Q4 2021 SVB Financial Group Earnings Call
Ladies and gentlemen, thank 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 S V B 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.
If you'd like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one thank you it.
It is now my pleasure to turn the call over to Meghan O'leary head of Investor Relations Ma'am. Please go ahead.
Thank you Brent and thank you everyone for joining us today are 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.
We issued 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.
Thanks, Meghan and thank all of you for joining US today, we're pleased to be reporting another quarter of strong growth.
Profitability.
Our core business continues to fire on all cylinders with a growing balance sheet healthy net interest income in spite of NIM pressure robust fee income and excellent credit quality.
The warrants and investment gains moderated from record levels in Q3, we see continued strength.
Cross 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 early this afternoon and they're available on the Investor Relations section of our website.
And with that I'll ask the operator to open up the line and turn it over for questions. Thank you.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press the pound key.
Your first question comes from Ebrahim <unk> with Bank of America. Your line is open.
Yeah.
Good afternoon.
Hey, Brian I guess, so hey, Greg.
Maybe just in your letter you mentioned public market volatility a couple of times when.
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's what we are seeing in with tech stocks in the IPO market is remind us in terms of if we do have a sustained sell off and technology higher growth stocks.
Will that manifest itself in terms of your growth outlook be clear did beat in terms of fee or a balance sheet growth.
Yes.
So I'll I'll I'll try to answer it in a couple of different ways Ebrahim and then Mark Cowger I'm going to talk about credit or Mike I'm going to talk about the commercial our commercial bank.
When you see the volatility that we've seen in public markets. You know there's a few places that you could you could see that obviously in any ECM business we had in.
In the investment bank that could be one area, but.
To counter that with the upside of our we have a lot of the M&A capabilities and so I think M&A will pick up so I actually think it will.
The offset and there's.
More upside there and we can get into investment banking a little bit later, so that's one place second place is and the volatility we would see in moderating warrant and investment gains, which we talked about in the letter.
So clearly if we stay in this place for a.
Material play 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 I'll give my perspective, and then Marc may want to add.
You know you really have to see the ripple effect and a pretty material way right valuations are not what repays loans.
You have cash flow and cash that repays loans and the company's 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 you know.
The outlook, obviously is very healthy.
We think it's gonna be healthy even if there is some volatility.
In the market so.
Those are a few places that you you can see it in maybe new client growth.
But again, we've seen for the last three years of really nice tick up in our.
Our new client additions and we still obviously are very bullish on the innovation economy, and so I don't I don't see that slowing down so a temporary volatility in the public markets.
Net net isn't going to have that material of an impact.
Got it.
Yes. So just specific question, maybe I don't need sensitivity for you Dan.
We laid out the impact from Oh, they takes both on NII 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 today is in that corporate bond portfolio that you added over the last few years just to give us some color into that if you could.
Yeah Ebrahim. So on the first question specifically if you look at.
Cash balances as we've talked about in previous years, Theres, a pretty substantial amount of distributions that happened around private equity and venture capital.
Saw we saw that plus the.
Effectively putting over $20 billion to work in the investment securities portfolio ended up in the quarter. So.
We're we're still bullish on liquidity as you see in the guidance for 'twenty.
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.
The majority of that is still being agency mortgage backs.
Mortgage collateral things.
Things along those lines. The corporate book is still quite small and that's all of high credit quality. So don't expect to see any any 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, and this better rate environment.
And do you expect any difference in deposit behavior. Then this cycle versus what we saw in 16 and 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 mixed shift could.
Behaved this cycle versus last.
Yeah, Ebrahim, where we're watching that and modeling sensitivities to that all in and our rate sensitivity, we've got 60% deposit beta and that's on the interest bearing balances.
We have.
And the portfolio, which is consistent with the last cycle and we've effectively for conservatism modeled.
A faster.
Data and some of these net interest income assumptions, meaning that they would take place sooner.
And then the rate cycle than we experienced during the last night. So we feel like we've got some measure of conservatism in there just to take into consideration. The fact that that 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.
Got it thank you.
Your next question comes from the line of Steve Alexopoulos with Bank of America. Your line is open.
Hi, everybody I'm still at J P. Morgan.
[laughter] thought you change change jobs 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 vcs getting more cautious given the tech correction in tech stocks now playing out and whats back stocks see even more of a bit of a beating our private companies starting to see down rounds.
No.
So it's very early when this correction in the tech market has played out I would say the engagement we have in our discussions.
We're paying attention very close attention to it but we really havent havent seen it so our channel checks and talking with our clients and talking with them.
