Q3 2021 SVB Financial Group Earnings Call
Okay.
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the SBB Financial group third quarter 2000.
'twenty one earnings call all lines have been placed on listen only to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session if.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Thank you.
I would now like to turn the conference over to Meghan O'leary head of Investor Relations.
Thank you Paula and thank you everyone for joining us today are 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.
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 will 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 detail.
[noise] tailing with 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.
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.
By continued strong balance sheet growth strong net interest income robustly in 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 owner callout that we raised our 2021 growth outlook for the third time. This year. We also introduced our preliminary 2022.
E O outlook, which calls for continued strong growth as well as further acceleration of key investments in our business we.
We believe the additional net interest income generated by our larger balance sheet well 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.
Thank you the floor is now open for your questions and again as a reminder to ask a question. Please press star one at any point you would like to withdraw yourself from the queue you had simply press star one again.
Your first question comes.
The line of Abraham Zwolle with Bank of America.
Hey, good afternoon.
Hey, Ryan.
Two questions one Oh Gregg your letter sounded extremely bullish.
And you mentioned about the 'twenty to 'twenty, two outlook being stronger than any preliminary outlook in New York.
I guess just on the fact that put us in terms of how much of that optimism is based on what purely happening in market and how much of that is tied to seem to be having a larger balance sheet larger investment bank.
More a global presence.
To the extent you can give us a breakdown.
Comes from between those two components that informs your outlook.
Yeah, It's a great question Ebrahim.
So I'd I'd break it down this way clearly the growth that we've had in 2021, so far and what we 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 and head count private banking and wealth all that momentum.
He carries forward and so there's there's kind of a tailwind.
One number two we.
We certainly expect the markets that we serve in the innovation economy too to continue to perform well, although not quite at the accelerated pace that we see right now nothing that we're seeing that's causing that that point of view. It's more of just it's hard to fathom that it will stay at this at this pace and.
And maybe the third category is this I'm more convinced than ever that the strategy that we've laid out over the last couple of years. These four pillar businesses the commercial bank the private bank.
B capital.
And the investment bank all working together is incredibly compelling for our clients.
I'm hearing that firsthand our teams are hearing that and just having that 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 a it's a combination of those three things ebrahim that's giving.
I'm kind of optimistic view rolling into 2022.
Got it and I guess, just a separate question on I'm trying to really get to how youre thinking about Boston private here. When you. When you look at your loan growth guidance for next year fee guidance how.
How long are you thinking about the contribution just the mix of that loan.
Our loan book and how that loan growth looks looking out and what do you where do you think assets under management grow in 'twenty or 'twenty two.
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.
We closed the acquisition of <unk>.
July one and really the last 90 days has been all about making sure that we're syncing 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 sync up.
But I will tell you what what I have found what the team has found is.
A lot of positive.
So I would say it wouldn't call them surprises, but validation of what we assumed was going to play out both on people and technology and in so many other things. So I'm I'm again going back to your first question that causes me to be bullish.
And what we always believed.
It's the case the reason that we wanted to bring Boston private onto a platform because of the opportunity was so great and that 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.
Which is truly incredible so it's we haven't got to a place that 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 released our numbers there they were going to give you a lot more details as we usually.
Across our guidance levels.
Levels and that'll 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.
Understood.
Well I guess I'll, just add Dan had anything to add to that.
Yeah, the only other thing.
Do you know, where we are seeing some positive momentum you'll see it in the materials. We've added 10 advisors since the closing of the deal. So are already off to a good start based on the attractiveness of the platform. So that that that's that's a positive factor and I think as we get into as Greg mentioned.
To add a more detailed guidance here.
Here in January we will start to talk more about building out the private bank a C Moore from a mortgage lending.
And then some to our private stock lending perspective.
As a part of the growth it won't.
Clearly get a level.
Yes.
Private equity or global funds banking, but youll start to see the green shoots of growth in that guidance.
And then just remind us again.
What's the timeline for systems conversion when you get all the tech infrastructure kind of Onboarding Oh one.
