? Just curious if that's an area that we could see you expand into as well?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

So the way, the way I think about it, this is Greg. Our product team, which is under Mike, they have an entire strategic plan around payments. It's very broad-based and so you will see additional partnerships like Plaid. You'll see additional capabilities that are built in-house without partnerships. And I feel really good about that and really focused on delivering for our clients.

On the investment banking side, for technology investment banking, as we add more capabilities, it's going to be very broad-based across really all categories of innovation. Will they'd be able to add value to our payments team? Yeah, probably. I think they will. But they are distinct in the standpoint of what they're focused on. As you can see on Slide 13, it kind of goes through the different categories we have in investment banking and the technology side. And while we have, we expect to be making some near term announcements on the fintech capabilities.

But the payments business, the product is in one category, one area and then investment banking is another.

[Bill Carcache, Analyst at Wolfe Research]

I see, okay, now, that's really helpful. And I guess, maybe Greg is a follow-up, final one for me. Has the new investment bankers that you hired already, are they -- have they joined the platform at this point or some of them still are garden leave and maybe could you frame how conservative or aggressive that $150 million to $250 million of incremental, SVB Leerink revenue is in terms of how soon they'll be able to hit the ground running and impactful after they joined the platform versus does that contemplate giving you little time to ramp on the new platforms, how are you thinking about that?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah. Maybe I'll start the second question first and go back to the first one. So we feel, we feel good about the numbers that we talked about in the deck as far as the guidance for 2022. You clearly see a significant uplift in those numbers and it's a combination of, we have a world-class biotech healthcare team, ECM and building out M&A capabilities. We have a world-class healthcare services team in HealthTech. And now have, and are building out even more of a world-class technology investment banking team or innovation investment banking team. And so, there is hitting the ground running. We have hired 43 technology and 44 health care services in health tech investment bankers tear-to-date, which is effectively doubling the number of investment bankers we had on the SVB Leerink platform. And they are already on the platform and winning mandates. Now those mandates, as you know, especially for M&A and even for some of the IPOs. They take a little while from agreeing, from signing something up until it closes. So some will happen this year, but we'll start to see that rolling into 2022, but feel very good about the outlook for next year.

As we've said, we still expect that next year, we'll be adding somewhere between 35 and 50 additional hires in Technology Equity Capital Markets, Fintech, Equity Research, etc. So we are still looking to add to it. But by the end of next year, we'll be more doing what I'll call incremental adds as opposed to what we've done last year or this year and next year. So really feel good about it where we are. I've been on some client calls with some of the investment bankers. And they're just being incredibly well received, landing new deals already and feel really good about the outlook.

[Bill Carcache, Analyst at Wolfe Research]

That's super helpful color. Thank you for taking my questions.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah.

[Operator]

Your next question comes from Chris McGratty of KBW.

[Christopher McGratty, Analyst at Keefe, Bruyette & Woods North America]

Hey, good afternoon.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hey, Chris.

[Christopher McGratty, Analyst at Keefe, Bruyette & Woods North America]

Regarding the growth that you've laid out the $10 billion a quarter roughly on balance sheet. What are your assumptions within your fee guidance of the off-balance sheet relative to 2021?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Dan, do you want to cover that?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. Hey, Chris. So we don't guide to off balance sheet. But I think what we have been seeing in terms of overall liquidity growth is roughly let's call it 50% up liquidity ending up on the balance sheet and then the rest of the liquidity going off the balance sheet. So around the margins. I think that's a pretty good assumption.

But again, we don't guide specifically to the off-balance sheet client funds.

[Christopher McGratty, Analyst at Keefe, Bruyette & Woods North America]

Okay, it's helpful though. I think the follow up would be regarding capital with the momentum in earnings, the downstream that occurred in the quarter, the raise in August. How are you guys thinking about just capital levels given the guide that you've given?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah, Chris. We come out of the quarter in solid shape from Tier 1 leverage perspective sitting at 7.3% at the bank. So feeling good about exiting the quarter. That being said, there is always -- we do have the growth forecast in the preliminary guidance heading into next year. So as we did in the previous quarter, common equity raise. What we've done after this common equity raise is just to be able to support growth as to go back to prefer to go back to senior debt to be able to support Tier 1 leverage.

So we did, obviously in the third quarter do a common equity raise and feel good to the extent that growth continues that we can go back to the market and potentially look to preferred, look to senior to the extent that we need to bolster the capital position. So that's the way we're thinking about it.

[Christopher McGratty, Analyst at Keefe, Bruyette & Woods North America]

Right. Very helpful. Thanks, Dan.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Thanks, Chris.

[Operator]

Your next question comes from John Pancari of Evercore ISI.

[John Pancari, Analyst at Evercore ISI]

Good afternoon.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Hi, John.

