Q4 2020 Stifel Financial Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year results Conference call for Stifel Financial Corp. All lines are currently in a listen only mode. After the speaker's presentation. There will be a question and answer session. If you'd like to ask a question with all time you may do so by pressing star and the number one.
On your telephone keypad.
As a reminder, today's conference is being recorded.
It's now my pleasure to hand, the conference over to Mr. Joel Jeffrey. Please go ahead Sir.
Thank you operator, I'd like to welcome everyone to Stifel Financial's fourth quarter and full year 2020 financial results Conference call I'm joined on the call today by our chairman and CEO, Ron Kruszewski, our co presidents, Victor and EC and Jim <unk>, and our CFO, Jim Morrison earlier.
Earlier. This morning, we issued an earnings release and posted a slide deck to our website, which can be found on the investor Relations page at Www Dot Stifel Dot Com I would note that some of the numbers. We stayed 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'd remind listeners to refer to our earnings.
Lease and our slide presentation for information on forward looking statements and non-GAAP measures. This audiocast is copyrighted material by 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.
Thanks, Joe Good morning, and thank you for taking the time to listen to our fourth quarter and full year 'twenty and 'twenty results.
I'm going to start the call by running through the highlights of our results before turning it over to our CFO, Joe <unk>, who will take you through our balance sheet and expenses operator, I'll then come back to discuss our outlook for 'twenty and 'twenty, one and my concluding thoughts.
With that let me turn to our results 2020 marks Stifel 130th anniversary and also the best year in our history Stifel net revenue increased to a record $3 8 billion and earnings per share totaled $4 and 56 assets both up.
12%, while return on tangible equity was 25% the company's two operating segments global wealth and institutional both achieved record revenue. We continued our strategic growth initiatives by integrating the six acquisitions, we closed in 2019, while continuing to grow.
Our business through investments and both talented individuals and technology.
The fact that Stifel recorded its 25th consecutive year of record net revenue against the backdrop of rapidly changing and volatile market conditions illustrates the diversity and balance of our business.
Illustrate let's look back on our 'twenty and 'twenty results as compared to our original guidance issued in January of 'twenty and 'twenty.
So turning to slide two as you can see back and the beginning of 'twenty and 'twenty, we forecasted net revenue of $3 five to $3 7 billion, which at the time was driven by NII growth of approximately $50 million and $125 million and incremental revenue from the.
And Additionally, we expected revenue growth from investment banking, driven largely by advisory revenue S. K B W was anticipating another strong year of bank M&A on the expense side, we targeted compensation of 57% and 59% with non comp expenses of 19% to 20.
And 1% both as a percentage of net revenue so what happened well as we all know the pandemic materially changed market conditions, while also presenting us with the challenge of protecting our employees yet maintaining client service levels, all while working remotely.
And March market volatility increased significantly the U S economy contracted the government provided nearly four trillion of stimulus two nine at the time and the federal reserve cut interest rates to effectively zero with negative real rates also ramping up quantitatively.
Thanks.
How does this impact our 'twenty and 'twenty result, compared to what we thought at the beginning of the year well, let's first look at the items that were negatively impacted.
As a result of the zero rate environment. Our net interest income came in below the midpoint of our forecast by approximately $140 million with our bank net interest margin more than 70 points below the low end of our guidance lower rates also weighed on our asset management piece and feeds from our <unk>.
Third Party Bank program declined an additional $25 million. In addition, our asset management fees were negatively impacted by lower market levels.
On the investment banking side, a surge and volatility and the significant contraction of economic activity negatively impacted our advisory business, particularly in financials and technology verticals as well as our fund placement business taken alone. These factors should have led to a decline in 'twenty and 'twenty from our two.
2019 revenue however, the diversity of our business model enable us not only to post another record year, but to surpass the high end of our guidance. How did this happen well first on the revenue side, we were able to quickly transition our staff to remote locations, which allowed our traders to take.
And to the spike and volatility and the first and second quarters, which drove our record brokerage revenue second the performance of our 2019 acquisition was slightly better than we expected third our investment banking business benefit benefited from the strength of our health care franchise, which more than offset.