Venture capital is still very active and I think you have to.
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 was so much dry powder and.
They need to put it to work and so could there be some valuation corrections in the later stage, yes, there could be as companies look to raise money, but if they do they are still at healthy valuations.
And so I think companies need to raise money there is ample money out there for them to raise money.
They hold out and wait for a high evaluation, possibly.
But again, we're just not seeing it yet and I think you have to wait at least a quarter or two to really see if theres any but a trend that start anything that starts submitted trend beyond that.
Okay Yeah.
I wanted to follow up on that so V season P firms are sitting on a record dry powder, but if the exit markets where 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 or do you think that firms will just invest right through a market disruption.
Well when you go back and talk about cycles right. I mean, the last time, we had I'll call. It a dip was back in 262016, and if you remember that was because of.
Asia and concerns around the Asian market.
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 may.
Investments because it's a different way to do it that was about a 90 day 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 talked 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.
As you combine those things with gist.
The innovation market growing very fast domestically and globally.
Could there be a prolonged slowdown it's possible.
Just think the likelihood is a lot less than it has been.
In prior significant cycles.
And it's because of the dry powder on the sidelines. That's why you think it will be.
Well, it's two things.
The dry powder number one number two it's the innovation economy still growing on a global basis right and number three if you do see.
Evaluations, even do a minor minor correction I think people are going to look at it and say that as an opportunity to get back in.
This is gonna be temporary so those are the three reasons I would point to to say that it could be a short lived if there is a short term kind of slowdown mhm okay.
Then final question for Dan, assuming we do see rate hikes I know the 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.
Yeah.
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 when that occurs.
But imagine what you see rate increases March June time frame that that could potentially move us into the.
Next expense guidance range of the mid Twenty's. So that's that's kind of the way to think about it if we see March June increase.
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.
Got you okay.
That's helpful. Thanks for taking my questions.
Yep Thanks, Steve.
Your next question comes from the line of Casey Haire from Jefferies. Your line is open.
Thanks, Good afternoon guys.
Okay.
So on the on the loan growth guide.
Guidance.
Just curious about the mix.
Obviously fund banking.
Capital called it drove about 60% of it in 'twenty. One 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.
Hey, Casey it's Dan.
I'll start Mike might want to add but as 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 banking wealth management and see the opportunity for mortgage lending, which is already strong to continue to see that grow. So it's still predominantly capital call lending, but starting to see mortgage as well as Uh huh.
There are elements of private bank lending pick up in.
In the new year now at the same time don't count out what's happening in technology Health care life science lending and even with all of the liquidity that's been in the market we've seen.
So good growth good growth there so.
Predominantly capital call thought.
Private bank as well as what we do and core technology health care of life Sciences will also contribute.
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 10 year, obviously 30 bps higher.
And where we were at the beginning of the year.
Is that 165, 175% accurate relative to what where we are today rate wise.
Yes, I think based on where the 10 year sitting and the sell off we've seen over the last couple of weeks you could and it is hard to count on this for a longer period of time.
Looked at another 10 15 basis points.
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 opportunity. There's a lot of that depends on liquidity slow. So we're comfortable with the $1 65 to $1 75.
And to the extent that longer term rates and the sell off that.
That's year to date six there could be some small opportunity there.
Okay.
And just last one for me on the <unk>.
Front.
The charge off guidance down a little bit is that.
The slide deck makes it seem like it's it's more environment driven but is that finally, just a reflection that the low risk capital call as is just too much.
It 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.
Yes, so starting to get smart <unk> and starting on the charge offs question.
Yes, 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 have historically taken.
The majority of our losses continues to grow in dollar terms, but continues to shrink as a percentage of total loans and so those things are certainly conspiring to bringing the guidance down and then to your question about reserve.
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 are finally I think abound.
<unk>.
The bottom probably pretty close to it it's hard to imagine.
Sure.
More reserve release would come from what we will certainly have some.
And.
Capital call lending as we've mentioned before is certainly figures prominently in the outlook and if that continues that 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 I think.
Also more normal provision in the fourth quarter reflective of the growth.
Yes.
Great. Thank you.
Your next question comes from the line of John and Gary with Evercore ISI. Your line is open.
Good afternoon.
Hey, John .
On the back to the loan growth.
Just oh.
Kind of taking a little bit more in terms of.
If we do get.
I mean, there is some expectations for practically eight hikes by the end of 'twenty three if we do get that.
We get that piece 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 that dynamic.
Do you see much of an impact or just the again.