Yeah Ebrahim the vast majority.
The systems conversions that need to occur are going to occur in 2022. So the vast majority of it will be done let's call. It Q3.
In into Q4.
In terms of the transition you'll have some stragglers, but the things that we need in order to manage the enterprise.
To manage the opportunity across our businesses Q3 is the target.
Does that just take your ability then to really go to market in terms of how you would like to.
Indicated that 400 billion dollar opportunity.
No I think it actually allows us to take a step back and understand.
Private information that we're going to need to understand how to manage those opportunities and to do it in the best way so.
We're 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.
US making progress towards.
And the objective.
And I would add on to that part.
Let me just that under that part because I actually think that the technology side is one of those areas.
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.
Towards that or they are added were adding them onto the.
Legacy.
Boston private systems, and actually that will be the main systems client facing systems that we engage in the market. So I.
I feel really good that 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.
Got it.
Thanks for taking my questions.
Yep.
Your next question comes from the line of Casey Haire of Jefferies.
Yes, thanks, good afternoon guys.
Okay. So question.
Yeah.
Question on the <unk>.
The deposit growth guide.
If I if I layer in.
21, and 'twenty two it looks like it's about $10 billion, a quarter, which is obviously very conservative.
Relative to what you've seen this quarter or this past year.
I'm, just wondering the the distributions which happen at year.
Is that something like after a banner year Youre expecting.
An outsized distribution.
At the end of the year this year.
Hey, Casey, it's Greg I'll start I'm sure, Dan or Mike 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.
We're not we're not seeing anything that really indicates that our teams are still bullish.
Year end, 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 from a deposit growth now.
We have high confidence in that and is there upside sure there.
There is upside.
But its preliminary guidance and we'll clearly be able to give you a lot more color as we cross the year and we'll see if there are.
Higher levels of distributions than we've seen in other in prior years or anything else that would maybe be a little bit of an anomaly. So I'll see if dan or Mike.
There is to add anything to that.
Yeah, Greg This is Mike <unk> here.
So when you 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 picture. The fundamentals are still extraordinarily strong I mean, we see the flows of funds come in you see the the amount of dry powder.
One out there some account that's two trillion two and a half three children just tremendous amount of money the amount of money being deployed into the space from Bce's continues to grow the size of the funds are growing multiple sources. So that those things just have not have not changed and then on the execution front I mean, if you look at our client acquisition count when you go into the deck that we have here.
Or that is continue to bring those on increase at record numbers of clients and what happens is it takes some time for them to get funded and so you've seen us accumulating effect. So we all believe that the fundamentals are in place, but as Greg said I mean.
What we've been growing and it's just such an extraordinary high pace, but I will tell you I'm really really happy with kind of what you implied there.
They are in terms of if we can grow $10 billion to $11 billion per quarter. I think that's just sensational growth as well too so again nothing fundamentally changed in our outlook.
Great. Thanks.
On the liquidity deployment, just slide 24.
It looks like you guys are expecting.
New purchase yields around.
Like $1 50 level.
I'm just curious what is the what kind of the 10 year up 20 bps from last week I'm just wondering now.
How up to date that number is and what kind of.
Ray backdrop, you guys are assuming on reinvestment rates.
Yeah, Casey it's Dan.
That was the.
Around the win rates were based on forward curve at 930. So you are right. We obviously sold off from there I think the way to look at it is in the three to five year part of the curve.
For every let's call it 15 basis points on an annualized basis, we should get about another.
Reinvesting point annualized net interest income. So that's just a rule of thumb, if we see that three to five year part of the curve increased by 15 basis points that that's about a percentage point of pre tax net interest income so.
Since September.
At September 30, if you've seen.
For sell off and that kind of 15 basis point range now.
Now, we'll see how that sustained again thats annualized.
And as upside to the guidance.
Okay, great. Good rule of thumb last one for me.
So our capital management.
When you guys have lived that.
In the southern tier one leverage ratio at seven to eight forever as you guys.
