SVB Financial Group Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

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

Analysts

• Ebrahim Poonawala, Bank of America Merrill Lynch
• Steven Alexopoulos, JPMorgan Chase & Co.
• Casey Haire, Jefferies Financial Group Inc.
• John Pancari, Evercore ISI
• Bill Carcache, Wolfe Research
• Jared Shaw, Wells Fargo Securities
• Christopher McGratty, Keefe, Bruyette & Woods
• Chris Kotowski, Oppenheimer and Company.
• Jennifer Demba, Truist Securities

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Q4 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

It is now my pleasure to turn the call over to Meghan O'Leary, Head of Investor Relations. Ma'am, please go ahead.

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

Thank you, Brent, and thank you everyone for joining us today. Our President and CEO, Greg Becker and our CFO, Dan Beck are here and will be joined by other members of our management team for Q&A regarding our fourth quarter and full year 2021 financial results.

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, specifically our financial release and slide deck.

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

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

Thanks, Meghan, and thank you all of you for joining us today. We're pleased to be reporting another quarter of strong growth and profitability. Our core business continues to fire on all cylinders, with the growing balance sheet, healthy net interest income, in spite of NIM pressure, robust fee income and excellent credit quality. Our warrants and investment gains moderated from record levels in Q3, we see continued strength across our entire business. We are reiterating our strong 2022 outlook and raising our expectations for loan growth and net interest income. In addition, our outlook does not include the significant positive impact of future short-term rate increases, which seem increasingly likely. We filed our earnings materials earlier this afternoon and they are available on the Investor Relations section of our website.

And with that I'll ask the operator to open-up the lines and turn it over for questions. Thank you.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from Ebrahim Poonawala with Bank of America. Your line is open.

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

Hey Ebrahim.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

I guess -- hey Greg. Maybe just in your letter you mentioned public market volatility a couple of times. When I look at your results, extremely strong. The outlook is strong, but when you look at the stock performance since October it's exact what we are seeing in with tech stocks in the IPO market. Remind us in terms of if we do have a sustained sell-off in technology higher growth stocks, where will that manifest itself in terms of your growth outlook, be it credit, be it in terms of fee or balance sheet growth?

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

Yeah. So I'll try to answer it in a couple of different ways, Ebrahim and then Marc Cadieux would talk about credit or Mike would talk about the commercial bank. When you see the volatility we've seen in public markets, there is a few places that you could see that. Obviously in any ECM business we have in the investment bank that could be one area, but I'll counter that with the upside of -- we have a lot of M&A capabilities and so I think M&A will pick-up. So I actually think it will offset and there is more upside there and we can get into investment banking a little bit later. So that's one place. Second place is in the volatility we would see in moderating warrant and investment gains, which we talked about in the letter. And so clearly if we stay in this place for a material period of time where tech stocks are down, you could see some compression there, but still we expect even with some compression we still believe it will be healthy in 2020.

Credit quality wise, I'll give my perspective, and then Marc may want to add. You really have to see the ripple effect in a pretty material way, right. Valuations are not what repays loans. You have cash flow and cash that repays loans and the companies public and private are incredibly strong from a balance sheet perspective and their ability to raise money is also very strong. So we don't see -- and the outlook obviously is very healthy. We think it's going to be healthy even if there is some volatility in the market. So those are a few places that you could see it and maybe new client growth. But again we've seen for the last three years a really nice tick-up in our new client additions and we still obviously are very bullish on the innovation economy and so I don't see that slowing down. So a temporary volatility in the public markets. Net-net isn't going to have that material impact.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

Got it. And I guess just a separate question maybe around the sensitivity for you, Dan. So you've laid out the impact from rate hikes both on NII and investment fees. Talk to us about, one, cash came down a fair bit this quarter. How are you thinking about the bond book in terms of what are we adding duration and credit-wise? And is there any meaningful credit risk in that corporate bond portfolio that you added over the last few years? Just give us a color into that if you could?

