Q3 2020 Stifel Financial Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Stifel Financial third quarter 2020 earnings Conference call.
All lines are currently in a listen only mode. After the speakers remarks, there will be a question and answer session. Thank you.
Like to ask a question at that time, you may do so by pressing star and the number one on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to hand, the conference over to Mr., Joel Jeffrey head of Investor Relations at Stifel.
Thank you operator.
Welcome everyone to Stifel financials third quarter 2020 financial results Conference call yesterday, we issued an earnings release and posted a slide deck to our website and found on the Investor Relations page at Www Dot Stifel Dot com.
I remind listeners to refer to our earnings release in our slide presentation for information about forward looking statements and non-GAAP measures. This audio cast is copyrighted material 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 Chief Executive Officer, Ron Kruszewski.
Thanks, Joel good morning, and thank everyone for taking the time to listen to our third quarter 2020 results.
Joining on the call today by co President, Jim Zemlyak, Indictor leasing as well as our CFO chimerix yet.
I'll start the call by running through the highlights of our third quarter before before turning it over to Jim will take you through our balance sheet inexpensive I'll then come back with my concluding thoughts.
Before I discuss our results, let me begin by thanking all steep associates for their dedication to client service.
<unk> pandemic has impacted millions of people worldwide and resulted in an ever chat changing challenge for both our health care system and our economy.
Despite this backdrop it's.
It's the focus of my partners know associates. That's depot that has enabled us to provide the high quality financial advice that our clients have come to rely on over the past 20 plus years as we've grown into a premier wealth management and middle market investment Bank. So again to my more than 8000 partners. That's people I want to say thank you.
With that let's look at our results simply we had another great quarter.
People benefited from strong capital raising and trading activity as well as continued growth in fee based assets. This more than offset the expected pullback in advisory revenue and net interest noteworthy we had one of our strongest recruiting quarters in recent history as we've been able to successfully implement it burn.
Troll recruiting strategy.
Our pipeline remains strong and despite the uncertainty of the U.S. economy, resulting from the pandemic steeple remains well positioned for continued growth.
To highlight the strength of our business for both the quarter and year to date, we generated record third quarter revenue and our second best quarterly earnings per share.
For the first nine months of the year, we achieved record revenue and earnings per share capital raising rep revenue achieved a quarterly record trading volumes are up year over year and credit quality remains strong its people bank. Additionally, wealth advisor recruiting accelerated which built on the momentum.
We achieved during the first six months.
The financial performance during the quarter and frankly, the past few years is driven by a diverse business Mexico. That's enabled both in our institutional group and wealth management segment to generate strong growth. This diversification is illustrated by record nine month wealth management revenue despite significant.
Climbs and net interest income and deposit sweep fees, both be resolved to the pads implementation of a zero rate environment. Likewise, we achieved record nine month institutional revenue has record capital raising and brokerage more than compensated for a 13% decline in advisory revenue.
Simply steeple is a growth company with diversified balanced in synergistic businesses over the last 12 months wealth management under both brokerage and fee model has contributed 46% of net revenue institutional revenues comprised of equity and fixed income investment banking and trading.
Made up 41%, while net interest income comprised the remaining 13%.
The synergy and complimentary nature of these businesses is reflected in our return on tangible common equity, which is 23.2% over the past 12 months.
Turning to slide two I would note that some of the numbers. We stayed throughout this presentation are presented on a non-GAAP basis I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release.
For the third quarter Steeples net revenues were 883 million up 8% from the prior year, representing the fourth highest quarterly revenue in our history. In fact for the 12 months ending September Thirtyth 2020 people generated revenue of more than 3.6 billion up 14%.
From the 12 months ending September Thirtyth 2019 compensation as a percentage of net revenue came in at 59.6% well operating expenses totaled 21%.
I would note that our compensation ratio is higher for both the quarter and year to date as compared to the full year 20019, primarily as a result of the decline and then I.
Relatively modest loan growth and a stabilization of economic factors, coupled with our man has been overlay resulted in a sense like no provision for loan losses to give a sense of the range of outcomes under a seasonal economic models, assuming our base case scenario, we are approximately 40 million over a crew.
Under our most severe scenario, we would be approximately 16 million under accrued altogether.
Earnings per share were $1.59 up 6% pre tax margins were 19.4% annualized return on tangible common equity was 22.2% and tangible book value per share increased 13% over last year.
$32.34.
Moving on to our segment results and starting with our global wealth management crew.
Third quarter wealth management revenue totaled 527 million up 4% sequentially the third.
Third quarter benefited from the expected rebound in asset management service fees, which increased by 16% sequentially as well as improved brokerage revenue, both offsetting an 11% decline in <unk>.
Through the first nine months of the year, our wealth management revenue was up 2% to a record of more than 1.6 billion. Again. These results were achieved despite the fact that our eni and deposit fee income decline approximately $65 million.
Excluding this impact.