Get bigger and hit that.
$250 billion, Mark what do you have any whats your confidence level that you'll be able to continue to live.
At that at that capital floor going forward.
Yes, Casey I think we'd look at.
The requirements of capital planning and stress testing for a category for category three bank.
We fashioned those original capital targets based on what we would anticipate so I think number one we had already built the structure based on that.
Number two if we then just look at the overall risk in the balance sheet, you'll have the bound more than half the balance sheet as being investment Securities and then we've got a substantial amount of high credit quality lending.
How that translated into the stress test is to some degree lower credit losses, So we don't see incremental.
There are two that tier one leverage target.
Part of moving into the category for category three from from a capital perspective.
Great. Thanks.
Thanks Casey.
Comes from Ken Zerbe of Morgan Stanley.
Alright.
<unk>.
Definitely no question your guidance was incredibly strong so definitely give you kudos for that.
But just.
Flip it over to the other side if things do go awry.
There is the biggest risk factors.
To your guidance like what could be the areas, where we see.
Great.
Potential downside volatility if things don't go.
<unk>.
Ken This is Greg I'll again I'll start.
Thank you <unk>.
Valuations and just flow flows of venture capital and some disruption occurring where things have a dramatic slowdown.
Down.
That's probably the biggest ripple effect that you would see you could see at that point.
Investment values warrant values drop credit quality may be challenged so if you see an economic a true economic change that's really the biggest the biggest driver now.
So that's the risk.
Well, let's talk about what are the and Mike did a great job of describing the things that are kind.
Kind of pushed against that risk.
The one the one place that as we're out in the market and it's both.
The United States are installed and it's also international if you if you go to.
The U K and Europe in Europe, South America.
Erica or you're in Asia, there is such momentum around the innovation economy.
Every market.
And that that to me what we've seen even when there is a slowdown so even when you go back to 15 or 16, and there was a temporary slowdown even when you saw at the beginning of the Covid Covid crisis.
This 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 to jump in at these valuations and now I'm going to come in because I want to be in the innovation economy. So there is there is.
That's.
The risk, but theres. So many things that are tailwind to offset that risk that we certainly see on a on a daily basis.
Oh, no I understood definitely understood yeah, it's the tail winds are very positive.
Agree.
I guess, maybe just separate question in terms of expenses.
You guys have.
I'm going to say, great job of investing you're sort of less.
Let's say excess revenues.
<unk> growing the business and it.
I don't want to imply that 20% expense growth is not reinvesting in the business, but it feels like there's a lot of revenue growth coming over the next couple.
Doctors and.
You are slowing the expense growth is is that just a function of.
Having I say additional opportunities to invest in new verticals.
Verticals or I'm, just trying to make sure I understood why revenue growth so vastly outpaces expense.
A year.
Because presumably there's still opportunities for you to grow.
Or reinvest in the business if that makes sense. Thanks.
So can I take it but 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.
Gross but let me let me, let me take a stab at it.
As we look at this and Theres a couple of slides in here.
Slide 12, I want to say, it's a slide 35, and what they talk 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.
And putting more money into those into those investments because I agree with you and I know the team agrees that we have lots of opportunities. So we're trying to balance as you would expect us to always do whats.
What's that operating leverage what's the right investment level for the growth.
And we've done a good job of that historically and we will take that same approach as we go.
Look at 2022, and so if we if we feel good about the revenue and the growth and the outlook there are even better than what we have in our forecast.
Don't be surprised if we continue to add more to the investment portfolio.
Alright, Thank you very much.
Yep. Thanks.
Yeah.
Your next question comes from Steven Alexopoulos J.
J P Morgan.
Hi, everyone.
Hey, Steve.
Not to beat a dead horse on the preliminary 'twenty two guidance, Greg one thing I wanted to flush out with you I know, it's not the situation that X dollars of VC investment in equals.
Y dollars of financial results, but from a big picture view, it's still not clear to me what type of year are you assuming with this guidance is at a more normal year, while that hundred billion much better than that because I'm trying to get a sense. If things do continue as we see them what does that mean for the outlook.
