Stifel Financial Corp. (NYSE:SF) Q1 2024 Earnings Call Transcript

Stifel Financial Corp. (NYSE:SF) Q1 2024 Earnings Call Transcript April 24, 2024

Stifel Financial Corp. misses on earnings expectations. Reported EPS is $1.5 EPS, expectations were $1.62. SF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Stifel Financial First Quarter 2024 Conference Call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations at Stifel Financial. Please go ahead.

Joel Jeffrey: Thanks, operator. I’d like to welcome everyone to Stifel Financial’s first quarter 2024 conference call. I’m joined on the call today by our Chairman and CEO, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen. Earlier this morning, we issued an earnings release and posted a slide deck and financial supplement to our website, which can be found on the Investor Relations page at www.stifel.com. I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures.

This audio cast is copyrighted material of Stifel Financial and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Ronald Kruszewski: Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our first quarter 2024 conference call. The momentum we had exiting 2023 continued as we generated the second highest quarterly revenues in our history. We benefited from market conditions that included strong equity markets, recovering capital markets and an improving U.S. economy. Total net revenue of more than $1.16 billion was driven by record global wealth management revenue as well as the continued improvement in our institutional group. As revenues improved, we maintained a focus on expense discipline and this approach resulted in a 20% pretax margin, operating earnings per share of $1.49, which was a 6% increase year-on-year as well as a return on tangible common equity of 21%.

This resulted in another quarter of substantial excess capital generation, which we deploy primarily via share repurchases. Even with the substantial share repurchase activity and our increased dividend, our Tier 1 leverage ratio increased by 10 basis points during the quarter. I’d also note that the strength of our business was recognized by the credit agency upgrade we received from Standard & Poor’s earlier this month. Slide 2 is a variance table to consensus estimates. Our EPS of $1.49 was $0.03 higher than consensus and was the result of net revenue that came in $20 million above expectations. We beat on all revenue items except net interest income, which I note came within our guidance range. I think it’s important to note that our NII for the quarter of $252 million may very well be the low point of the year, as we anticipate balance sheet growth and less impact from cash sorting during the remainder of the year.

In terms of where we beat consensus, I’d note that investment banking came in nearly $30 million above expectations on stronger advisory and underwriting revenue, both as compared to consensus as we are beginning to see increased activity levels. Transactional revenue came in $5 million above The Street on stronger wealth management and institutional equity revenue. Total expenses were higher than consensus. However, much of that was reflected in compensation expense as a result of higher revenues. I would note that the comp ratio remained consistent at 58% and was slightly below expectations. Non-comp expenses were $8 million higher than expectations, which Jim will discuss in greater detail later in the call. But I’d point out that excluding credit provision and investment banking [gross-ups], our non-comp operating ratio was essentially in our guidance.

Slide 3 compares operating metrics since 2019, starting with net interest income, I would note that this has increased over 100%. This is noteworthy because it represents a consistent source of revenue that along with our other fee-based revenues offset the volatility of our institutional business. In 2019, Global Wealth Management revenue was $2.2 billion, which compares to approximately $3.2 billion based on our annualized first quarter 2024 global wealth revenue. On a percentage basis, Global Wealth Management is up 45% since 2019. This growth offset a deep industry-wide recession in capital markets that reduced the pretax income of our institutional group from $560 million in 2021 to essentially breakeven in 2023. Our results in the first quarter indicate the onset of a rebound in investment banking, but it is far from a normalized run rate.

As market conditions improve, we anticipate returning to more historical levels of profitability in this segment. For example, in 2022, we generated $254 million in pretax income, which I would note was not even a particularly strong market for investment banking. As revenue and margins continue to return to more historical norms, we will also benefit from the investments we’ve made in our Wealth Management segment. One item I would like to note is the benefits we’ve seen from our Smart Rate product, which enabled us to maintain our client cash within Stifel as interest rates rose. The increased levels of cash and Smart Rate makes Stifel less sensitive to the impact of lower interest rates when the Fed begins to cut. Last year, we noted that a 100 basis point decline in rates would result in a $65 million reduction in net interest income.

Given the growth in Smart Rate, which carries a higher deposit beta, our updated disclosure in 2024 reduces the impact on net interest income to $15 million on the same 100 basis point decline in rates. So as we look to the future, we can see improving results from our institutional group, consistent growth from our wealth management franchise and elevated levels of NII contribution. This combination leads me to believe that we will continue to generate strong performance for 2024 and as we transition to 2025. With that, let me turn the call over to Jim Marischen to discuss our most recent quarter results.