Our year to date wealth management revenue increased 18% driven by strong growth in our brokerage and asset management revenues, both of which reflect strong recruiting and markets.
The fourth quarter, we expect another strong quarter for our asset management revenue due to the 8% sequential increase in fee based client assets, which totaled 115 billion at September Thirtyth I.
I would also note that total client assets reached 326 billion at the end of the quarter and are just 3 billion below the record level set in the fourth quarter of 2019.
As you can see on the wealth management metric slide we had another outstanding recruiting quarter as our virtual recruiting strategies continue to produce significant growth in our advisor headcount.
To put numbers to this we recruited 45 financial advisors with total trailing 12 month production of 38 million our.
Our recruiting performance this quarter is a continuation of our successful recruiting efforts since the beginning of 2019 as we've added nearly 250, new advisors, who had trailing 12 month production of roughly 200 million. This will continue to drive future revenue growth and wealth management as a new advisors.
Transition their clients onto our platform.
Looking forward, we have a lot of momentum behind our recruiting efforts and while there is some seasonality in the fourth quarter, primarily due to the holidays. Our pipeline remains extremely strong as steeple remains a very attractive destination for high quality advisors.
Moving onto our institutional group.
Through nine months, we generated record net revenue of 1.1 billion, which is up 33% from last year roughly.
Reflecting our growth in investments the first nine months of 2020 would represent our third highest annual revenue. These results were driven by capital raising and brokerage both up more than 50% from last year.
The third quarter net revenue totaled 363 million up 25% from last year.
Similar to our year to date results capital raising and brokerage revenue brokerage increases of approximately 50% drove the increase in the quarter and more than offset the expected softness in advisory revenue.
Before I go into the details of this segment's performance on the next few slides I want to take a minute to talk about the general perception of our institutional business I'm.
I'm sure you remember that on last quarter's call I commented that this segment is can generally underappreciated by analyst in general institutional businesses tend to be transactional in nature and consequently, there are persistent concerns such strong results in any given quarter or not sustainable.
It's true that we're not likely to generate record results every quarter. We believed that performance in the business is better judged by annual results.
As you can see by the chart on the battle bind the bottom half of the slide not only have our results been sustainable they've grown substantially in fact, if you analyze annualize our results for the first three months of 2020, our institutional revenues have grown at a compound annual rate of nearly 11% since 2009.
Bites substantial changes in the operating environment.
This growth is a direct result of the investments we've made into our business that has enabled us to pick up market share and become more relevant to our clients, which will help to drive continued growth in the future.
With that said, let's move on to our institutional equities and fixed income businesses.
This slide depicts brokerage and capital raising for both equities and fixed income.
Focus on the brokerage business now and address capital raising on the investment banking side.
Fixed income brokerage revenue was 97 million up 60% year on year and was our third highest quarterly revenue ever but the top two quarters occurring in the first half of the year as.
As such we are having a record year in fixed income brokerage as the first three quarters are not only up 70% from 2019, but already surpassed our previous full year record in 2016 by 5%.
The strength of our results continues to be driven by activity in investment grade high yield rates as well as municipals.
Equity brokerage revenue of 54 million was up 32% year on year as activity levels slowed from the record levels in the second quarter as market volatility slow.
Like our fixed income businesses. We are also having a record year in our institutional equity brokerage business as to the first nine months revenues are up 23% from our previous nine month high recorded 2014.
I would also note that I am pleased with the contributions from our international businesses.
On the following slide we look at our firm wide investment banking revenue.
Revenue of 218 million was relatively flat with the prior quarter and up 10% year on year driven by record revenue in capital raising overall, the third quarter was our third strongest investment banking quarter much like my comments about our overall institutional business our investment banking.
Business has not only been sustainable on an annual basis, but has grown at a compound annual rate of 20% since 2009 and has more than offset industry headwinds and our institutional brokerage business we.
We will continue to invest in this business as we believe that we can continue to take market share and grow as a premier middle market investment bank.
Looking at our capital raising business in the quarter, we generated record revenues in both our equity and fixed income issuance.
Equity underwriting revenue of 85 million was up 41% year on year and surpassed our prior record by 20% as IPO activity was up significantly from the prior quarter.
<unk> record results in the quarter underscored the diversity of the business. We built that's health care and technology were our strongest contributors, while our largest vertical financials slowed as clients look to raise capital in the debt markets.
Our fixed income underwriting revenues of 53 million was also a record as our public finance business had a strong quarter and the issuance market continued to improve steep.
Steeple lead managed 264 negotiated municipal issues and one once again ranked number one nationally in terms of the number of issues managed through the first nine months. We have lead managed 632 municipal issues, which is up 17% compared to the combined value of Stifel and George came about.
For the same period in 2019.
But also note that although our corporate debt issuance revenues were down from the prior quarter, we continue to benefit from our bankers ability to cross sell services as I mentioned earlier KBW as clients continue to benefit from our expertise and the debt issuance Mark in markets. This again highlights the benefits of our model.