That the weakness and financials on the expense side the decline in net interest income did drive up.
<unk> up a higher comp ratio, but our expense discipline drove down non comp expenses below our guidance.
So the diversity of our model to changes and market environment not only resulted in our 25th consecutive year consecutive year of record revenue, but also our fifth consecutive year of record earnings per share move.
Moving on to our fourth quarter results, we had record net revenue as we surpassed $1 billion and quarterly revenue for the first time. This was driven by record investment banking revenue and our second strongest quarter and global wealth management, the growth and revenue and our focus on expense management resulted in record non-GAAP EPS.
And $1 67, and an annualized return on tangible common equity of more than 33% and.
It's one way of expressing our confidence and our future, we announced a 32% increase on our quarterly dividend as well as splitting our stock three for two.
Turning to the next slide as I stated our fourth quarter net revenue totaled $1, 60, which was which was up 12% compensation as a percentage of net revenue came in at 57, 9%, which was below our recent guidance range I'll, let Jim speak about this in greater detail, but this was essentially due to the.
And of our revenues, our operating expense ratio, excluding credit provision and investment banking gross ups totaled 16, 9%, which came in below our guidance on expenses due to the strength of our revenue and strong expense management for.
For the second consecutive quarter, we had essentially no increase and our credit loss provisions and this was the result of continued improvement and the economic factors that drive our seats for models that was offset by additional provisions tied to loan growth altogether compared with last year's record fourth quarter earnings per share.
We're up 33% pre tax margin, nearly 24%, which increased 330 basis points annualized return on common equity as I said over 33%, which increased 340 basis points and our tangible book value per share increased 21%.
Moving on to our segment results and starting with global wealth management fourth quarter revenue totaled $575 million up 9% sequentially. The increase in the quarter was driven by the expected strength and asset management fees, which increased 8% sequentially as well as a 14%.
<unk> will increase and brokerage revenue due to growth and corporate debt equity and private placement commissions for the full year. Our wealth management revenue is up 3% to a record of nearly $2 2 billion again. These results were achieved despite the fact that our net interest income and sweep fee income declined approximately.
<unk> $96 million.
Excluding this impact our full year wealth management revenue increased 9% again, driven by strong growth and our brokerage and asset management revenues, both of which reflect strong recruiting and markets.
We finished the year with record client assets total assets under administration were more than 357 billion and increase of 32 billion from the prior quarter and fee based assets of 129 billion, which rose, 12% sequentially, which should drive another strong quarter of asset management and <unk>.
Revenue and the first quarter.
Moving on to our recruiting I want to highlight our year on year growth rates are assets under administration and fee based assets were impacted by the sale of Ziegler capital markets, specifically are fee based assets, excluding the ziegler sale increased 22%.
The next slide highlights the strength of our recruiting and the investments we've made into our platform.
We had another good quarter in terms of gross advisor additions. Despite what is typically a seasonally slow period of the year in the fourth quarter. We added 32 financial advisors with total trailing 12 month production of $22 million a recruiting performance. This quarter is a continuation of our successful recruiting efforts.
Since the beginning of 2019, we've added more than 280, new advisors that had trailing 12 month production of $221 million.
Moving on to our institutional group. They also had an outstanding year for the full year, we generated record net revenue of nearly $1 6 billion, which is up 30% from last year. Our results were driven by capital raising and brokerage which were both up roughly 50% from last year.
<unk> for the fourth quarter net revenue totaled $489 million up 25% from last year, and driven by more than a 35% growth and both capital raising and brokerage 'twenty and 'twenty underscored the value of the diversified business model. We've built and you can see from the chart on the bottom of this.
Slide our business model helps to provide more consistency to our revenue during changes and market conditions and we expect this to continue into 'twenty and 'twenty one.
Moving on to our institutional equities and fixed income businesses I'll focus my comments on this slide on the brokerage business and discuss capital raising on the investment banking side equity brokerage revenue and the fourth quarter was up 51% year on year as activity levels increased and we benefited from solid trading gains for the.