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

Yeah. Ebrahim, so on the first question specifically if you look at cash balances, as we've talked about in previous years, there is a pretty substantial amount of distributions that happen around private equity and venture capital. We saw that plus effectively putting over $20 billion to work in the investment securities portfolio in the quarter. So we're still bullish on liquidity if you see in the guidance for 2022.

Now when we look at the investment securities portfolio and where we're putting money to work, based on the current environment, we'd probably be putting money to work in the 165-175 range, with the vast majority of that still being agency mortgage-backed, mortgage collateral things along those lines. The corporate book is still quite small and that's all high credit quality, so don't expect to see any issues there from a credit perspective. So the good news at least on where we're putting money to work is that that is above effectively the yield of the portfolio to the margin compression that we've been seeing by putting money to work underneath the securities yield seems to be abating in this better rate environment.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

And do you expect any difference in deposit behavior than this cycle was what we saw in '16-'17 just given the fed might be hiking at a much faster pace, you have larger customers. Do either of those dynamics change how deposit betas, the mix shift could behave this cycle versus last?

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

Yeah. Ebrahim, we're watching that and modeling sensitivities to that. All-in, in our rate sensitivity we've got a 60% deposit data and that's on the interest bearing balances that we have in the portfolio, which is consistent with the last cycle and we've effectively for conservatism model a faster beta in some of these net interest income assumptions meaning that they would take place sooner in the rate cycle than we experienced during the last hike. So we feel like we've got some measure of conservatism in there just to take into consideration the fact the fed could move faster and client behavior could be different this time. That's how we're getting comfortable with that all-in $100 million to $130 million annualized pre-tax net interest income number.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

Got it. Thank you.

[Operator]

Your next question comes from the line of Steve Alexopoulos with Bank of America. Your line is open.

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

Hi, everybody. I'm still at JPMorgan.

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

I thought you changed job, Steve.

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

No. Ebrahim I think is still at BofA. Greg, I wanted to start with the environment. So we're obviously paying a lot of attention to the equity markets, but our VC is getting more cautious, given the correction in tech stocks now playing out. With stack stocks, see even more bit of a beating, our private companies starting to see down-rounds?

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

So it's very early when correction in the tech market is played out. I would say the engagement we have in our discussions, we're paying attention, very close attention to it, but we really haven't seen it. So our channel checks and talking with our clients and talking with venture capital is still very active and I think could there be a little bit of a slowdown, it's possible. Again, we haven't seen it yet, but you have to remember there is so much money that was raised last year. There is so much dry powder and they need to put it to work and so could there be some valuation corrections in the later stage. Yeah, there could be as companies look to raise money. But if they do, there is still at healthy valuations. And so I think companies need to raise money, there is ample money out there for them to raise money. Could they hold out ways for higher valuation, possibly. But again we've just not seen it yet and you get to wait at least a quarter or two to really see if there is any trend that start -- anything that start made a trend beyond that.

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

Okay. I want to follow-up on that. So VCs and PE firms are sitting on a record dry powder. But if the HM markets were to get disrupted, do you think we would see the pace of investments slow the way we've seen in other cycles or because of all this dry powder do you think that firms will just invest right through a market disruption?

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

Well, when you go back and talk about cycles, right, I mean the last time we had a, I'll call it a dip was back in 2016. And if you remember that was because of Asia and concerns around the Asian market. It literally slowed down for about 90 days or 120 days and we were very worried it was going to continue to be a very slow decline or a pause, it quickly came back. You can look at the beginning of the pandemic. We thought with everyone going to Zoom that people wouldn't be making investments because it's a different way to do it. That was about a 90-day cycle. You really have to go back and look at 2010 to say when there was really a pause or slowdown. And when I talk to limited partners, when I talk to investors, the one mistake I think most of them would say is, they didn't put money to work more quickly, they waited too long to jump back in. If you combine those things with just the innovation market growing very fast domestically and globally, could there be a prolonged slowdown, it's possible. I just think the likelihood is a lot less than it has been in prior significant cycles.