For our advisory business revenue of $81 million decrease by 23% year on year as we were negatively impacted by the slowdown in bank M&A. Following a very strong year in 2019 in.
In terms of verticals the performance of our advisory business was driven by technology industrials and restructuring.
A decline in advisory was expected as the market had been impacted by the slowdown in deal announcement earlier. This year. Following the pandemic that said, we continue to see our clients Reengaging. Our pipelines continue to pick up a bank M&A activity continues to lag the robust levels. We saw in 2019, we are.
Starting to see some green shoots as we recently advised C. I T on their announced sale the first citizens, which will create a bag with 100 billion in assets. Additionally, in the fourth quarter, we advised eastern bank and the largest ever first step mutual conversion.
In terms of our overall pipeline they continue to build and I'm optimistic for our investment banking business overall I would note that the capital raising business is robust yet highly market dependent.
And with that let me now turn the call over to our CFO Kim Ericsson.
Thanks, Ron and good morning, everyone before.
Before I discuss net interest income I'll make a few brief comments regarding our GAAP earnings.
I would note that as we successfully integrated over recent acquisitions, we've seen a continued convergence of our GAAP and non-GAAP results.
This can be seen in what was our second highest quarterly GAAP EPS in our history, which resulted in an order we have nearly 13% and ROTC of more than 20%.
Similar to last quarter, the strong GAAP earnings in the pause our share buyback program resulted in fairly meaningful increases in book value and tangible book value.
Describe in more detail in the following slides.
Now, let's turn to net interest income.
For the quarter net interest income totaled 101 million, which was down $14 million sequentially.
Our results were impacted by the zero percent interest rate environment and elevated levels of cash on our balance sheet.
Our firm wide net interest margin declined to 190 basis points, which was consistent with the banks net interest margin declining to 237 basis points.
Firm wide average interest, earning assets were relatively flat due to a modest increase in our loan portfolio.
I merely due to mortgage loan originations and an 80% increase in our cash position as a result of the debt and preferred equity issuances earlier this year as well as the elevated cash position held at the bank.
We go to the next slide we review the banks loan and investment portfolios.
We ended the period with total net loans of 10.9 billion, which was flat sequentially.
The breakdown of our portfolio skewed to a greater percentage of consumer loans through the end of the third quarter.
Our mortgage portfolio increased by $100 million sequentially as we continue to see demand for residential loans and refinancings from wealth management clients given the decline in interest rates.
Our securities based loans increased in the quarter by approximately $120 million growth and securities based loans continues to be strong as epay recruiting momentum continues to grow.
Our commercial portfolio accounts for just less than half of our total loan portfolio is comprised of senior loans, which declined by 2% during the quarter.
Our portfolio is well diversified with our highest concentration in any one sector at less than 7%.
Well the size of our portfolio declined in the quarter. We continue to focus our lending efforts on credits that have been less negatively impacted by the pandemic and typically have access to the capital markets, including such sectors as manufacturing technology health care and homebuilding supplies while.
While we remain cautious in our approach to loan growth. We continue to look for opportunities to grow our balance sheet with limited credit risk.
Moving to the investment portfolio as you can see the vast majority of our securities continued to be comprised of double and triple play sell those.
We've provided granular detail on the credit risk profile. This portfolio over the last few quarters and have not seen any material change in the underlying credit subordination provided by these securities.
We continue to view these securities as an attractive risk adjusted return and an opportunity to have exposure to the underlying loans with structural credit protection we've.
We have not incurred any losses in this portfolio and even under the most severe stress testing we deployed we do not anticipate incurring any losses.
Turning to the allowance.
We adopted Cecil earlier this year and in the first half of the year, we incurred $35 million of credit loss provision through the piano, which doesn't include the $11 million opening adjustment that ran through equity.
Much of the increase in the first half of the year was driven by changes in macroeconomic scenarios based on the Moodys model, which estimated increasingly severe declines and GDP as well as increasing unemployment.
As you can see on the slide well the allowance for credit loss was essentially unchanged. We did see an increase in the allowance and our coverage ratio on our commercial portfolio, which increased to 2.03% as a result of the defer additional management overlays.
We continue to see strong credit metrics with nonperforming assets nonperforming loans at eight basis points.
While we understand we are still in the early innings of the current credit cycle, we've yet to see anything but nominal charge offs over the last several quarters.
Moving to capital liquidity, our capital ratios were relatively stable during the quarter, our tier one leverage ratio increased to 11.3% primarily on the strength of our earnings and the lack of share repurchases.
Our tier one risk based capital ratio was 19.2%.
Hi declined from last quarter's 19.3% as we had elevated risk weighted asset density in our trading portfolio given some of the volatility we saw earlier in the year.
This decrease risk based capital by approximately 90 basis points look.
Looking forward to the fourth quarter, we would not anticipate any material changes in our balance sheet.