All year, we generated record revenue of $257 million, which increased $90 million from the prior year, while market volatility and 2021 will likely be lower than in 2020, we expect to see increased contributions from our electronic businesses, which include our Ats and algo products.
Fixed income brokerage revenue and the quarter was up 26% year on year and was our fourth highest quarterly revenue ever all of the top four actually occurring in 2020 on.
Our full year revenue of 405 million surpassed our prior record set in 2016 by 34% our results continue to be driven by activity and investment grade high yield rates and municipal I would note that we are also seeing solid results from our non CUSIP businesses as well, which we have been inverse.
<unk> and for the past few years on the following slide we look at our firm wide investment banking revenue.
Revenue of 338 million surpassed our prior record from the fourth quarter last year by more than 22% driven by record capital raising and advisory revenue.
Equity underwriting revenue of $111 million was up 58% year on year and surpassed our prior record by 20% the record results and the quarter underscore the diversity of the business. We built as health care technology and Spacs were strong contributors are fixed income underwriting revenue of 53.
And was up modestly from the prior quarter as our public putting on.
<unk> business had a strong quarter. Despite what we saw as low activity levels and November which we believe was due to the election for the full year. We lead managed 929 issues, which is up 17% versus 2019, given our market position and the possible.
Do you have an infrastructure Bill from Congress and 2021, we believe that public finance should have another strong year.
For our advisory business revenue of $173 million more than doubled third quarter results in terms of verticals are top performers, where technology and consumer as well as another solid quarter from our restructuring franchise in terms of our overall pipelines. We entered 2021 at levels that we're at.
And that are above where we had pipelines and 2020 at the beginning of 2020 and as such I'm optimistic for our investment banking business overall.
So with that let me now turn the call over to Jim Bearish, and thanks, Ron and good morning, everyone.
Let me begin my let.
Let me begin by making a few comments regarding our GAAP earnings and the quarter, we generated the highest GAAP EPS and our history.
And 55, which.
Which resulted in and return on equity of 20% and our return on tangible common equity of nearly 31% similar to last quarter, the strong GAAP earnings and the quarter and the pause on our share buyback program resulted in fairly meaningful increases and our capital ratios levels of excess capital book value and tangible book value that I'll describe in more.
Detail and the following slides and now let's turn to net interest income.
For the quarter net net interest income totaled $105 million, which was up $4 million sequentially and at the middle of our guidance our firm wide net interest margin increased to just under 200 basis points and our banks net interest margin improved to 239 basis points.
Both net interest income and net interest margin benefited from the remix of bank assets between our securities portfolio and our loan portfolio.
And our ability to continue to grow loans and the limited cash flow coming off of our securities portfolio. We continue to believe that we've reached a level of stabilizing them and have the ability to continue to grow net interest income we.
We'll provide more detail on this topic later in the presentation.
Moving on to the next slide we review the bank's loan and investment portfolios. We ended the period with total net loans of $11 2 billion, which was up 4% from the prior quarter we.
And we saw growth on both the commercial and consumer portfolios.
Our mortgage portfolio increased by $150 million sequentially as we continue to see demand for residential loans from our wealth management clients given the overall low interest rate environment.
Our securities based loan portfolio increased in the quarter by approximately $90 million growth and these loans continues to be strong as equity recruiting momentum continues to drive increased loan balances and this lending channel.
Our commercial portfolio accounts for 46% of our total loan portfolio and is comprised primarily of C&I loans, which increased by 3% during the quarter.
Our portfolio is well diversified with our highest sector exposure in financials and 8%.
Moving on to the investment portfolio, which continues to be primarily comprised of AAA and double Acos and.
We've not seen any material change and the underlying credit subordination provided by these securities and continue to be pleased with their performance.
We had a modest increase in the quarter and MBS and corporate securities, but this was driven more by our short term liquidity management program, rather than any change and our overall investment strategy.
Turning to the allowance during.