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

And it's because of the dry powder on the sidelines? That's why you think it will be narrow one?

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

Well, it's two things. It's the dry powder, number one. Number two, it's the innovation. Economy is still growing on a global basis, right. And number three, if you do see valuations, even do a minor correction, I think people are going to look at it and say that's an opportunity to get back in. This is going to be temporary. So those are the three reasons I would point to say that it could be short-lived if there is a short-term kind of slowdown.

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

Okay. And then final question for Dan. Assuming we do see rate hikes and other guidance is ex-rate hikes, you talk about reinvesting a portion of it. How should we think about how much of that potential benefit you guys will reinvest back into the company?

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

Yeah. I think, Steve to the extent that we see rate increases, it's clear we're going to reinvest a portion of those increases across the stated objectives. The question is really about the timing of those rate increases when that occurs. But imagine we see rate increases March-June timeframe that could potentially move us into the next expense guidance range of the mid-20s. So that's kind of the way to think about it, if we see March- June increase that we could move into that next range as we reinvest a portion of that spend. And at that point, we would talk about the impacts into 2023, how much of that is one-time, how much of that is recurring.

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

Got you. Okay. That's helpful. Thanks for taking my questions.

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

Yeah. Thanks Steve.

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

Thanks Steve.

[Operator]

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

[Casey Haire, Analyst at Jefferies Financial Group]

Thanks. Good afternoon guys.

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

Hi Casey.

[Casey Haire, Analyst at Jefferies Financial Group]

So on the loan growth guidance, just curious about the mix. Obviously fund banking capital [Indecipherable] drove about 60% of it in '21. Are you expecting the same kind of strength where it's driving the majority of the loan growth or do you see the mix changing and if so, how?

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

Hey Casey, it's Dan. I'll start, Mike might want to add. But if we look at 2022, I think the mix will still be predominantly capital call lending from a growth perspective. But as we continue to develop and we continue to be excited about the integration with Boston Private, private bank wealth management and see the opportunity for mortgage lending, which is already strong to continue to see that growth. So predominantly capital call lending, but starting to see mortgage as well as other elements of private bank lending pick-up in the New Year. Now at the same time don't count out what's happening in technology, healthcare, life science lending and even with all of the liquidity that's been in the markets where you've seen good growth there. So still predominantly capital call, but private bank as well as what we do in core technology, health care, life sciences will also contribute.

[Casey Haire, Analyst at Jefferies Financial Group]

Very good. Thank you. And then just Dan you mentioned that the new securities yields 165, 175, I know you guys kind of -- you kind of update that at year-end. The tenure obviously 30 bps higher than where we were at the beginning of the year. Is that 165 and 175 accurate relative to where we are today rate-wise?

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

Yeah. I think based on where the tenure sitting and the sell-off we've seen over at least the last couple of weeks, you could and it's hard to count on this for a longer period of time look to add another 10, 15 basis points to that yield if we stay effectively at the same rates today throughout the rest of the quarter, but a lot of that depends on market opportunities, a lot of that depends on liquidity flow. So we're comfortable with the 165 to 175 and to the extent that longer-term rates and the sell-off that's year-to-date sticks there could be some small opportunity there.

[Casey Haire, Analyst at Jefferies Financial Group]

Okay. And just last one from me on the credit front. The charge-off guidance down a little bit. Is that -- the slide deck makes it seem like it's more environment driven, but is that finally just a reflection that with the low risk capital call is just a much is over half the book. And then also the ACL ratio kind of plateauing here at 65 bps, is that also a good level going forward?

[Marc Cadieux, Chief Credit Officer at SVB Financial Group]

Yeah. So starting, it's Marc Cadieux and starting on the charge-off question. Yeah, I think it is reflective of the continued evolution of the portfolio towards the lower risk forms of lending like capital call lending, mortgage lending and by extension while early stage lending where we've historically taken the majority of our losses continues to grow in dollar terms, but continues to shrink as a percentage of total loans. So those things are certainly conspiring to bringing the guidance down.