On a dry powder factor that you've talked about.
Really trump that thanks.
Yeah.
Okay.
So I'll I'll start John .
Oh go ahead go ahead Mike.
Okay.
And I was just trying to figure I had it on mute.
Hey, John This is my desk, they're here.
Yeah.
In general I mean, the first as you know and you've been following us for a number of years. The first few basis points high it's really it's not going to have much impact on the loan books as well too clearly you are looking at some leverage loans in that particular area. Some buyout them 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 it so well.
Not really anticipating that we'll have that strong of an impact here, but you've obviously something to keep an eye on.
Got it that's helpful. Thanks, and then.
In terms of.
The warrant and investment gains I know youre reasonably you expect them to moderate off of the very strong 2021 levels I know this is probably.
Uh huh.
Tough question, but any way to help us gauge the magnitude of moderation.
That we can expect.
Any way to.
Kind of frame it.
As youre looking at the market now the backdrop.
Just trying to see if there is just how we should think about it.
Yeah.
Yes, John .
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 a $1 $1 billion worth of warrant and investment gains, but I think is clear is 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 on the environment. So.
Hard to put a percentage around it we just we just know that with this market volatility.
It could be slower.
For for the next quarter, or so, especially relative to what we saw in 2000.
In 2021 still again expecting 2022 to be a good year.
Got it okay, maybe maybe not.
John I'll just add on.
I'll just add on top of it with Dan is saying I mean, it is no doubt a very difficult thing.
To predict but just some of the factors to consider.
We keep talking about dry powder. There is a lot of a lot of dollars out there, but theres 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 fact sheet the number of companies that are value.
Greater than the median value of what went public last year is significantly greater than what went public. So there is a lot.
Good company that can be candidates for exit there. So the fundamentals are still really really strong and a lot of good companies out there.
Got it thanks, Mike.
Alright, and then Dan I know, Greg you referenced earlier on.
But just curious around the.
Investment banking trends.
If you could maybe give us a little bit of color on on the outlook there.
Pipeline and everything and then.
Also in terms of.
Impacts that you expect from what we're seeing right now if we are in Canada.
A rising rate environment, and this backdrop or and how does that impact that outlook.
Yes.
So we've got a couple of slides in the deck that talked about both the revenue side of what we've seen in a quarter to quarter basis, but really it's when I think of 'twenty. Two we have a pretty nice growth built in there relative to what the record quarter was a record year was in 'twenty one.
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 and do a few categories first is the historical Seb Leerink business. So it was mainly biopharma. It was you.
It was trading research.
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.
Health care services technology.
M&A and ECM and M&A for biotech and now with research with technology as well so.
So while you are hearing from some other larger investment banks softness as they go into 'twenty two for us, especially in technology and health care services, and then of course M&A.
We're going from either a 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 soft.
Softer market in 'twenty two.
I also believe it.
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 health care services.
The main teams were more M&A led so so we feel we feel good about the outlook.
We feel good about the outlook for 'twenty, two but the trajectory in 'twenty three and 'twenty four based on the people that we brought onto the platform who really are exceptional.
Great. Thanks, Greg appreciate it.
Yep.
Your next question comes from the line of Bill <unk> with Wolfe Research. Your line is open.
Thank you good afternoon.
Greg I wanted to ask a question on <unk>.
Management, it would seem that wealth management teams would find the opportunity to join US ABB is quite compelling given your client base can you speak to the pace at which you would expect to onboard new teams as you grow that business and so is there maybe a certain number per year that you're targeting or are there any sort of parameters you can share on that.
Characteristics of the team's you'd be looking to onboard, including maybe like a minimum level of assets under management or any color.
Yeah. So when we when we add wealth advisors, it's a little bit different.
So again I'll break this down into a couple of different parts. One is the interest level of the interest level is very.
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 adviser hires in 'twenty, one and it really you 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 'twenty two.
I've been on some of those calls to recruiting calls and discussions.
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 is 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.
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 what's the 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 kind of have a I'll call it tempered outlook because.
We wanted to see the evidence of it happening.
So more to come over the coming quarters, but the foundation is very strong.
That's very helpful. Thank you.
Following up on your earlier comments, where would you say the technology investment banking businesses in its ramp from last September's launch I'm guessing it hasnt hit full stride, yet, but it would be helpful. If you could.
Frame for us.
Yeah.
I guess, just give us a sense of what you've assumed in your eyes.
Yeah.
It's actually it's we expected that it would take.
Six to 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 youre really going to see what I'll call. The full potential until later this year.