[John Pancari, Analyst at Evercore ISI]

On the long-term financial targets, I wanted to see if you could maybe help us with some of the other assumptions behind that, because just knowing that in a higher rate environment, certainly, there could be different balance sheet dynamics that we're looking at. We could be looking at balance sheet growth slowing in an environment like that, we could be looking at credit costs higher and possibly lower warrant gains, et cetera.

So just wanted if you could maybe help unpack that a little bit. Thanks.

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah, John, it's Dan again. When we look at these targets, these are obviously not sitting in the annual guidance for the year ahead. These are just more generally speaking as we've seen the franchise over a long period of time be able to produce these returns. So when we think of a higher rate environment, and when we think of the returns in the EPS growth to the extent, you see, some less liquidity in the market. We've traditionally been able to continue to grow core fee income. And at the same time, we have these alternative businesses and what we have acquired in Boston Private and Wealth Management, Private Banking as well as the Investment Bank to continue to support the earnings growth rate.

So looking ahead, we think that we've got the earnings power and the balance sheet growth in a higher rate scenario to be able to continue to support the strong EPS growth and ROE target because of these tools that we've been able to generate in the past in terms of profitable growth. And these additional capabilities to be able to support clients across private bank, wealth management as well as the investment bank. So that generally speaking, obviously, these are not forecast the targets. These are, how we're thinking about the business over the long term.

[John Pancari, Analyst at Evercore ISI]

Got it. Okay, thanks Dan. And then, on the comp expense, this quarter, the increase, the linked quarter increase in the comp expense, can you help us -- you sized up, how much of that is performance-related and tied to a better core fee and possibly warrant performance versus headcount growth for hiring for example?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah. In terms of comp, I think you could break it into two pieces. One, let's call it in the 60% to 70% range being incentive driven, both from better performance and warrants.

And then the rest, as we continue to invest in the technology investment banking initiative and add these great group of bankers on the Leerink side, adding additional compensation there. So I'd say the really make up by the large component of the increase.

[John Pancari, Analyst at Evercore ISI]

Got it, okay. All right, thanks. And then, in the investment banking business. As you're building out the business and certainly see the long-term opportunity there, what is the long-term returns that you're expecting for that business in terms of ROE?

And then, what is the efficiency ratio that you're seeing in the business now and what are you forecasting longer term?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Yeah, John, it's a good question. I think as we look at the business and you think about what we've been doing and adding world-class health care services team, adding technology investment banking. That's starting to shift the revenue more to advisory over the long-term versus Equity Capital Markets.

And with that comes some better margin opportunity. So the way to think of the business I think over the long term is less for an ROE perspective, more thinking about it in pretax profit and thinking about it kind of range 18% to 20% maybe a bit more than that on a pretax basis for the business and I think that's a good place to look and we'll see how this continues to evolve with the addition of advisory business for Leerink.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

This is Greg. Let me just add onto it. What I think is important, so, Dan gave you the standalone business metrics. But what we're building here and this is the power of it is, when all the pieces work together. So I'll give an example. So having the investment banking capabilities in healthcare, life sciences and technology, that technology investment banking allows us to retain clients longer, to add more value to existing clients. And it also generates additional client activity for the private bank.

And so, when you think about what we're building and we're seeing it, we're seeing it's early, but you certainly see the power of where it's going is when all four of those businesses work together. And to me, that's, I mean, each one of these businesses on a standalone basis is exciting. They're all doing really well.

But what really gets me excited over the long run is when they all work together, right? We're the only institution that has these four businesses that are exclusively focused on the innovation economy. And you see how well they're working together and the potential. And that to me is where the real upside is over the long run.

[John Pancari, Analyst at Evercore ISI]

Got it. All right. Greg, thanks. I have one more question and it's on competition. I guess if you look, if you compare where you're right now in your business dynamics versus maybe even not too longer maybe three years ago versus now. What are the changes you're seeing in competition? And how is that the competitive landscape changed, in terms of, are you seeing new players digging deeper into capital call lending, are you seeing new entrants from any of the bigger money centers? I mean, can you just help us understand the more recent competitive dynamics and how they've been changing?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, I'll start and I'm confident Mike will want to add to it. The -- how I think about it is the answer is, and the short answer is yes. We're seeing competition increase across all different areas. But here's the part. I've been asked this question which is, how are you building the mode? What are you guys doing to protect against this franchise that you have? And how I answer is there is a little bit differently, which is we have been going on offence, but building out our capabilities to not play defense but to actually add more value to our clients and I'll go back to what I just can I answer with that's the main reason why we've been pushing so hard to create all four of these businesses and build them out and have been scalable and competitive in the market.

And when they all work together, that is hard to compete with. Now, there is still competition. We wake up every day, realized from that, and it's only getting more competitive. But our ability to compete has never been stronger.

And I think that's a really important message to deliver. And we're also spending more money as we talked about earlier, the call earlier, in digital transformation, which is a requirement, we're spending more money on again helping our teams become more efficient. And we still have a long ways to go, which is why we're continuing to accelerate that investment.