And then to your question about reserve, I think adjusted for the change in composition of the portfolio from the beginning of COVID to now, I think what you see basically is that adjusted for that change in composition, we have finally I think found if not the bottom, probably pretty close to and it's hard to imagine where more reserve release would come from, we'll certainly have some growth in capital call lending as we've mentioned before it certainly figures prominently in the outlook and if that continues you could see some continued modest downward pressure on the reserve. But I think at this point most of what was built during COVID is now out of it and we're back to normal, as I think the also more normal provision in the fourth quarter reflective of the growth would suggest.

[Casey Haire, Analyst at Jefferies Financial Group]

Great. Thank you.

[Operator]

Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.

[John Pancari, Analyst at Evercore ISI]

Good afternoon.

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

Hey, John.

[John Pancari, Analyst at Evercore ISI]

On the -- back to the loan growth, just kind of digging a little bit more in terms of, if we do get the -- I mean there's some expectations for practically eight hikes by the end of '23. If we do get that and we get that pace starting relatively soon in 2022, does that -- can you talk about how in isolation that may impact your loan growth expectations at all. Just curious if in that dynamic if you see much of an impact or does the -- again, does the dry powder factor that you've talked about really drove that? Thanks.

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

So I'll start.

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

Hey John, this is Mike.

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

Go ahead, Mike.

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

I was just trying to figure how to unmute [Indecipherable]. Hey John, this is Mike Descheneaux here. In general, I mean the first as you know and you've been following us for a number of years. The first few basis point hikes really is not going to have much impact on the loan book as well. Clearly, you're looking at some leverage loans in that particular area, some buyout that they might consider, but still nonetheless that is still so much cheaper than equity. So you're still going to have people that are going to use this here. So we're not really anticipating that we'll have that strong of an impact here, but it's obviously something to keep an eye on.

[John Pancari, Analyst at Evercore ISI]

Got it, Mike. That's helpful. Thanks. And then in terms of the warrant and investment gains, I know reasonably you expect them to moderate-off of the very strong 2021 levels. I know this is probably a tough question, but anyway to help us gauge the magnitude of moderation that we can expect anyway to kind of frame it as you're looking at the market now and the backdrop to trying to see if there's how we should think about it?

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

Yeah. John, this is Dan. It's really hard and that's obviously why we don't guide to it to put a range around what that could look like coming out of the year with close to $1.1 billion worth of warrant and investment gains. But I think it's clear that that's exceptional and likely not to repeat, but at the same time as we've been talking about we're still bullish on the environment. So hard to put a percentage around it. We just know that with this market volatility, it could be slower at least for the next quarter or so, especially relative to what we saw in 2021. Still again expect in 2022 to be a good year.

[John Pancari, Analyst at Evercore ISI]

Got it. Okay. [Speech Overlap]

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

Maybe John, I'll just add on. I'll just add on top of what Dan is saying. I mean it is no doubt a very difficult thing to predict. But just some of those factors to consider, I mean we keep talking about dry powder, there is a lot of dollars out there, but there is a lot of companies that have been formed over the last couple of years that are primed and really great candidates to go public as well. I mean we had something like close to 300 public listings in 2021. But there is -- if you look at some of the factsheets, the number of companies that are valued greater than the median value of what went public last year is significantly greater than what went public. So there is a lots of good companies that can be tenants where exit there. So the fundamentals are still really, really strong in lot of good companies out there.

[John Pancari, Analyst at Evercore ISI]

Got it. Thanks, Mike. All right. And then I know Greg you referenced it earlier on, but just curious around the investment banking trends. If you can maybe give us a little bit of color on the outlook there and pipeline and everything. And then also in terms of impacts that you expect from what we're seeing right now if we are looking at certainly a rising rate environment in this backdrop and how does that impact that outlook? Thanks.

