SVB Financial Group in the tech hub of Santa Clara, Calif., is the latest banking company to release reserves based on a sunnier view of the economy.
The $96.9 billion-asset parent of Silicon Valley Bank reported a $52 million reserve release on Thursday, citing a pickup in venture capital deals it can finance and other factors.
Marc Cadieux, the company’s chief credit officer, told analysts the decision to lower reserves was based on “improved economic scenarios” the bank relies on from Moody’s Investors Service and a strong performance in the private bank, which mostly funds mortgages with high down payments in California.
Recent decisions by Fifth Third Bancorp and a few others to release reserves just as cases of COVID-19 are picking up in the U.S. again and threatening to once more shutter businesses has raised eyebrows.
But SVB’s allowance as a percentage of total loans is still relatively high, landing at 1.34% for the third quarter, which is below the 1.61% level in the previous three months but still above the 0.97% reported in the third quarter of last year.
When analysts pressed for more details about the rationale for the release, Cadieux said SVB executives made a “qualitative adjustment to effectively smooth out the volatility” in gross domestic product and unemployment.
“While not yet confident enough to do any more releasing, we did think that was appropriate this quarter,” Cadieux said on a conference call.
Executives pointed to some bright spots in SVB’s business lines. About 20% of its total reserves for losses were set aside for loans tied to early-stage venture capital deals, down from a 25% share in the second quarter.
The bureau said it began developing the standards before the coronavirus pandemic. But more transfers may occur as some servicers struggle to meet their obligations during the economic downturn.
The central bank said customers will be able to make more transfers and withdrawals "at a time when financial events associated with the coronavirus pandemic have made such access more urgent."
More details have emerged about the damage the coronavirus pandemic is inflicting on the hospitality industry. One servicer alone has received 2,000 workout requests in the past month.
Total loans from SVB’s Global Fund Banking unity, which finances private-equity deals, saw an 8% increase in total loans from the previous quarter.
Venture capital and private-equity investors had been hesitant to adapt to making deals while sheltering in place at the start of the pandemic, SVB Chief Executive Greg Becker said on the analyst call. Now, practically all of their investor clients are making deals virtually.
“There's no question that deals are being done over Zoom, and I actually think that they're feeling really good about it,” Becker said.
The reserve release helped SVB report $441.7 million in net income for the quarter, nearly double the amount in the previous three months and up 68% from one year prior. Noninterest income was another big driver, increasing 86% year over year to $547.6 million.
SVB is planning on riding more private-equity and venture capital business in the fourth quarter, Silicon Valley Bank President Michael Descheneaux said on the call. Being able to conduct investments by videoconference, he said, is critical to seizing some “interesting opportunities” for investment.
“The pipelines are at record levels,” Descheneaux said. “We are starting to see people are doing more and more deals.”