Yes.
Here's how I would describe.
And Dan or Mike when I want to add.
Prior to I would say 2020 in 2021, where we've seen a truly incredible growth and I would say the second half of 'twenty, what's just kind of start there.
We have we had as you know had incredibly strong growth it's just.
Scribe into outsize, the last really five quarters, so what I view as the outlook. We have for next year is being somewhere in between the two.
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 end.
Ben You know, Mike Mike went through and describe the reasons why it could be at the same at the same pace.
We're trying to be I would say a.
A little tempered in the sense of.
It's been so incredibly strong.
Again, this quarter $80 billion of venture capital flows.
If it stays at that pace or accelerate you could clearly see higher deposits in total client funds growth. So I I would.
I wouldn't call it conservatism I would say it is a.
You know what our Crystal ball says just based on how long that period of exceptional growth could continue.
And that pace and just the belief that it will temper.
Okay. So said another way you are assuming a fairly material step down and what we're seeing right now.
The preliminary I think yeah, I think in earlier earlier comment.
Question is if you go back and look at the last several quarters, we were at about a 20 billion.
<unk>.
Deposit growth rate and now it's in that range that was articulated roughly.
10.
If we stay at the pace, we are clearly theres going to be material upside to what you see in the forecast.
Yes, so we haven't seen anything that would cause us to say it I would just would.
Yeah.
The belief ive been doing this a long time, and so as Mike and others that did.
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 of a normalized growth rate but.
Certainly hoping.
Say it stays at this pace.
Yeah, maybe maybe one thing to have and might consider Steve.
I mean look at some of the the numbers coming out here like venture capital did what about $83 billion in capital deployed in Q3 huge amount of it is just one quarter.
When.
[noise] exits right is just massive exits of something like 187 billion in Q3. The fundraising I think this is a really important point that kind of digesting. The fundraising we're already at D. C is already at $96 billion year to date, which is a record.
For a full year.
Exceeding just the nine months to date has already exceeded the record that we already.
When you look at so when we look at again come out when we talked about earlier, the fundamentals and the sources of capital going there.
They are gone and that's those are going to get deployed and so the the war chests are certainly there. So again as Greg says I mean, we have I think we're being very sensible at this moment because again again it should revert back to meet the deep we're still an extraordinary.
Already have here for sure.
Yep Yep Yep 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 the help from rates typically have larger balance sheets dunce growth potential at a bank it doesn't make it better and this has created.
Level sustainable NII growth outlook.
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 youre not flat.
Flat rate environment, you're not going to get.
A more lift out of it but I think the point is we've seen and that's what's created 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 the combination it's really that.
It should have been awarded.
Now what.
You didn't ask but I will I will answer is is this which is what.
What we're really excited about is at some point, we certainly believe that there'll be some rate increase.
Increases and we have a slide in the deck that goes through and talks about how spring loaded the balance sheet.
What 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 model than.
On an annualized pre tax basis for each 25 basis points.
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 points.
The increase you could see revenue growth of roughly 311.
Two.
I'm sorry.
$311 million to roughly 325 or 330 so.
The normalized after the after this one the second rate increase happens, but the balance sheet is clearly spring loaded so.
And 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.
Okay final question the inclusion of the long term targets in the CEO letter, including 10% EPS growth in a low rate environment has definitely caught some attention I think.
I saw that in 2019, what was your motivation to reintroduce that at this point.
Well a lot a lot has changed Stephen I think one of the things that we wanted to go back to is kind of how we think about what we're driving to over the over the long run and as we sat back and.
We.
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 you know.
Everybody is very focused on the next quarter or the next few quarters. What we wanted to do is say.
What we're driving.
Do over the long run and that's why we put them on 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.
Okay.
Fair enough thanks for that question.
Yes, I think yes, I mean I might add.
Something under that as well so.
Yes, Steve It is the other.
<unk> testing to think about it as if we had a larger balance sheet, we're growing net interest income.