James Marischen: Thanks, Ron, and good morning, everyone. Looking at the details of our first quarter results on Slide 4. Our quarterly net revenue of $1.16 billion was up 5% year-on-year. The increase was driven by stronger client facilitation, trading and underwriting revenue that was partially offset by lower net interest income and advisory revenue. Our EPS was up 6% from the prior year as higher revenues and a lower share count more than offset modest expense growth. Moving on to our segment results. Global Wealth Management revenue was a record $791 million, and our pretax margins were 37% on record asset management revenue and strong growth in transactional revenue. We continue to add new advisers to our platform. During the quarter, we added a total of 22 advisers.

This included 15 experienced advisers with trailing 12-month production of $6.8 million. We ended the quarter with record fee-based assets and total client assets of $177 billion and $468 billion, respectively. The sequential increases were due to higher equity markets and organic growth as our net new assets grew in the mid-single digits. We highlight our longer-term growth drivers of our Wealth Management business on Slide 6. Our focus on recruiting and supporting our advisers with best-in-class service has been the approach to our long-term success. Not only has our revenue contribution from this segment continue to increase, but the percentage of revenue generated by recurring sources such as asset management and net interest income, has increased significantly and now stands at 77%.

Moving on to Slide 7, where we highlight the solid trends at the bank. Net interest income of $252 million was in the lower half of our guidance range as bank net interest margin was impacted by higher deposit costs, larger average cash balances and the movement of sweep deposits back into third-party banks. Given the timing of the move to third-party banks at the end of the fourth quarter of 2023, we recognized the bulk of this impact on NII and asset management revenue in the first quarter as asset management revenue from third-party banks increased $7.5 million sequentially. As we had forecasted, cash sorting was impacted by seasonality in the first quarter, but continues to slow. Bank sweep deposits increased during the quarter by $130 million, but more than offset by the reduction of third-party sweep balances by $872 million.

Given our expectations for similar cash sorting and modestly higher bank NIM, we expect that NII in the second quarter will be similar to our first quarter results. And as such, we are forecasting a range of $250 million to $260 million. Our credit metrics and reserve profile remained strong. The non-performing asset ratio stands at 20 basis points. Our credit loss provision totaled $5.3 million for the quarter and our consolidated allowance to total loans ratio was 89 basis points, which was impacted by the decline in loan balances as a result of paydowns in fund banking. Lastly, our balance sheet continues to be well capitalized. Tier 1 leverage capital increased 10 basis points sequentially to 10.6%. I’d also note that the unrealized losses in our bond portfolio continued to improve as credit spreads tightened in the CLO market.

On the next slide, I’ll discuss our institutional group where we saw continued improvement as the operating environment continues to recover. Total revenue for the segment was $351 million in the first quarter, up 6% year-on-year, led by a strong increase in capital raising and transactional revenue. Firm-wide investment banking revenue totaled $213 million and substantial growth in capital raising more than offset a decline in advisory revenue. In terms of equity underwriting, the $40 million we generated was our strongest quarter since the fourth quarter of 2021 as we had a meaningful contribution from our healthcare vertical, where we’ve made significant investments in recent years. Advisory revenue was $119 million as we had solid results in our industrial and healthcare verticals.

We were again impacted by the delay in deal closings. However, our pipelines are improving as the U.S. M&A market is showing signs of strength. Equity transactional revenue totaled $54 million, which was up 3% from the first quarter of 2023, which was a tough comparison as last year’s commissions were positively impacted by the volatility that resulted from bank failures during that quarter. We continue to gain traction in our electronic offerings as well as strong engagement with our high-touch trading and best-in-class research. Fixed Income generated net revenue of $139 million, an increase of $36 million year-on-year. We experienced strong growth in transactional and capital raising revenues as both increased $18 million from 1Q 2023. I would note that we continue to see strong flow activity in our transactional business, but our trading gains in fixed income were significantly lower than what we experienced in the fourth quarter.

Fixed income underwriting revenue increased 57% from 1Q 2023, as we continue to be a leader in the municipal underwriting business as activity increased, and we continue to be ranked number one in the number of negotiated transactions as our market share was greater than 15% in 2024. We are also seeing improved traction in our taxable capital raising activities, which improved year-on-year. On the next slide, we go through expenses. Our comp-to-revenue ratio in the first quarter was 58%, which is at the high end of our full-year guidance as we accrue conservatively early in the year. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $245 million.