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

Yeah. So we've got a couple of slides in the deck that talked about both get the revenue side of what we've seen in the quarter-to-quarter basis. But really when I think of '22 we have a pretty nice growth built in there relative to what the record quarter -- a record year was in '21. And the question really is, okay, how volatile is that? How do we think about that? And to answer that question I would break down the business into few categories. First is the historical SVB Leerink business. So it was mainly biopharma. It was ECM. It was trading, research and they just continue to do an exceptional job in that area. Exceptional moving up the league tables had a great year last year. But what we're building out capability-wise is healthcare services, technology and M&A and ECM and then M&A for biotech and then with research with technology as well.

So while you're hearing from some other larger investment banks, softness as they go into '22 for us especially in technology and healthcare services and then of course M&A we're going from either zero base or a very little base. And so when you think about the team that we've assembled, we certainly believe that the upside from where we are is still significant even if it's a softer market in '22. I also believe that the equity capital markets are slow. Again what we push towards is having a balance of both ECM and M&A and in fact in technology and in healthcare services, the main teams were more M&A-led. So we feel good about the outlook and we feel good not just about the outlook for '22, but the trajectory in '23 and '24 based on the people that we brought on to the platform who really are exceptional.

[John Pancari, Analyst at Evercore ISI]

Great. Thanks, Greg. Appreciate it.

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

Yeah.

[Operator]

Your next question comes from the line of Bill Carcache with Wolfe Research. Your line is open.

[Bill Carcache, Analyst at Wolfe Research]

Thank you. Good afternoon. Greg, I wanted to ask a question on wealth management. It would seem that wealth management teams would find opportunity to joint SIVB as quite compelling, given your client base. Can you speak to the pace at which you would expect to on-board new teams as you grow that business? And so is there may be a certain number per year that you're targeting or are there any sort of parameters you can share on the characteristics of the teams you'd be looking to on-board including maybe like a minimum level of assets under management. Any color?

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

Yeah. So when we add wealth advisor, it's a little bit different. And so again I'll break this down into a couple of different parts. One is the interest level, the interest level is very high. Lots of inbound and when we do approach targeted individuals that are in the innovation economy, we're getting a very, very positive reception. And so we added 14 wealth advisor hires in '21 and really think about it that was mainly the last three or four months of the year. And then we expect as we roll into this coming year that we're going to have anywhere from 14 to 20, maybe 25 add in '22. I've been on some of those calls to recruiting calls and discussions and it's very positive and talk to some of our team members who have joined who've been on the platform for 30 days, 60 days kind of getting their feedback.

And again very positive for a couple of different reasons. One is the opportunity because we always said it's incredible here, given our connections to the innovation space where wealth is created at our incredibly rapid pace, that's number one. And number two, the collaborative environment that exists on the platform. Those two things are very compelling. And so it's still early, so we certainly can't claim victory. But so far feel really good about our ability to recruit, but it's not just about recruiting, it's about who is the team that you have already here and I feel really, really good about that as well. So I think the outlook is positive. We want to, we kind of have, I'll call it, tempered outlook because we want to see the evidence of it happening and so more to come over the coming quarters, but the foundation is very strong.

[Bill Carcache, Analyst at Wolfe Research]

That's very helpful. Thank you. A follow-up on your earlier comments. Where would you say the technology investment banking business is in its ramp from last September's launch. I'm guessing it hasn't hit full stride yet, but it would be helpful if you could frame for us. I guess just give us a sense of what you've assumed in your [Technical Issues]?

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

Yeah. It's actually, it's -- we expected that it would take really six, nine months for really to hit, I wouldn't even say full stride. But I would say really starting to get a little bit of a flywheel and I don't think you're really going to see what I'll call the full potential until later this year and into '23. And it just takes, it takes time to get everything in order to get everyone communicated with. That being said, what has impressed me right out of the shoot is that we've had more than 10 very significant mandates signed up and a very, very strong pipeline in the technology side and healthcare services and again in the biotech side, it's already an incredibly robust team and outlook. So I think we're in a really good trajectory. And again most of those are M&A, but we certainly have already signed on a couple of public offerings as well. So again feeling really good about the foundation that's being built.