Wanted to reinforce the fact that profitability is really important over the long term when you see the addition of the businesses.
In Seb, Leerink and Boston private.
And the investments there we believe that's going.
Thank you Ian.
Even at the size and scale of the balance sheet to generate that strong return impulse, a flat rate environment as well as a higher rate environment. So we just thought it was time to reinforce that profitable growth.
Strong growth is important to us.
Okay.
Thanks for the follow up there.
And you can do the next question comes from Bill Clark County of 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 curious how to think about that.
Yeah.
Yeah Bill this is Dan.
That incorporates really all of our all of the all of our revenues, including some of the noncore items and I think the.
The reason for that is as we move forward and go ahead.
Head.
Private bank wealth management, what we're doing and SBB Leerink plus.
Some of the benefits that we continue to see an investment 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.
Understood that's helpful.
Helpful clarification completely separate separate topic on the planet announcements can.
Can you frame what client pain points, you're addressing through that partnership what's the key value add for your clients 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.
I'll I'll take that this is my question, it's a little bit of everything right and so the partnership arrangement are.
Utilization in flat it enables our clients to be able to use the service there and connect into the system, but I again connecting with US is really really important and clay to once you're able to do that and capture that information. Together then there's certainly can.
And build some revenue opportunities that will work with but again still very very early but again, we are very proud of our ability to partner with with plant.
Understood and I guess, maybe as an extension of that can we expect to see you guys participate more broadly in the payment space through the addition of.
The technology investment banking team.
Would that be sort of under under their umbrella.
Just curious if that's an area that we could see you expanded too as well.
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 and it's very broad based and so youll see additional partnerships like Plaid youll 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.
And as we add more capabilities, it's going to be very broad based across really all categories of innovation.
Will they be able to add value to our payments team.
Yes, probably I think they I think they will but they.
They are distinct in the standpoint.
Endpoint of what they're what they're focused on as you can see on slide 13, you kind of go through the different categories. We have an investment banking on the technology side and while we have we expect to be making some near term announcements on the fintech capabilities, but the payments business. So product is in one.
Category, one area and then investment banking is another.
I see okay, that's very helpful.
I guess, maybe Greg as a follow up on the final one for me the new investment bankers that you hired already are they now they joined the platform at this point or some of them still on garden leave and maybe could you frame how conservative.
<unk> or aggressive that $150 million to $250 million of incremental.
Yes, we'd be Leerink revenue is in terms of how soon they will be.
You know able to hit the ground running and and impactful after they joined the platform versus you know does that contemplate giving them a little time to.
You know ramp on the new platform.
Maybe I'll.
Yeah, maybe I'll start the second question first and then go back to the first one so we feel we feel good about the numbers that we talked about.
In the in the deck as far as the guidance for 2022.
You clearly see.
A significant uplift in there.
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 health care services team in health Tech and now have and are building out even more.
More of a world class technology investment banking team or innovation investment banking team.
And so they are hitting the ground running we have hired.
Forty-three technology in 44 health care services in health Tech investment bankers year to date, which is effectively doubling the number of investment bankers.
We had on the SPV 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.
Take a little while from a green 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 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.
Search et cetera. So we are you know.
We're still looking to add to it.
But by the end of next year will be more doing what I'll call incremental adds as opposed to what we've done last year.
Our this year and next year, so really feel good about where we are.
I've been on some client calls with some.
The investment bankers and.
Being incredibly well received landing new deals already and feel really good about the outlook.
Yeah.
That's super helpful color. Thank you for taking my questions.
Yep.
Your next question comes from Chris Mcgratty.
K B W.
Yeah.
Hey, good afternoon.
Hey, Chris.
Regarding the growth that you've laid out 10 billion a quarter roughly on balance sheet. What are your assumptions within your fee guidance of the off balance sheet.
Relative to 'twenty 2021.
Dan do you want to cover that.
Okay.
Yeah, Hey, 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%.
Of liquidity ending up on the balance sheet.
And then on the <unk>.