But we're definitely, I believe in the best competitive position we've ever been. Mike, anything you'd add to that?

[Michael Descheneaux, President, Silicon Valley Bank at SVB Financial Group]

No, I think you sums it quite nicely as well too is as you alluded to and talked about. We are -- we have expanded our capabilities so much. I mean, as you know, we've been around for many, many years at this bank. And to now see all the capabilities and the tools and the platform that we have to bring to our clients, there is no one else out there that can bring all this together for our clients and at least in the innovation sector as well too.

So it's only opening up even more possibilities for us to go out there and be extremely competitive. But again, having said all that, yes. There is competition in various segments, where you have a lot of debt funds as well too. And people see it's a very attractive area to lend too as well so no doubt. There would have been proliferating as well some of these big box banks are coming down into trying to get the smaller as well because they know that we are going even more up market in terms of size as well too.

So it's there. But again we have never been better equipped today than we have ever been before. And I can tell you, going forward, it's only going to get stronger from our competitive positions.

[John Pancari, Analyst at Evercore ISI]

Got it. All right, Mike. Thank you, Greg. Thank you, Dan for answering. Thanks a lot.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah.

[Operator]

[Operator Instructions] Your next question comes from Jared Shaw of Wells Fargo Securities.

[Jared Shaw, Analyst at Wells Fargo Securities]

Hey, guys. Thanks very much for that inside that you've given us already. And just maybe a couple of questions. How should we be thinking about the pace of incremental securities purchases or cash deployment from here? I know you're pretty aggressive this quarter, are we at a good level or should we still think cash can coming down?

[Daniel Beck, Chief Financial Officer at SVB Financial Group]

Hey, Jared, it's Dan. I still think we've got opportunity in the materials we talk about a target in the $8 billion to $10 billion range. So we've got opportunity to continue to put money to work. Based on how we ended the the quarter and obviously with the liquidity and deposit forecasts included in the guidance. So will the pace be the same as what we saw in the last couple of quarters. Obviously, the guidance would imply a slower investment rates. But we have opportunity with what's on the balance sheet and with the deposit cadence to continue to deploy. Our liquidity in the rate environment in a good spot for us to continue to do that with the recent sell off.

[Jared Shaw, Analyst at Wells Fargo Securities]

Okay. Great, thanks. And then, looking at the Boston Private additions, any additional thoughts or any updated thoughts around your view or approach to Crypto. Is there an opportunity there to be more active in that space and would you ever consider I guess lending against crypto positions through the private bank?

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah, this is Greg. I'll start. Obviously the crypto market is getting more and more attention and we're spending time on it. We do obviously have some clients that are involved in the crypto space. But on that part, the bar is pretty high. As you know, you read about -- we certainly pay attention to compliance issues around crypto companies. And so, we want to make sure that any clients we do bring onboard are ones that are at that high bar level for compliance and we are all on the same page on that. But at the same time in our innovation team, strategy innovation team, we're spending time figuring out what is that, what is that game plan to approach that market and how do we want to invest in, how do we want to play.

So we're certainly looking at that. There isn't anything eminent to amounts. But certainly at some point, we're going to be leaning in more in this space, given the attention and it's getting in the market.

[Jared Shaw, Analyst at Wells Fargo Securities]

Great, thanks so much.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Yeah.

[Operator]

At this time, there are no further questions. I will now turn the floor back over to Greg Becker for any additional or closing remarks.

[Greg Becker, President and Chief Executive Officer at SVB Financial Group]

Great, thanks. So thank you everyone for joining us today. We are obviously really happy with our continued growth and excited about the opportunities ahead. We're making real incredible progress on these four businesses and how they all work together. And I just couldn't be more proud about how the teams are working together, the strategy build out, the execution, the commercial bank and what we're seeing from the Investment Bank, normally just in the Investment Bank, the biotech team, the healthcare team is doing so well. But the addition of the tech team really across the board. The integration of Boston Private, so I'm certainly optimistic as you can tell. As we bring people on board, we're committed to keeping the culture that we have at SVB, which is incredibly client-centric. There is a culture of really embracing the innovation economy and helping those clients be successful. It's all part of what has made us successful to-date and certainly what we believe is going to continue to allow us to be successful in the future. As always, I want to say thanks to our incredible employees, in my view, the best in the industry. They do such an incredible job, taking care of our clients and thinking about the future and collaborating with their colleagues.

And as you could tell, we've added other new colleagues in different businesses, and that collaboration has been exceptional. So I couldn't be more pleased with their dedication and inspiration they give to all of us every day and clearly the clients. We wouldn't have a business that wasn't for the most interesting compelling fastest growing companies in the entire world. And then, we all certainly appreciate the fact that they trust us to partner with us. And thanks to all of you guys for joining us today to hear our story and continuation of the strategy that we've been building.

So thanks to everyone and have a wonderful day. Thank you. [Operator Closing Remarks]