Silicon Valley Bancshares got its first debt rating this week, but it does not plan to issue debt soon, nor is the rating aimed at stock investors, who worry more about venture flows when they look at the company.
Who is the intended audience? "Our clients," said Lauren Friedman, the chief financial officer of the $3.7 billion-asset company, in an interview Wednesday.
Making sure customers feel secure about their deposits may seem like an obvious goal for any bank, but it has a particular urgency at this Santa Clara, Calif., company. Its core clients are young companies, backed by venture capital, in industries like technology and life science - the kind of companies considered risky investments these days.
Ms. Friedman said Silicon Valley got a rating partly to counter the false perception that its ties to young companies undermine its financial strength.
"Clearly, people may have had concerns that we bank relatively small tech and life-science companies," she said. Because these sectors ran into trouble "there may be some rumors that we had financial reversals - and that's not true."
Silicon Valley makes money by holding deposits, often the seed money these companies receive from investors, and lending against receivables when the companies start producing goods or services.
As collateral it often takes warrants in the companies, and can reap big gains if one of them makes a successful public offering.
Not surprisingly, Silicon Valley's fortunes have tracked the rise and fall of its customers'. At the peak of the late-1990s bull market, with deposits growing so fast it could not make enough loans to keep up, Silicon Valley became one of Wall Street's favorite stocks. Often viewed as a stock that combined the safety of a banking company with the yield of a technology firm, its price reached a high of $64 in September 2000.
There were some stumbles along the way. In an October 1999 memorandum of understanding the Federal Reserve indicated concern over the rapid increase in deposits and underwriting issues at Silicon Valley. The memorandum was withdrawn the next June after the company improved credit quality and moved some deposits off the balance sheet, helping to its raise Tier 1 capital levels.While the technology market soared, Silicon Valley did too. But last year earnings fell 45% as hundreds of its clients went out of business, deposits fell 31%, and the company wrote down its equity investment portfolio. Its stock hit a low of $16.67 in September and was still trading in the $20 range last fall.
Since the fall the stock has regained some ground. It closed Thursday at $25.99, down 3.5% from Wednesday's close.
The company has also has increased its capital levels in the last couple of years, and Ms. Friedman said they are high enough so it need not issue debt for a long time.
"We are a strong bank, our financial wherewithal is strong, and we're a place where you can put your money and feel confident it's safe," she said.
There are no plans to seek ratings from any other agencies, she said.
Moody's assigned an A3 rating to Silicon Valley Bank's deposits. The parent company got an issuer rating of Baa1 - higher than the Baa3 of the similar, $8.3 billion-asset Greater Bay Bancorp of Palo Alto but lower than the A3 at $11.2 billion-asset City National Corp. of Los Angeles.
During the first quarter Silicon Valley's earnings, which hinge on the venture capital investments in young companies, fell 60% from a year earlier. (Nationwide, venture capital flows fell 24% from the fourth quarter to the first, according to a quarterly survey by Venture Economics, the National Venture Capital Association, and PricewaterhouseCoopers.)
Low interest rates have also punished Silicon Valley. Three-quarters of its loan portfolio is tied to the prime rate, and half of its deposits pay no interest, so it is extremely asset-sensitive.
However, Joseph Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said Silicon Valley's deposits have held up well despite the drop in venture capital investment. "It's our belief that earnings bottomed out in the first quarter and should gradually improve from here," he said.
Still, much depends on future venture capital investments, Mr. Morford said. "If venture capital investing continues to fall 10% to 20% a quarter, it will be hard to hold up deposit balances," he said.