Our non-comp OpEx as a percentage of revenue was 21.1%. The effective tax rate during the quarter came in at 25.2%. The tax rate was positively impacted by the excess tax benefit related to stock-based compensation, but was offset by non-deductible foreign losses. Before I turn the call back over to Ron, let me discuss our capital position. In the first quarter, we repurchased approximately 2.3 million shares through both net settling of equity-based compensation and open market purchases. As of the end of the quarter, we have 11 million shares remaining on our authorization. We have approximately $210 million of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate substantial amounts of excess cash as illustrated by our first quarter net income of $154 million.

We remain focused on generating strong risk-adjusted returns when deploying capital, and we’ve done this through reinvesting in the business, making acquisitions as well as through share repurchases. Absent any assumption for additional share repurchases and assuming a stable stock price, we would expect the second quarter fully diluted share count to be 109.9 million shares. And with that, let me turn the call back over to Ron.

Ronald Kruszewski: Thanks, Jim. At the end of last year, I said 2024 would be a transition year and that my outlook for 2024 was optimistic. I stand by those statements. I would add that so far in 2024, we are off to a good start in both revenue and EPS in the first quarter exceeded consensus estimates. Simply looking at our annualized first quarter revenue, we are already near the midpoint of our full-year guidance despite market conditions that aren’t overly accommodating. The outlook for the remainder of the year is certainly not without risk as our performance could be negatively impacted by the ongoing geopolitical crisises, the uncertainty of the U.S. presidential elections, potential credit market deterioration and persistent elevated inflation, just to name a few.

Speaking of inflation and Fed policy. I would note that at the beginning of 2024, the market anticipated six to seven rate cuts. Stifel was not in this camp, and we projected two to three rate cuts. We stand by this view, although we now believe that zero to one rate cuts and even a rate increase are also in the cards. Look, the Federal Reserve finds itself in a precarious position, navigating the tight rope between controlling inflation and preventing recession. It’s not an easy task. The Fed’s unprecedented series of rate hikes in 2022 were successful at slowing the inflation that reached 40-year highs. Yet the market has numerous reasons to justify the Fed to begin a cycle of rate reductions, cheap among them a desire to achieve a soft economic landing.

While we and everyone, it seems would like lower rates, the Fed should recognize that reducing rates now is both unnecessary and risky for the economy. We believe that inflation will prove sticky and cutting rates too soon may reignite inflationary pressures on doing the progress made so far. Simply, ensuring that inflation is at or near the Fed’s stated target of 2% is more important than trying to ensure a soft landing. The Fed has plenty of rate flexibility if the economy slows significantly and in our opinion, should not attempt preemptive rate cuts at the risk of invigorating inflation. That said, we are seeing market conditions continue to improve. Specifically, I’d point to improve sentiment for investment banking, strong year-to-date equity market performance and increased client transactional activity.

If these trends continue, we would expect to see increased revenue growth and improved operating efficiency throughout the remainder of the year. This would put Stifel on a very strong position heading into 2025. Let me conclude by saying that we are committed to create value and maximize returns for our shareholders through all market cycles. We have and will continue to do this by reinvesting in our business through strategic hiring and acquisitions, deploying capital based on generating the best risk-adjusted returns and always putting our clients’ needs first. This approach is essential to Stifel reaching our near-term targets that I’ve discussed of over $5 billion in revenue and about $8 of earnings per share. I would note that this is essentially 2025 consensus analyst projections.

Additionally, you’ve heard me talk about our longer-term goal of $1 trillion in client assets under management. Well at that level of asset growth, I believe our business would be at the scale to generate roughly $10 billion in annual revenue. I recognize that this is essentially twice our current size. However, my confidence in reaching these levels was bolstered by our historical growth rates. As recently as the period between 2015 and 2021, we doubled our annual net revenue. As we continue to attract high-quality individuals and as we, as an organization, continue to adapt and constantly think like a growth company, I believe that over the next decade, these revenue and client asset milestones are achievable, if not exceedable. And with that, operator, please open the lines for questions.

Operator: Thank you. [Operator Instructions] We will take our first question from Devin Ryan with Citizens JMP.

See also 12 Highest Yielding Dividend Stocks You Can Buy Right Now and 30 Largest Stock Exchanges in the World.