[Bill Carcache, Analyst at Wolfe Research]

Okay, great. That's great to hear. Last one from me for Dan. Your reserve build was growth-driven. Maybe looking ahead, should we expect the reserve rate to hold such that the growth in your reserves will generally be commensurate with your loan growth? Is that a reasonable way to think about it?

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

Yeah. So I think that Marc might want to add something to it, but I think when we look at where the reserves are, we are effectively probably at the bottom from a reserve rate perspective. So I think to the extent that we continue to add on additional lending that is going to drive the additional formulaic provision that we saw this quarter. So obviously those loans are generating good solid net interest income and client relationships, certainly going to see more provision associated with loan growth.

[Marc Cadieux, Chief Credit Officer at SVB Financial Group]

Nothing to add here, Dan. Thank you.

[Bill Carcache, Analyst at Wolfe Research]

Got it. Thank you for taking my questions.

[Operator]

Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.

[Jared Shaw, Analyst at Wells Fargo Securities]

Hey, everybody. Good afternoon. Thanks.

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

Hey, Jared.

[Jared Shaw, Analyst at Wells Fargo Securities]

Hey. Maybe just circling back on the expense conversation and the expectation for additional investment if rates are once rates do go higher. Should we -- how should we be thinking about that? Is that really more when you look at slide 14, it will just be an acceleration or pull-forward of investments that may otherwise have -- takes a little bit longer or would there be new initiatives, are there new opportunities that you would use that opportunity from revenue to expand?

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

Yeah, Jared. Go ahead, Greg.

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

I [Indecipherable] to start. So I wouldn't call it necessarily a pull forward. Here is what I would say is we have an incredible amount of opportunities to invest in a very long list. And part of this is, we're constrained by just how many things you can do it once and there is some you know we want to make sure that we're investing at the right pace. If we do see revenues start to pick-up with some rate increases, we're going to look at opportunistic opportunities to accelerate some of those investments. So is it a pull forward. I wouldn't describe it that way because a pull-forward means that you have a certain dollar amount you're moving it up and then it will drop down to a lower level. It's more we're going to take advantage of those investment opportunities. So I think I just would think about it saying it's opportunistic and we have a lot of opportunities ahead of us. So if we do get that rate increase, we'll put some of it to work for sure.

[Jared Shaw, Analyst at Wells Fargo Securities]

Okay. All right. Thanks. And then looking at the AUM guide and in light of the prior question around the success you've had bringing people relationship managers out of the platform and the expectation for that to continue, the AUM guide seems little conservative, I guess, given the growth we were used to expecting from Silicon Valley. What could cause AUM to grow faster with the broader expectation of the support you're putting behind the private bank?

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

Yeah. I think we have to get what I'll call the flywheel up and running and we're just getting started. And so think about -- that's one thing. Let's just talk about the differences between wealth management and that I'll call commercial banking. In commercial banking, you have a commercial client, they have a lending need. It's usually within a reasonable period of time. You put that together, you put the loan in place and they borrow money, it's a relatively, I'll call it, short time period to bring on those type of new clients. When you're looking at in the private bank and wealth, you typically -- it takes a while to build that relationship to reconnect with them, to convince them that you have the full product set for them it's capable and that's even for wealth advisors that are coming over because again we're looking specifically at the innovation economy. So it's going to take a little bit of time and once we see that, then I think you're going to see an outlook, it's going to be increasing at a much accelerated pace. But I think we're just saying until we see that flywheel effect, we're not going to set overly ambitious goals in wealth AUM at this point.

[Jared Shaw, Analyst at Wells Fargo Securities]

Okay, great. Thank you.

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

Yeah.

[Operator]

Your next question comes from the line of Chris McGratty with KBW. Your line is open.

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

Hey, great. Thanks. I'm interested in kind of your thoughts on the geography of deposit growth in 2022 under a varying rate outlook on or off balance sheet the mix where you see it going?