As I mentioned earlier, we will pay off for $300 million five year senior notes when they mature in December given.
Given the timing of the maturity, we anticipate that interest expenses will be modestly lower in the fourth quarter.
Our book value per share increased to $50.95, an increase of $2 or 11 cents sequentially and our tangible book value per share increased to $32.34 up from $30.16.
These increases were driven by strong quarterly earnings and improved marks on our Fs portfolio.
As I noted last quarter, our liquidity position remains strong in addition to the sweep program. The bank has access to off balance sheet funding of more than $4 billion within our primary broker dealer and holding company. We have access to nearly $2 billion of liquidity from cash credit facilities that are committed and unsecured as well secured funding source.
Yes.
I would also highlight that despite another quarter another strong quarter in the equities market. We continue to see an increase in client allocations to cash within our Sweet program. We saw balances increased by 1.7 billion in the third quarter. So.
So far in the fourth quarter client cash has grown another $400 million.
On the next slide we provide for Q guidance and go through our expenses.
In terms of your outlook for the fourth quarter, we would expect net revenues to be in a range of 870 million to 920 million based on strong growth in fee based assets and the robust investment banking pipelines that Ron described earlier.
We forecast the banks net interest margin to come in between 235, and 245 basis points, which is in line with our third quarter guidance.
Barring a meaningful decline in LIBOR, we estimate that our current guidance represents a good estimate for where we see bank NIM stabilizing.
This is based on the fact that our assets are predominantly floating rate and we have limited reinvestment of cash flows from our bond portfolio in an environment with limited options for yield in fixed income.
We expect our firm wide net interest margin in the fourth quarter to come in between 190, and 200 basis points given the impact of the maturity of a five year debt in December.
Given NIM expectations, we expect our Eni in the fourth quarter to be between 101 hundred $10 million, which is in line with our third quarter guidance.
In the third quarter, our pre tax margin improved 160 basis points sequentially to 19.4%.
This increase was the result of lower compensation accruals and the decline in our reserve for credit losses.
Specifically the comp to revenue ratio of 59.6% was down sequentially as we accrued conservatively in the first half of the year and given our clear outlook for the remainder of the year, we feel more comfortable with our overall comp accruals.
As such we are forecasting a comp ratio of between 57.5% and 59.5% in the fourth quarter.
Non comp operating expenses, excluding the credit loss provision and expenses related investment banking transactions totaled approximately 173 million represented less than 20% of our net revenue.
We estimate that non comp operating expenses in the fourth quarter represent between 19 and 21% of net revenue.
In terms of our share count.
Average fully diluted share count was up by 2% as a result of the increased share price some modest issuance related to normal stock compensation practices.
In the fourth quarter, assuming a stable share price and no repurchases, we estimate our average fully diluted share count will be 77.4 million shares.
And with that I'll turn the call back over to Rob.
Thanks, Jim before.
Before I turn the call over to the operator for questions I want to reiterate what I said more than once on this call, which is the diversification of our business. Unlike some of our peers that have more model line business models, we are not solely reliant on strategy such as balance sheet grow or advisory group.
Underscoring thus we've generated three of our top four strongest revenue quarters and are on pace to record our 25th consecutive year of consecutive year of record net revenue the strength of our performance was not limited to the top line as we also generated two of our top four earnings per share quarters and our.
Our annualized EPS through the first three quarters would result in our second strongest annual earnings despite significantly lower and I and a substantial increase in our credit provision as a result of the implementation of Stifel.
As we move toward 2021, I fielded numerous questions about the impact of the elections now less than a week away and the impact on our outlook regardless of the outcome. The short term environment should be favorable for our various businesses as pundits often say don't fight the fed and in this case you shouldn't fight.
And accommodative fed coupled with huge additional stimulus package in.
In conclusion, the diversified business model, we built continues to prove that it can generate substantial and sustainable revenue growth.
While the market the economy remain uncertain given the pandemic in the presidential election, the business. We built over the past 20 plus years, we'll continue to generate strong growth and solid returns over the long term.
And with that operator, please open the line for questions.
At this time, if you would like to ask an audio question you may do so by pressing star and the number one on your telephone keypad again that is star one well pause for just a moment.
Our first question will come from the line of Steven Chubak with Wolfe Research.
Hi, good morning.
Good morning, Stephen.
So maybe we'll start off with a question on cap at all you know leverage ratio, it's ticked up nicely.
Our tier one risk based capital, it's still running a little bit below 20%, but we've seen pretty steady capital build especially with the buyback shut off I'm. Just curious if you can update us on whats your binding constraint at the moment.
What level, you're comfortable operating at on both the leverage and risk based measures and then Ron If you maybe you can just update us on your capital management priorities, given the business momentum that you're seeing and the fact that you continue to accrete substantial capital.
I think first of all we're comfortable.
In our capital position today, I think we've we've often said that as a range, 10% leverage ratio, 18% 17 days first on risk based capital now that can fluctuate goes are hard.