Q&A Session

Ronald Kruszewski: Good morning, Devin.

Devin Ryan: Thanks so much. Good morning. How are you Ron?

Ronald Kruszewski: Good.

Devin Ryan: Good. First question, just want to take a step back and look at the investment banking business that you guys have built here, and just really thinking about kind of the evolution in recent years. And it maybe great just to maybe give some perspective around how you guys have increased the size and capabilities of that business relative to where you were in pre-COVID because revenues have clearly been anything from normal the last few years from 2021, extremely good to the last couple of years, maybe on the other side of that. And so just trying to think about what kind of a normalization for Stifel could look like because of all those investments? It would seem that you don’t need a 2021 like environment to get back to something into that ballpark of revenues. Thanks.

Ronald Kruszewski: I think it’s a great question. It requires a little bit of a crystal ball, Devin. But what I’m confident in saying is that as you look and compare to 2019, the capabilities of the firm across our Institutional business, not just in investment banking, but are significantly greater in terms of senior producing people, managing directors, products, services and just the evolution of the business. As you continue to do more business and are more relevant to your clients that leads to more business. That’s just the cycle of the business. I don’t think there’s any question that we’ll look, I think for a little while as 2021 being a high watermark, everything that came together at that time including the phenomenon of [SPACs] and everything that happened, that will be a high watermark in revenue, at least for a little while, in my opinion.

But as we’ve looked at it, we can get back to acceptable margins in this business. And we’ve said that instead of 2021 being $2.2 billion, we say more like $1.7 billion to $1.8 billion. I think that, that’s easily attainable. And the important thing is going back to some profitability from a business where we essentially broke even last year and yet still achieved great corporate results as that business improves the profitability approved. And of course, that will be part of us getting to the targets that I mentioned in my remarks.

James Marischen: So Ron talked about increased capabilities, more managing directors, just to put some numbers behind that. We’ve increased the number of managed directors by 65 people from 2018. So it’s a fairly significant investment. You talked about a lot of our capabilities we’ve added, I would say we’ve also made investments in some of our key verticals. We’ve got a best-in-class product in our financials group with KBW. And you heard us reference multiple times on this call, some of the investments in the results being generated by the investments we’ve made in our health care and our industrial franchises. So I’ll just add to that.

Devin Ryan: Okay. Great color. Thank you both. Just a real quick follow-up here for Jim. In the bank, obviously, loan balances declined a bit from last quarter. I’d love to just get some flavor for kind of the environment you’re seeing around the loan book or appetite to grow the loan book from here what type of risk-adjusted returns in the market today? And then just also kind of an interplay between kind of growing the balance sheet versus just leaning in on buybacks that you guys have been doing? Thanks.

James Marischen: Yes. I mean, I think we kind of hinted to this in the prepared remarks as well is that we do anticipate seeing some balance sheet growth, specifically in the loan portfolio. I think you will see more loan growth in the areas we’ve historically grown. If you think about fund banking and venture banking as well as our mortgage portfolio, those are all areas that we’re going to continue to invest in. And I think you can look at the yield table and see the kind of returns we can generate there. And I think as we sit here in balance today, we are generating a lot of excess capital and thinking about balancing some of the buyback versus balance sheet growth is part of that consideration. It does take some time to start to generate and get those things going in terms of adding loan balances, but that’s something we’re definitely focused on.

Devin Ryan: All right. Thanks very much.

Operator: We will take our next question from Bill Katz of TD Cowen.

William Katz: Okay. Thank you very much. I appreciate it. Just following up on those last sets of questions. As you think through the interplay between your NII guide. How do we think about to the extent that if rates are sort of higher for longer the interplay between the NIM looking ahead versus the opportunity to grow the balance sheet to sort of calculate through to that NII outlook? Thank you.

James Marischen: I think the answer to that is a little bit hard to predict because understanding and predicting client behavior in that environment is going to have an impact on the NIM as we’ve said, we continue to see cash sorting continue to slow. But obviously, there was an impact associated with tax season that we see every year. I think the key thing to think about there is we continue to monitor this what happens to these balances, not just the Stifel across the industry as we continue to get further and further away from tax season. That said, even if we saw additional sorting pressures, the capabilities we’ve built and the yield opportunity on the loan portfolio would allow us to continue to grow and make the reasonable risk-adjusted returns that we target. So even if there is continued pressure there, we do feel comfortable with what that environment looks like.