Rest of the liquidity going off the balance sheet. So around the margins I think that that's a pretty good assumption, but again, we don't guide specifically to the off balance sheet.
Okay.
Is helpful. Though.
Maybe the follow up would be regarding capital with the momentum in earnings.
Earnings the downstream that occurred in the quarter the raise in August.
How are you guys thinking about just capital levels, given given the guide that you've that you've given.
Yes, Chris we could come out of the quarter in solid shape.
Tier one leverage perspective sitting at seven 3%.
And at the bank.
So feeling good about exiting exiting the quarter.
That being said, there's always I mean, we do have the growth forecast and the preliminary guidance heading into next year.
So you know as we did in the previous quarter common.
Common equity raise.
<unk>.
What we've done after those common equity raises to be able to support growth as you go back to prefer to go back to senior debt to be able to support our tier one leverage. So we did obviously in the third quarter due a common equity raise.
And feel good to the extent that growth continues and we.
You can go back to the market.
And potentially look to preferred looked a senior.
The extent that we need to bolster the capital position so.
That's our that's the way we're thinking about it.
All right very helpful. Thanks, guys.
Thanks, Chris.
Your.
Our next question comes from Jonathan <unk> of Evercore ISI.
Good afternoon.
Hey, John.
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.
In a higher rate.
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 then possibly lower warrant gains et cetera. So just wanted to see if you could maybe help unpack that a little bit.
Right.
Yeah, Yeah, John is saying it again when we look at these targets. These are obviously not sitting.
And the annual guidance for the year ahead. These are just more generally speaking as we've seen in the franchise.
Over a long period of time been able to produce these returns.
So when when do we think of a higher rate environment.
And when we think of the returns and the EPS growth.
To the extent you.
You see.
You have some less liquidity in the market.
<unk> traditionally been able to continue to grow core fee income and at the same time we.
Have these alternative.
Businesses in.
What we have acquired in Boston private wealth management, and 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.
Gross.
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 these are how we're thinking about the business over the long term.
Got it okay. Thanks, and then.
On the <unk>.
On the comp expense this quarter.
The increase the linked quarter increase in the comp expense.
Can you help us.
Can you size up how much of that is performance related and tied to the better core.
And possibly warrant performance versus.
<unk>.
Head count growth or hiring for.
For example.
Yes 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 bolts from better performance in warrants.
And then the rest as we continue to invest.
<unk>, the technology investment banking initiative and add.
These are great group of bankers on the Leerink side.
Adding additional compensation there so I'd say that.
The two really make up the largest components of the increase.
Got it okay.
And then.
<unk> investment banking business.
As you're building out the business and certainly.
See the long term opportunity there what is the.
What is the long term returns that you're expecting for that business in terms of.
In terms of ROE and then.
Alright.
Do you see.
The efficiency ratio that youre seeing in the business now and what are you forecasting for longer term.
Yes.
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.
Yes.
World Class.
In 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 some better margin opportunity you said the way to think of the business I think over the long term.
Class.
There's less run ROE perspective, more thinking about it and pre tax profit.
And thinking about it kind of range.
<unk> to <unk>.
20%.
Maybe a bit more than that on a on a pre tax basis.
For the business.
Term I think that's a good place to look.
And we will see how this continues to evolve with the addition of advisory business for Libre.
This is Greg let me just let me just add onto it.
What I think it's important Dan give you the standalone business metrics.
What.
What we're building here and this is the power of it is when all the pieces work together. So I'll give you. An example, so having the investment banking capabilities in healthcare life Sciences and.
<unk> technology that technology investment banking allows us to retain clients longer to add more value to existing.
And it also also generates additional client activities for the private bank and so when you think about what we're building and we're seeing it.
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.
And that's I mean, it's each one of these businesses on a standalone basis is exciting they are all doing really well, but what really gets me excited over the long run is when they all work together right. It's we're the only institution.
That has these four businesses that are exclusively focused on the innovation economy and <unk>.
Well they are working together and the potential and that to me is where.