And into 'twenty, three and it just takes it takes time to get everything in order to get everyone communicated with that being said what has impressed me read out of the chute is that we've had.
More than 10.
There is significant mandates signed up and a very very strong pipeline and the technology side and health care services and again.
On the biotech side, it's already an incredibly robust team and an 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 public offerings as well.
So again feeling really good about the foundation is being built.
Okay, great that's great to hear.
Last one for 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.
Yeah.
Yeah.
So I think that mark might want to add something to it but I think when we look at where the reserves are where we're 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 are certainly going to see more provision associated with loan growth.
Yeah.
Nothing to add here Dan Thank you.
Got it.
Thank you for taking my questions.
Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.
Hey, everybody good afternoon. Thanks.
Jerry.
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 we look at slide 14. It will just be an acceleration or pull forward of investments that may otherwise have.
It takes a little bit longer or would there be new initiatives are there new opportunities that you would use that opportunity or that.
Opportunity from from revenue to expand.
Yes, Jared aired Oh go ahead Greg.
Jerry to start.
So I wouldn't I wouldn't call it.
Is it sort of a pull forward here's what I would say as we have.
An incredible amount of opportunities to invest in a very long long list and part of this is we're constrained by just how many things you can do it once and there is some we want to make sure that we're investing at the right pace. If we do see revenue start to pick up with some rate increases we're going to look.
At opportunistic opportunities to.
To accelerate some of those investments so is it a pull forward.
I would I wouldn't describe it that way because it pull forward means that you have a certain dollar amount and you're moving it up and then it'll 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 as saying.
It's opportunistic and we have a lot of opportunities ahead of us. So if we do get that rate increase will will put some of it.
To work for sure.
Yeah.
Okay, Alright, Thanks, and then.
Looking at the AUM.
M Guide and in light of the prior question around you know.
The success, you've had bringing people.
Our relationship managers onto the platform and the expectation for that to continue.
AUM guide it seems a little conservative I guess given the.
The growth we were used to expecting from from Silicon Valley.
What could cause.
AUM to grow faster.
With the broader expectation of the support you're putting behind the private bank.
Yes.
I think we have to get what I'll call, the flywheel up and running.
And we're just getting it started.
And so think about that is one thing and let's just talk about the differences between wealth management and what I'll call commercial banking and commercial banking you had a commercial client they have a lending need.
It's usually within a reasonable period of time, you put that together.
<unk> 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 youre looking at in the private bank and wealth.
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, that's capable and that's even for <unk>.
Wealth advisors that are coming coming over but Ken because again were 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 that's going to be increasing at a much 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 and wealth.
But at this point.
Okay, great. Thank you.
Yes. Your next question comes from the line of Chris Mcgratty with <unk>. Your line is open.
Okay, great. Thanks.
And what shouldn't and kind of your thoughts on the geography of deposit growth in 2022, and there are varying rate rate outlook on or off balance sheet the mix.
Where do you see at Cowen.
Yeah.
Hey, Chris.
Dan I think.
As we look at the first couple of rate increases imagine 25, or 50 basis points I think we're going to start to see behavior.
Pretty similar to what we saw during <unk>.
The last rate rise cycle.
Youre, not really seeing a massive shift towards the off balance sheet and.
And not even seeing much of that money you start to be motivated.
To move into the interest bearing.
Sectors I think as we start to get into the 75 to 100 125 basis points fed funds, that's when the money money market rates off the balance sheet really should start to be more attractive and I think that's when you could start to see more movement and that's where I think we've just got a competitive advantage. If you look at the <unk>.
<unk> 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 ended up with a very low cost of deposits and deposit base. So I think first 25 50 basis points no big shifts.
And client behavior 75.
100 on this why did 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.
But to use some of these products that we've been developing here over the last couple of years.
Okay, that's great. Thanks, Dan.
Maybe a follow up.
I heard from one of your peers yesterday that they were obviously youre going to try to take down some of their rate sensitivity is.
As rates go up.
I know you have some hedges on the balance sheet, but just interested in kind of the appetite to moderated a bit if we get the forward curve.
Yes, 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.
We're seeing at least some movement in the rate environment out in term that that helps dampen some of that sensitivity and are in fact lock in some of that a rate environment that we see so youre generally seeing more.
Organically by the way were 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 exists 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.
Okay. Thank you.
Okay.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from the line of Chris Kotowski with Oppenheimer and company. Your line is open.
Yes.
Let me start I guess with another shot at the equity and.
Warrant gains just in the sense that in your portfolio today is about $2 5 billion in Bakken.