During the fourth quarter. The allowance remained essentially unchanged as the impact of loan growth was offset by the overall improved economic outlook.
Both our commercial and consumer allowances and coverage ratios did experience a decline on a sequential basis that was partially offset by the overall increasingly allowance on construction and CRE loans, which did see an increase and the severity of the economic variables and our model during the quarter.
That said I would note. This is a relatively smaller exposure within our overall loan portfolio.
In total our commercial portfolio had a coverage ratio of 194 basis points, while our consumer coverage ratio totaled 32 basis points.
We also continue to see strong credit metrics with non performing assets and nonperforming loans at seven basis points.
And we understand we are still and the early innings of the current credit cycle, we've yet to see anything but nominal charge offs over the last several quarters.
Moving on to capital and liquidity.
Our capital ratio has improved during the quarter on.
Tier one leverage ratio increased to 11, 9% primarily on the strength of earnings and the lack of share repurchases our tier one risk based capital ratio was 22% up from last quarter's 19, 2% the.
The improvement and our capital ratio since the first quarter has led to more than $500 million of excess capital.
As we look forward to 2021 based on our guidance that Ron will discuss in greater detail later and presentation, we estimate generating more than $600 million of incremental capital.
Our 300 million dollar five year senior note matured on December one and resulted in a little under $1 million reduction and interest expense during the quarter.
We estimate that the full quarter interest expense savings will be approximately $2 6 million.
Our book value per share increased to $35 91.
And increase of $1 94 sequentially and our tangible book that our tangible book value per share increased to $23 58.
Up from $21 56.
These increases were driven by strong quarterly earnings and improved marks on our securities portfolio.
We continue to feel good about our financial position as our liquidity remains strong and addition to the nearly $7 billion available on our 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 on liquidity from from cash and credit facilities that are committed and unsecured as well as secured funding sources.
I would also highlight that similar to what we saw on the third quarter. We continued to see an increase and client allocations to cash despite the strong performance and the equity markets within.
Within our Sweet program, we saw balances increased by nearly $2 5 billion and the fourth quarter, So far and the first quarter client cash is grow and another $300 million.
On the next on the next slide and go through expenses and the fourth quarter, our pre tax margin improved 440 basis points sequentially to nearly 24%.
The increase was the result of strong revenue growth lower compensation accruals and our continued expense discipline.
Specifically, our comp to revenue ratio of 57, 9% was down sequentially and came in below our recent guidance of 58, 5% to 59, 5% due to the strength and composition of revenues primarily within the institutional group.
Non comp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $179 million and represented less than 17% of our net revenue.
And this was also below our recent guidance and similar to the lower comp ratio was due to stronger than expected revenue.
In terms of our share count our average fully diluted share count was up 3%, primarily as a result of the increase and our share price and with that I'll turn the call back over to Ron to discuss our outlook for 2021.
Thanks, Jim.
So what drives our growth and 2021 look 2020 was nothing short of a remarkable year, considering all the challenges and the frankly the value of our diversified business model was proven as we generated record results. Despite very a very different operating environment.
And then the one we had forecast our success in 2020, and our history of profitable growth gives us increased optimism for 2021 as our guidance implies another record year for Stifel.
Obviously any forecast have assumptions about economic activity and market conditions, we believe that equity markets in terms of the S&P 500, while generally trade between 30, 604000 and trading activity, both equity and debt to remain robust overall the fiscal <unk>.
And monetary stimulus is good for economic activity, coupled this with a diminishing drag of the pandemic, resulting from vacs vaccinations and one has a recipe for a strong possibly very strong GDP growth and 2021.
The thing to consider would be and increase in inflation and bond yields, which would moderate valuations and of course and increase and bond yields or a steepening of the yield curve would benefit would be beneficial to financial like Stifel on.
On the wealth management side, we entered the year with record fee based assets are very strong recruiting pipeline and substantial excess capital assuming equity markets stay at current levels, we expect growth and asset management revenues and continued solid contribution from our brokerage business. Additionally, we are more.