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

Hey Chris, it's Dan. I think as we look at the first couple of rate increases imagine 25, 50 basis points, I think we're going to start to see behavior pretty similar to what we saw during the last rate rise cycle where you're not really seeing a massive shift towards off balance sheet and not even seeing much of that money start to be motivated to move into the interest bearing sectors. I think as we start to get into 75, 100, 125 basis point fed funds, that's when the money market rates off the balance sheets really could start to be more attractive and I think that's when you can start to see more movement and that's where I think we've just got a competitive advantage if you look at the total $400 billion worth of client funds. You have clients that may want to look for some higher rates, which we could offer on the balance sheet and money market as we did during the last cycle. And so by doing that end up with a very low cost of deposits and deposit base. So I think first 25, 50 basis points no big shift in client behavior. 75 to 100 basis points on is when you start to see a little bit more migration. And again I think that's where the liquidity that we have really plays in our favor to be able to manage between that on and off balance sheet put together some of these products that we've been developing here over the last couple of years.

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

That's great. Thanks, Dan. Maybe a follow-up. I heard from one of your peers yesterday that they are obviously going to trying to take down some of the rate sensitivity as rates go up. I know you have some hedges on the balance sheet which is interested in kind of the appetite to moderate it a bit, if we get the forward curve.

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

Yeah. Chris, this is one where almost by the balance sheet growth that we've been experiencing, we've been moderating asset sensitivity naturally. So just look at what we've been doing and moving cash liquidity into the investment securities portfolio as we're seeing at least some movement in the rate environment out in term that helps dampen some of that sensitivity, in effect lock in some of that rate environment that we see. So you're generally seeing more just organically by the way we're putting that money to work in the investment securities portfolio, some dampening of the asset sensitivity and we're taking advantage of those rates in the environment that exist today. So we will always be asset sensitive just by the nature of the balance sheet, but certainly seeing it being tempered in this environment by the actions we're taking with the portfolio.

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

Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Chris Kotowski with Oppenheimer and Company. Your line is open.

[Chris Kotowski, Analyst at Oppenheimer and Company.]

Yeah. Let me start I guess with another shot at the equity and warrant gains. Just in the sense that and your portfolio today is about $2.5 billion and back in 2018-2019 it was like $600 million to $900 million. So it's roughly three times and a normalized level should still be bigger than what we saw in 2019 I guess is the first part of it?

And then secondly am I right in thinking that like you probably wouldn't put an equity position on your balance sheet if you didn't expect kind of mid-teens through the cycle return-ish? Hello?

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

Hey Chris, it's Dan. I think the way to think about it is that these are highly granular position. So if you think about the fact that we've got warrants and close to I think it's close to now 3,000 individual companies. Those individual companies obviously react to what's happening from a market condition perspective. Now what's actually happened over the last couple of years is we've gone from a warrant portfolio of 1,500 granular names to closer to that 3,000. So it's actually more variability there today then back in the previous period. So it's really hard to make and if it were easier we would certainly have a guidance range about it, the broader assumptions that you're making.

[Chris Kotowski, Analyst at Oppenheimer and Company.]

Yeah. But I was wondering specifically I realize the warrants are particularly different, but presumably on the equity positions that you take, presumably you'd be targeting a mid-teens return granted that there is lumpiness, but through the cycle?

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

Yeah. In many cases, those equity positions are the result of the conversion of the warrants into equity positions while we're in the lockup period. So there is no return thresholds, in particular associated with it. So just the conversion of that into the warrant post the IPO.

[Chris Kotowski, Analyst at Oppenheimer and Company.]

Okay. And then on the $2.5 billion that is on your balance sheet today, is there a mark-to-market risk or is that primarily at cost or lower cost of market?

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

Yeah. The vast majority of that is mark-to-market. So that's a ready mark-to-market and we've got the details included in the last 10-K of the mark-to-market methodology associated with it. So that's marked on a quarterly basis and is up to date as of 12/31 based on the market activity.

[Chris Kotowski, Analyst at Oppenheimer and Company.]