Guardrails those articles are guidelines that we use to manage the business I think we are where we are generating substantial capital.
You have to look both at your adjusted earnings and your GAAP earnings, but when you look at that.
And Oh, I'm comfortable with where we said I think that maybe what's changed.
Now for our process the opportunities that we are beginning to see.
Across the landscape that will support our growth and so we.
We haven't been for a lot of reasons I have.
Yes, many of all almost national best practices with within banks not to be buying back stock, but were seeing opportunities that to deploy our capital at.
Good.
Good returns, including recruiting and encoding.
Well, a number of things across our investment opportunities. So that's how that's how I would answer it well certainly look at dividends and will always be mindful of our return on.
Invested capital in the best way to do it with our shareholders.
No. Thanks for that color and you I guess.
Finished off those remarks talking about recruitment and was hoping to get some more color on the recruiting pipeline. We saw a nice pickup this quarter I know you highlighted some of the seasonal factors that could weigh on for Q, but just bigger picture of what's your outlook for the recruitment landscape and more specifically Ron we've had some.
Remarks hit the tape or press releases of the tape, suggesting that you could have some bigger entrance like JP Morgan enter the space. No curious if you can give some perspective on what you're seeing competitively and how you're looking at combat potentially some disruptors entering that retail space and competing for some of those same advisers.
Hi, Bill.
Jump in the water great. Okay, let's come on and we will look for all in every competitor I am not we have a combination of.
Culture, we are at a wealth management firm that also bank were not a bank that onto a wealth management firm that will explain most of the difference both of our advantage and I think that as I look forward. Our recruiting is going to accelerate from here not decline regardless of who's entering the fray.
So welcome the competition.
Okay, well said and then just one final one for me Ron just on some of the comments you ended with around the election.
She will have to wait a week just to see what the outcome ultimately is but was hoping to get your thoughts on the one how the cap the changes in the tax regime and capital gains more specifically could impact both institutional M&A, but even retail activity or behavior as well and then just some final thoughts on what an infrastructure.
Sure Bill could mean for your immunity business and then lastly, steeper yield curve so tax regime.
Infrastructure Bill impact on Muni, and then just a steeper yield curve.
Well.
First of all it's a tough we have some sense the election within a week.
I think it's a I think as I said in the short run regardless of who wins.
There's there's a pretty accommodative fed and clearly the need for some more stimulus thats going on that's going to help in the short run as it would take a blue wave so to speak meaning the presidency and and the Senate.
So as well as the house, thus far gone if you get the first two.
To to implement a tax change.
I am a little.
You know skeptical even other people have said that would be done on day, one a little skeptical that that you would do tax reform that quickly and the best of what one.
Hopefully a new president wants which is a recovering economy not one where some pundits would argue that that could could stall any recovery and increase in taxes, but I think it's clear that sometime in the administration there wouldn't be an increase in taxes and I think that that's a that's a negative stimulus to the positive but.
But incremental taxes, especially taxes on capital.
It's not good in my opinion for long term economic growth and these are not just small increases in capital or talking about double the rate of taxes on capital formation, and so I think that that is negative to the overall economy clearly.
It'll change M&A valuation Thats just math.
Tax higher here here your free cash flow goes down your IR ours go down your M&A prices go down and so I think the market will adjust to that as it always does but that would take a period if that if that does happen. So overall.
These taxes can you know can be interesting I find some of the incremental rates in some of these.
Some of the states that are very important to the economic activity in this country, even cities like New York, and California is incremental rates with the 12% over 400 and increase the Margo, losing today adoption some of these grades get really.
Well I don't love, there, but I would think some of the most robust our concern about those marginal interest rate so that they can't be good in the long run.
As it as it relates to infrastructure I feel that that is a bi partisan.
Something that I want to maybe only the few items that could get bipartisan support regardless.
Thats, a blu ray wave of split government.
Or you know are red wave.
Which I don't anticipate but but I think that can happen and we are well positioned because you're talking about.
Holes.
No menu of items, which can support rebuilding the infrastructure, which is mostly done.
At the state level through state issue one.
The debt with public private partnerships and AD and hope that you have that and as you can see from our results are.
Our number issues and the number of clients that we have across the country, where the largest not the largest in terms of buying because we don't have is a big state issues, but I see a lot of activity. If we get an infrastructure Bill and again one of the largest public finance departments in the nation so that.
Yes that would that would be a bullish and your last won the steeper yield.
No.
Smiling as deeply steeper yield curve for every financial institution.
Not only we need two things we need to get out of a zero rate environment, because we all have equity yet we're not earning anything on our equity. That's that's kind of a simple way to think for financial institutions, but certainly what compressing them at all many many banks today is the cash flow, they're getting and then the inability to.
Reinvest that cash flow at almost any kind of yield that has the best cost of funding. So that would that would help that would certainly help us rethinking about how were managing our bond portfolio, but I want to note that weren't as we're in a good position there because we buy.
