Stifel Financial Corp. (NYSE:SF) Q3 2023 Earnings Call Transcript

Stifel Financial Corp. (NYSE:SF) Q3 2023 Earnings Call Transcript October 25, 2023

Stifel Financial Corp. misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $1.29.

Operator: Good day, and welcome to the Stifel Financial Third Quarter Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead.

Joel Jeffrey: Thank you, operator. I’d like to welcome everyone to Stifel Financials’ third quarter 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 Corp and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Ron Kruszewski: Thanks, Joe. To our guests, good morning, and thank you for taking the time to listen to our third quarter conference call. Let me start by saying that given the market conditions and what I consider to be one-time extraordinary non-recurring legal expenses, Stifel generated a solid quarter. Our operating results of $1.05 billion in net revenue and $1.18 of operating EPS excluding the aforementioned legal reserves are essentially the same as our numbers last quarter and in the third quarter of 2022. I will address the legal reserves momentarily. But frankly, our results over the past seven quarters can be summarized by increased wealth management and NII, offset by institutional declines which result from subdued industry-wide activity.

As such, I feel like I’m stuck in the movie Groundhog Day, where Bill Murray’s character wakes up and experiences the same day over and over. Though thankfully, my alarm doesn’t wake me up each morning to the song, I’ve got you babe. But seriously, since the end of 2021, it feels like every quarter, we talk about the optimism for near-term results based on green shoots and investment banking activity, the potential for delayed M&A deals to finally close the market stability when the Fed stops raising rates and then cuts, and declining cash sorting. Look, we are well positioned when institutional conditions improve. However, when these conditions actually do improve is open for debate. History tells us that while the catalysts for improvement vary, my experience has been that institutional activity tends to improve slowly and then ramps up suddenly.

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Q&A Session

Of course, we cannot control market conditions, but there are things we do control such as recruiting high quality advisers in our wealth management business, maintaining the high levels of support, as illustrated by our number one ranking by J.D. Power for employees adviser satisfaction. Increasing our relevancy to our institutional clients where we can capitalize on the eventual market improvement, controlling our expenses in an inflationary environment while building our brand recognition. Managing balance sheet growth and liquidity and strategically deploying excess capital. In today’s environment, this has been accomplished primarily through share repurchases, dividend increases and investments in our business. With this approach in mind, I would highlight that our Board of Directors has improved and increased share repurchase authorization of 10 million shares, which brings our total authorization to 14.2 million shares.

Lastly, as we’ve always done, we continue to look at potential acquisitions, but in the current environment, they are less attractive, particularly in a market with a 5% risk-free rate. Moving on to Slide 2. On the variance payable to consensus estimates, we’ve highlighted our results and include the impact of the non-recurring legal charges we accrued during the quarter. Given the impact on our bottom line, I’ll address this item first. The $67 million in legal charges was primarily the result of the SEC’s industry-wide review of off-channel communications. While this matter has not yet settled, we believe that we are properly accrued. Additionally, we have reserved from some smaller legal items as well. The impact of the non-deductibility of the SEC matter negatively impacted our tax rate.

All said, the after-tax impact of these legal matters was $0.58 per share. In terms of revenue, the $28 million shortfall to expectations was almost entirely due to lower investment banking revenue as we continue to see delays in deal closings in advisory and both equity underwriting and public finance activity was slow, given market volatility and of course, higher rates. Our transactional revenue was ahead of the street by $5 million as wealth management revenues were higher than estimates and asset management revenue came in $3 million above the street. Net interest income came $2 million below street estimate, primarily due to cash sorting, which I note, and I’ve been saying, has slowed from earlier pace. In terms of expenses, excluding the impact of the $67 million in legal charges, much of the difference in non-comp expenses versus expectations was tied to higher provision expense, which Jim will discuss later.

Moving on to Slide 3. I want to focus on the strength and growth of our wealth management franchise. The third quarter represented our 11th consecutive quarter of record net revenue in Wealth Management. Since 2015, Global Wealth Management revenue has increased more than 120%, while the percentage of recurring revenues increased from 47% to 78%. This level of growth has been the result of our strategy to recruit high quality advisers and to provide them with an extraordinary level of service. In this effort, we have continually invested in resources, support and technology to reduce bureaucracy and enable our advisers to thrive. Our substantial recruiting efforts are illustrated by the fact that over the past five years, we have recruited nearly 670 financial advisers with cumulative trailing 12-month production of approximately $430 million.

I would also highlight that year-to-date, we’ve increased the number of recruited advisers by 34%. As I mentioned earlier, a vital component to our recruiting strategy has been the adviser friendly culture at Stifel as well as the industry-leading level of service we provide. This strategy has been validated by the growth in the number of our advisers and our number one ranking in the most recent J.D. Power survey of overall employee adviser satisfaction. This level of recognition has resulted in increased inbound calls from potential recruits. And as I look out over the next few quarters, I anticipate that we will see continued strength in recruiting. So the bottom line is that our Global Wealth Management business continues to be a meaningful growth driver despite more challenging market conditions for our overall business.