Okay. And then secondly just if you could give very detailed guidance on an annual basis and it make our job very easy. And I was just wondering do you have a view on the cadence that we should expect through the year either from environmental factors or from internal factors like the fact that you brought on this big team of bankers you know that we start strong or I mean should we just step it up ratably during the quarters or does the team start coming on strong early and then kind of flatten out later. And again if you don't have a view then that's fine, but I'm just curious if you have a view on the cadence of the year that we should expect?

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

I think with balance sheet growth that we've seen, it's been fairly progressive, as liquidity has been raised. If you look at core fee income lines, you're generally less subject to seasonal factors on a quarterly basis. I think if we look at areas where there would be more volatility, you're looking at new investment banking types of revenues which are just much more subject to what's happening in marketing additions from quarter-to-quarter along with the investment and warrant gains that we just talked about. And then there will just as there always has been a progressive build from an expense perspective quarter-to-quarter, but generally speaking that's a good way to think about it. There's really no perfect way to break out the quarters.

[Chris Kotowski, Analyst at Oppenheimer and Company.]

Okay, fair enough. Thank you. That's it from me.

[Operator]

Your next question comes from the line of Jennifer Demba with Truist Securities. Your line is open.

[Jennifer Demba, Analyst at Truist Securities]

Thank you. Good evening. Question on Leerink. So with the broader sector focus now, what is the revenue potential for this company over the next few years? How big a business could this be relative to the rest of SVB?

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

Yeah. Jennifer, it's Greg. I'll start and Dan may want to add. You can see our guidance is for this year, which I would describe it as we're hitting on, we expect to be hitting on at least in technology and health care, it's kind of like four of an eight, four cylinders of an eight cylinder engine. So we're kind of halfway, halfway, halfway there. When I think of the full potential, I don't think that's really going to be reached until '23 or maybe even a little bit of '24. But the answer to your question is difficult in a sense there's two ways to think about it, right. So one way to think about it is your team and their potential and the second part is the robustness of the market and the revenue opportunity, the fee opportunities that exist. So that's more unknown. Do I see this business or could I see this business as a $1 billion revenue business in the next three years? The answer is yeah and that's a combination of the quality of people we have, the breadth of the products that they're providing to the market and I think the market staying relatively healthy. So that's the topline and then maybe in terms of bottom line you see pre-tax margins that you could be in the 20% to 25% range, which and maybe even a little bit higher than that as we gravitate towards more M&A. So yeah, I feel really good about the potential for this business to grow.

[Jennifer Demba, Analyst at Truist Securities]

Thanks so much.

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

Yeah.

[Operator]

There are no further questions at this time. I would now like to turn the call back over to the Chief Executive Officer, Mr. Greg Becker.

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

Great. Thanks, everybody. I just want to really thank you all for joining us today. We're certainly proud of what we delivered this past year and very excited about the year ahead and the work we're doing to deepen with our clients, the relationship, add value and insights and continue to make meaningful differences in their success. It's one of the things we track how our clients feel about our ability to have an impact on their success. And we had great uptick in that last year and we certainly expect it to play out that way this year as well.

Obviously, based on the questions we're keeping an eye on the markets and wouldn't be surprised given the current kind of volatility to see some volatility and private company valuations. But again, as we said, the market is still so robust, there's so much potential, there's so much dry powder that we remain still very optimistic. The bottom line is that we've been here before, we've seen our clients go through many cycles, large and small. We know from experience that those cycles are short, but in no way they diminish the power of this innovation economy that is just getting more and more attention. So I just want to thank our employees around the world for always giving their best to SVB to hanging in there during the pandemic and taking care of each other and their colleagues and especially the clients. I want to thank our clients for their partnership and trust in us.

And finally as we hopefully are in the final stages of the pandemic, I certainly look forward to more in-person meetings, in-person dinners and getting to spend time with members of our team and clients in the market. So in the meantime while we wait for that to play out, hopefully everyone stays healthy and take care of themselves. Thanks a lot and take care.

[Operator]

[Operator Closing Remarks]