Really that are now has reached sort of on a bottom or a base here without substantial changes in LIBOR floor, because our assets are a substantially floating rate and be we're not seeing a lot of cash flow off of that and that they are a little bit longer to raise duration in terms of cash.
Well, so I think all three of those questions I Hope I gave you the answer but all reasonable would be positive for Stifel.
[music].
Except I think for for tax rates and maybe just to supplement the Stifel steeper yield curve comments I'd also point to the growth in client cash allocations that you've seen over the last few quarters. Obviously, we have a lot of dry powder. There that we can put to work in an environment with a steeper steeper yield curve you'd see some opportunities for us to drive.
Some additional an eye on that.
No. It's a very fulsome response is Ron thanks for taking my questions absolutely.
The next question will come from the line of Alex Blostein.
Hi, Good morning. This is hunter koby filling in for Alex Thanks for taking my questions.
Maybe just on the expense side thinking about the non comp guidance that you guys have given for the fourth quarter of 19% to 21% how run ratable is that.
Typical levels, we think about the jumping off point into 2021.
So we'll come back next quarter with some more specific guidance on how we think about non comp in terms of 2021, but you know we've done a pretty good job of controlling expenses. So far this year. When you exclude some of the items, we've talked about we're been around or just under 20% of net revenues both in the quarter and on a year to date basis.
I think until you really get to a point, where you pick up to a normal operating environment in terms of travel and conferences et cetera.
You really won't see a material change in our expense base and so again, we'll come back in the fourth quarter with some additional guidance on how we're thinking about that for next year.
Got it that's helpful and then I guess, maybe similarly, just on the on the comp side.
Anything to glean from.
The trajectory of this years.
Comp rate as it relates to kind of jumping off point into next year or maybe just bigger picture kind of what the 2020 complete suggest.
Suggests for kind of the overall comp rate going forward with rates, where they are.
You know if you just put the calculator if you if you calculate with and without.
The anti impact can you take the 60, we said between deposit suite grades in our reduction in that I think for the nine months at $65 million. So if you annualize that and then.
And recognize that those are low compensable revenues.
And take out take.
Hey that production and you will see that that.
Dr. <unk> 1.7 to two points of comp ratio depending on what.
What level of comp to revenue what to put on those revenues and so that's the biggest impact on our comp to revenue is the reduction.
And then I might add with that we've had we had we said we weren't going to grow the balance sheet to this pandemic, which which we have and all that we're kind of a wash in cash right now, but that's the biggest impact is.
The mix between.
Principal revenues and Eni.
Got it and can I sneak in one more here on the <unk>.
Correct.
Thanks, just I guess just on the guidance.
For the fourth quarter so.
The mid point, that's suggesting a bit of a step up quarter over quarter.
In the in the N.I. dollars.
Just in terms of kind of the.
Mechanics, and how you're getting there.
Is there anything else going on besides kind of less interest expense as it relates to the debt extinguishment or.
Our debt maturity.
Or is there something on scripts going on that's helping push.
Push that higher yes.
Yes, you make what Youre, obviously going on the first one with the extinguishment of the senior debt. The second one I would talk about we referenced excess cash held at the bank, which has since been moved off to that to the sweep program that really compressed NIM in threeq you by about three or four basis points. So you think about the combination of those two factors.
And the impact on Fourq you if you hold everything constant from Threeq, you you'd be about at the mid point. The other thing I would just say in general our guidance assumes no balance sheet growth and if you think back some of the comments some of the things we're able to do in the quarter. We saw some pretty good momentum in terms of consumer loan growth up over $200 million in the quarter and that was offset by some declines.
On the scene I book, but if you think if we can continue some of that momentum that would be accretive to eni and NIM on top of what we've talked about here and I would just add that.
Not that I think the big takeaway from this call should be there's always a lot of focus on NIM and there should be focused on that but if it's continually declining because you are trying to find out where where NIM is going to settle what we've said on this call. We think that that's where we are with the current yield curve.
And and were library servers, so for going forward and so that you can sort of do that what I focus on at this point is that.
Okay, I want we're focused on how to generate and use our capital our clients and effectively.
Increase eni even in this NIM environment. So I think NIM is finding some stabilization don't like where it is but.
I think its upside from here on them and that we will be looking at increasing eni.
Okay. That's helpful. Thank you very much.
The next question will come from the line of Devin Ryan with JMP Securities.
Hey, good morning, Ron how are you.
Devin.
Good first one here just bigger picture or perhaps some of the technology initiatives and I. Appreciate you guys have been very active kind of launch.
Arms.
Over the past couple of years and additional capabilities.
Some of the capabilities around.
We're getting outside.
Really getting a more holistic picture on your clients' wealth and.
Did we lose you Devin.
Don I wanted to answer that question come back.
Yes.
Operator.