The real upside is over the long run.
Got it alright, great. Thanks, I have one more question and its a its own competition.
I guess, if you look if you compare where you are at now in your business dynamics versus.
See how.
Even not too long ago, maybe two years ago versus now.
What are the.
What are the changes youre seeing in competition and how is that the competitive landscape changed in terms of where you're seeing new players digging deeper into capital call lending are you seeing.
New entrants from.
Maybe any of the bigger money centers.
Can you just help us understand the the more recent competitive dynamics and how they've been changing.
Yeah, I'll start and I'm confident and Mike will want to add to it.
The how I think about it is.
The answer is the short.
Yes, we're seeing competition increase across all different areas.
But here's here's the part that I've been asked this question, which is how are you building. The moat. What are you guys doing to protect against this franchise that you have and how I answer is there's a little bit differently, which is we have.
What I answered in going on offense.
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 kind of answered with that's the main reason why we've been pushing so hard to create all for these businesses.
And build.
<unk> built and had them scalable and competitive in the market and when they all work together that is hard to compete with.
There is still competition, we wake up every day, realizing that and it's only getting more competitive but our ability to compete.
It has never been stronger and I think that's a really important.
To deliver and we're also spending more money as we talked about earlier on 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.
The message.
I believe in the best competitive position we've ever been.
Mike anything you would add to that.
No go ahead, I think you summed it up quite nicely as well too as you alluded to and talked about we are we have expanded our capabilities. So much I mean as you know we've been.
Our death 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's no one else out there that can bring all this together for our clients 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.
Around like competitive, but again, having said all that yes. There is competition in various segments or you have a lot of debt funds as well too when people see it as a very attractive area to lend to as Ralph just said no doubt those had been proliferating as well some of these big box banks are coming down into get trying to get smaller as well because they know that we are going even.
Extreme upmarket 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 position.
Got it alright, Mike. Thank you Greg. Thank you and then the same thing thanks a lot.
Yep.
Even more.
Again as a reminder, in order to ask a question. Please press star one on your telephone keypad again Thats Star one.
Your next question comes from Jared Shaw of Wells Fargo Securities.
Hey, guys. Thanks very much for the.
Insight, you've 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.
Pretty aggressive this quarter is where we are.
We had a good level or should we still think cash cash can come down.
Yes.
Hey, Jared it's Dan I still think.
Opportunity and 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 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 slower investment rates. So we have we have opportunity with what's on the balance sheet and with the deposit guidance to continue to deploy liquidity and the rate environments and in a good spot for us to continue to do that with the recent sell off.
Got it great. Thanks, and then.
Looking at the Boston private.
Addition, 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.
<unk> I guess lending against.
Physicians through through the private bank.
Yes. 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 in the crypto space, but on that part the bar is pretty high as you know and you read about we certainly.
Crypto will pay attention to.
Clients 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 at the same time and our innovation.
Team strategy and innovation team, we're spending time figuring out what does that what does that game plan to approach that market and how do we want to invest and how do we want to play.
So we're certainly.
Looking at that.
There isn't anything eminent to announce them.
But you.
Certainly.
And we're gonna be leaning in more in this space given the attention that it is getting in the market.
Great. Thanks, so much.
Yep.
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.
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.
Couldn't be more proud about.
So the teams are working together.
Strategy build out the execution.
The commercial bank, especially and what we're seeing from the.
The investment bank not only just in the investment bank the.
The biotech team the health care 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 onboard where we're committed to keeping the culture that we have at SCB, which is incredibly client centric.
Culture of a 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 my view of the best in the industry. They do such an incredible.
<unk> taken care of our clients and thinking about the future and collaborating with their colleagues and as you can tell we've added the auto new colleagues in different businesses in that collaboration has been exceptional so I couldnt be more pleased with their dedication and inspiration they give to all of US every day.
Really.
John.
We wouldn't have a business if it 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 hear our story and the continuation of.
The decline that we've been building so thanks to everyone and have a wonderful day. Thank you.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
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