Our 2018 2019 and it was like.
Six to 900 million, so it's roughly three times and.
And so at a normalized level should still be.
Bigger than what we saw in 2019 I guess, that's the first part of it and then secondly am I right in thinking that you probably wouldn't put an equity position on your balance sheet. If you. If you didn't expect kind of.
Mid teens through the cycle return ish.
Hello, 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 when you've got warrants in close to I think it's close to now 3000.
Individual.
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.
We've gone from a warrant portfolio of 500 granular names to closer to that 3000, so there's actually more variability there today.
And then back in the previous period, so it's really hard to.
And if if it were easier we would certainly have a guidance range about it.
The broader assumptions that youre, making.
Yes, no, but I was wondering specifically I realize the warrants are particularly different.
Presumably.
On the equity positions that you take presumably you'd be targeting a mid teens return.
Granted that there's lumpiness, but through the cycle.
Yes, and in many cases those.
It is equity positions are the result of the conversion of the warrants into equity positions while were in the lock up.
Period, So there is no.
Have your return thresholds.
And in particular associated with it so.
The conversion of that into the into the war and post the.
The IPO.
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.
The vast majority of that is mark to market. So thats already mark to market and we've got the details included in the last 10-K.
The mark to market.
Methodology associated with it so thats marked on a quarterly basis and is up to date as of 12 31 based.
Based on the market activity.
Okay, and then secondly, just could get very detailed guidance on an annual basis and that makes our job very easy.
And Oh.
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've brought on this big team of bankers.
We start strong or should we just step it up rabbit ratably during the quarters or or two did does the team start coming on strong in early and then kind of flatten out later.
If you don't have a view of that than that Brian , but I'm. Just curious if you are a beyond the cadence of the year that we should expect.
So I think with.
Balance sheet growth that we've seen.
It's been fairly fairly progressive.
As liquidity has been raised.
If you look at core fee income lines Gen.
Generally.
The last subject to seasonal factors.
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On a quarterly basis I think if we look at areas, where there would be more of volatility you're looking at.
Investment banking.
Of revenues, which are just much more subject to.
What's happening in market conditions from quarter to quarter, along with the investment and warrant gains that we just talked about.
And then there was just.
There always has been.
Aggressive build from an expense perspective.
Quarter quarter to quarter, but generally speaking thats a good way to think about it there was really no no perfect way to break out the quarters.
Okay Fair enough. Thank you that's it for me.
Yeah.
Your next question comes from the line of gender for timber with true Securities. Your line is open.
Yes.
Thank you good evening.
Question on Leerink, so with a broader sector focus now.
What is the revenue potential for this company.
Company over the next few years, how big a business could this be relative to the rest of her SBB.
Okay.
Yes, Jennifer it's Greg I'll start and Dan May want to May want to add.
You can see what our guidance is for for this year, which I would I would describe it as.
We're hitting on we.
We expect to be hitting on at least in technology and healthcare, it's kind of like four of an eight four cylinders when he cylinder engine. So we're kind of halfway halfway halfway there.
When I when I think of the full potential I don't think thats really going to be reached.
Until 'twenty, three or maybe even a little bit of 24.
The answer to your question is difficult in the sense of there's two ways to think about it right. So one way to think about it is.
<unk> team and their potential and the second part is the robustness of the market and the revenue opportunity to fee opportunities that exist. So so.
That's the more unknown.
Do I see this business or could I see this business as a as a $1 billion revenue business in the next.
Three years the answer is yeah.
And Thats a combination of the quality of people, we have the breadth of the products that they are providing to the market.
The market staying relatively healthy.
So that's the top line and then when you can turn to the bottom line you see pre tax margins that you could be in the 20% to 25% range.
Which.
Maybe even a little bit higher than that as we gravitate towards.
More M&A. So so yes, I feel really good about the potential for this business to grow.
Thanks, so much.
Yep.
Okay.
There are no further questions at this time I will now like to turn the call back over to the Chief Executive Officer, Mr. Greg Becker.
Yeah.
Great. Thanks, everybody I just want to really thank you all for joining us today.
Yeah.
We're certainly proud of what we delivered this past year and very excited about the year ahead.
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, 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 we wouldn't be surprised given the current kind of volatility to see some volatility volatility and private company valuations.
But again as we said the market is still so robust theres. So much potential there is 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 do they diminish the power of this innovation economy that is just getting more and more attention.
So I just wanted to thank our employees around the world for always given their best SCB to hanging in there during the pandemic and taken 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.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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