His line is still selling connected Devin if you return. Please press star one again to return to the queue.
Jeff.
Our next question will come from the line of Craig single dollar with credit Suisse.
Thanks, Good morning, everyone Hello, Craig.
So on the Morgan Stanley Eaton Vance announcement, it's looking like proprietary product, maybe making a comeback on captive distribution channels. So Ron I just want to get your perspective on this trend and does it make sense for Stifel to go out there and start looking at and maybe purchase.
Well, you know I think that.
Those are the kind of thing this those comments and I'm not talking about Morgan Stanleys strategy, but.
Oh captive asset management.
Now being our captive.
Pfizer selling proprietary asset management.
Yes ill is what drives a lot of advisors to come to Stifel. We offer an open platform and choice and the best products for the client not necessarily trying to cross sell and to our own proprietary products.
That said I mean, we we see we.
We see opportunities and the asset management space.
Probably be less inclined to be getting into the part of the asset management space. It seems to be disintermediated by T. apps and and the move from.
Active to passive and maybe.
Focusing.
More in the alternative space is where where we see some opportunities. So I think you know look I applaud.
Morgan Stanley or are showing faith in our business and based on the advice model and.
Purchasing.
That would great great company, but I don't feel that we're at any disadvantage not being able to distribute to look to our own proprietary product that back I feel that's an advantage for us when we're bringing advisors to our firm.
No we don't do that.
Got it and then my second wife, and listen I apologize in advance if you covered this but I was I was jumping back and forth between this on another one but this was your strongest advisor recruiting quarter in three years.
Wanted to see if you could elaborate a little more on what was contributing to this result and.
And also more importantly.
Respective on the sustainability and.
Maybe you can provide some on boarding activity comments based on what you're seeing right now too.
You know if it was it was a strong quarter I think that in hindsight, we probably.
So.
Tap the brakes, a little too hard during the whole deal well discussion if you remember and go back we were we were very concerned about that.
About how to recruit and structure and comply with deal well.
We probably took a harder re read of that.
Looking back now and so we tap the brakes and recruiting is like everything you need you need to build back your pipeline and have people in the pipeline. So yes.
Wasn't good recruiting quarter and I expect that to can continue and even accelerate theres going to be like M&A advisory. It sometimes gets lumpy I said the fourth quarter is generally slow or not as an excuse but actually shut down the transfer system for most of the month of December you can't even transfer your license.
Then write off no a lot of people know that so it tends to be a month for your work you all have a two month recruiting quarter in the fourth quarter. So I believe that our recruiting is going to be strong and I think it was down that was going to ask the question about our technology, maybe I'll see if he gets back on the line, but we're putting.
In front of advisors and the strategies that we are doing to.
To enforce our advisor centric model and communicating that in an effective manner both.
Today, primarily virtually.
Bodes well for our recruiting success in the future and I'm optimistic.
Great. Thank you Ron.
The next question will come from the line of Devin Ryan with JMP Securities.
Okay.
Hopefully I'm coming through asking a question about technology.
Technological difficulties here.
I noted the irony [laughter].
Yes.
Right. So if you touched on the virtual recruiting which is great I, just I really want to focus more on some of the capabilities you got it.
Around.
Aggregating outside accounts and just getting more of a holistic picture around clients' wealth and obviously opportunity to potentially compete for.
Your percentage of their wallet and.
What type of.
I guess early results and I get it that this will take time, but early results are you seeing and how are you thinking about kind of the organic growth that exists within existing customers.
Based on the fact that you can do a lot more with them I think moving forward on the back when a technology before you can start to think about other means of growth like recruiting.
Well I looked at it and I think that some of the things that you're talking about it's a broad subject to some of the things that you're talking about are really table stakes going forward.
Financial firms in the wealth management business aggregation and holistic views clients overall portfolios the quoting assets liabilities network their cash flow not only at Stifel, but across to all their retirement accounts and where they may have asked that the trust accounts et cetera is a foundation of what we're doing here, it's taking what we believe.
You bet, it's just not your assets that you hold it Steve fall, it's your assets and liabilities that you hold everywhere and that is the basis for Stifel off track I feel like I'm doing it right. Now you can go to W.W. that you hold that common down most people off track or you don't need to account to do it and you can if you are not breaking any rules anyone on this call go down.
Our motive and try this a very simple way to build the balance sheet and track their cash flow and and that becomes the basis of our digitalization of if I were our advisors are going to give advice and were going to deliver it in a very efficient manner. The other thing.
That technology is very important is going to be a banking services. Our clients have had a crash course in everything from exercising pellets on to Instacart and Netflix They do all things digital I Wonder how many people step physical bank branch in the last nine months so robust.
Deposit capture transcript money moving money.
Friends and your bank branch being or mobile phone has.
Accelerated in the last nine months were already there we don't have any bank branches. We don't have any tellers. We don't we don't operate that way so our investments in technology and we just had our annual meeting last night with all our advisors I can tell you they're excited about what we're putting on the table and its going to not all.
Only help us and recruiting but it's going to help us gather age you out from new and existing clients.
That's okay terrific.
No.
Follow up thank you for the question.
Kevin any other questions there what assets.
[laughter].
[laughter].
Let me squeeze another one in here on.
On topic of regulatory potential changes and.
Just thinking about the potential for change and.
Change administration or even if its a wave all together and your question that we get and I'd love to just get your perspective on is whether the deal well could reenter the picture.
And then scenario or is the FCC, just still far along and.
With the proposed it and is out there.
Really driving the bus now as industry regulator and so that's unlikely.
And that's kind of part one part two is it are there other regulatory items that you're watching closely that are being proposed that that's just good effective business one way or another.
Okay, well and anytime there is a change in administration.
You have to look at regulatory impacts the often you could start with what could fall fall under a CR Ray went to the Congressional Review Act that's the ability to basically I'll overturn any executive branch regulatory item I think enacted within 180 days can you.
Be overturned.
The Reg VI is outside that window Reg B.I. I think is on the books for a while it's a it's a it's a good rule, it's being implemented I think thats going to be any changes depending on who sits at the FCC will be the enforcement of right.
There are some interpretive things that could change the way you enforce that and as it relates to the Dol.
Thats such a political football now I I believe that.
No.
Tom will I don't think its but for us the Supreme Court I guess, a lot of fervor about whether or not.
You're a fiduciary under the 40 Act correct me I could see potentially.
Some changes.
The deal, but then with Reg.
Place I think there will be a lot of pressure to harmonize. The deliverance of served US the department of Labor is not securities regulator, So well see I I certainly believe that we're in a better place the things that there's other things that are going to be coming right.
Torley.
Direct listings the ability.
The debate to raise capital.
Without.
Yes, without an underwriter is kind of at the argument test.
It is one that we have to watch closely I don't think that really impacts our middle market clients I think it's more of a really big client thing, but those those are things that obviously as an intermediary of capital.
Under the 33 Act, we don't want to see that go away.
But again relatively small and so I think the bigger issue thats been a pack financial institution in the next year is going to be actually the amount of business that we have to do restructuring doing M&A and potentially doing an infrastructure bill because of.
But I think it's going to be a lot of stimulus.
Ben you know more of a 2022 2023 issue on some of these regulatory fronts.
Okay terrific well I don't want to press my luck here so.
Appreciate it Ron.
For taking my questions.
Sure.
Our next question comes true participant whose information did not record. Please state your name and your company followed by your question.
Participate your line is open.
Yes.
Yeah.
This is Chris down at Compass point.
Hey, Chris.
Technological issues.
Want to ask a little bit just on the fourth quarter guidance you noticed a strong investment banking pipeline tailwinds from the Phebe side any color just in terms of how you're thinking about the brokerage business maybe color on the environment.
The competitive positioning and is that the key input in terms of the high and the low into the fourth quarter revenue.
Well, let me just let me just start by we wanted we wanted to provide.
Some guidance and and and working a little bit with.
The this great sell side analysts care I mean, a lot of Lois and of our guidance are higher than what everyone.
Doing and so part of it is as to just try to to level set where we where we said today and I think that was the purpose of that and hopefully.
I know everyone will take note of that as it relates to the gives and takes.
I believe that Thats, a good asphalt we see investment banking pipeline strong capital raising a strong but as I said in my prepared remarks that.
Capital raising is happening very fast and very market dependent.
Same with brokerage and wealth management and so why why I don't want to go much further than that I believe that the back half of the core IP. After November 3rd is really highly uncertain right now as to how the markets would react to the various outcomes that could occur.
On the election, and not including I, certainly hope it doesnt happen, but any social unrest or chaos some assets election could could really potentially put the markets at a position where you saw some.
Some of this activity that's going on so I don't have a strong window, if everything stays the same today.
Things look good, but I want to be cautious about what could change very quickly.
Effectively a week from today so.
So that's probably the best I can get for you on that.
But I'd be very confident about what we're doing.
If there is no change in the environment as we sit here today in fact I'm very optimistic.
Got it thanks guys.
And with that we are showing no further audio questions I'll now turn the conference back for closing remarks.
Yes, I think that first of all thank you I guess my last closing remark is I've I've had I've had a few questions about.
All the momentum and our stock I feel that Steve both stock our shareholders appreciated we we've narrowed the gap in our earnings multiple discount.
Even there you know I wouldn't know that trailing 12 basis. Our earnings are about you can add them up or $6.22 and that's after taking a nearly $40 million credit provision.
So we still trade.
Under 10 times earnings and it's more of a two turns below and I'm, hoping that that that we all look at relative valuations.
Relative to our return on capital and relative to our growth that we've demonstrated frankly over the last two decades, and so with that claim.
I'm pleased with our progress I wish everyone.
A safe everything and go vote. Thank you.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
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