Comfortable with the credit environment, and we believe that we have opportunity to grow our bank balance sheet by up to $2 billion and 'twenty 'twenty. One recruiting has been and will continue to be a key driver and the growth of our wealth management franchise.
Key aspect of our recruiting success is the investments that we've made and technology and improving our digital platform.
Two years ago, we set out to significantly improve our client facing technology with investments and our reporting capabilities and our own client app called wealth tracker. The strategy is working by continuously connecting our advisers and their clients. We are now better able to help families organize and track their financial matters exactly.
The way they want to looking ahead, we have plans to delever, even more convenience by allowing clients to seamlessly interact with all their wealth management banking and borrowing capabilities on.
On the well on the financial adviser front, we've also been making investments to deliver the next generation of wealth management capabilities, our workforce to tools helped deliver of efficiency and convenient E sign integration robust remote capabilities allow us to extend the full branch toolbox to wherever our advisers work.
Our leading portfolio reporting platform allows it buyers and advisors to deliver family office level insight and analysis. We've recently rolled out fully integrated video conferencing capabilities to meet the new demand new text message collaboration tools are in the works and this year, we will implement a CRM platform.
That will further enhance the branch experience and the office of via mobile.
One area of technology that we are not focusing on its free online trading Stifel is and advice driven business and we are confident that the combination of Stifel advisor centric model.
And culture, combined with leading edge technology will drive recruiting and net asset growth that said I believe the introduction of millions of new investors. So the use of pre <unk>.
Trading apps bodes well for the advice model and years to come.
And our institutional segment, we anticipate our results and 2021 should be relatively similar to our 2020 results. We've spent the last several years improving the diversity of our institutional investment bank, along with adding best in class talent and on the tail of last year's record result, 2021.
Off to a good start we expect there will be some rotation and the verticals that drive the market. This year and our diversified model is well positioned to capitalize on changes and the market environment. We expect to see continued strength and underwriting activity as demand for capital raising remains strong we also.
Our advisory revenue to improve as we forecast improved results and some of our largest verticals such as financials and technology in terms of bank M&A, specifically I would note that K BW advise on three of the top four bank mergers in 2020 and two of them are scheduled to close.
And 2021, we also expect improved advisory revenue.
From our fund advisory business as well as our restructuring practice, which had C, which should see some of its long dated mandate mandates close and 2021.
In terms of institutional trading while we're off to a strong start to the year. We don't expect the same level of market volatility and 2021 that we saw in 2020, which could result in lower market volumes that said, we have a number of new products and both equities and fixed income that are gaining momentum and we anticipate.
Another solid year for our trading business. Additionally, I would note that the investments we've made and our fixed income business have resulted and our ability to offer bulge bracket level, a bulge bracket level product the value of our services has been recognized by our clients and Stifel as the only non bulge bracket firm ranked.
Institutional Investor top 10 globally and more impressively within credit research, we ranked in the top five for both investment grade and high yield research. So while market volatility may impact overall trading activity, we believe our product offering will enable us to generate strong results.
Before moving on to expenses I want to highlight our expectation for improved contributions from our international businesses, we have been investing and greater international capabilities for the past few years and while they have been essentially breakeven as we improve scale, we expect our international business to be contributors.
And so our Bottomline and 2021 on <unk>.
Ben side, we believe that our disciplined approach to expense management will enable us to hold our ratios and relatively stable levels. We do expect to see some comp benefit in terms of our comp to revenue ratio from an increase on our net interest income and some increase in non comp expenses.
As we see travel and entertainment cost picking up and the back half 2021.
That brings us to our guidance for 2021 on slide 16, we expect net revenue to come in between three eight and $4 billion. This is approximately 100 or $300 million above the current street estimates and we believe the growth drivers I reference we're producing another record year of net.
Revenue, we are forecasting balance sheet growth of up to $2 billion, and 2021 and stable to increasing net interest margin, which should result in net interest income of between 450 and $500 million on the expense side, we believe that our disciplined approach will enable us to hold our ratios at <unk>.
Relatively stable levels in terms of compensation expense, we estimate a range of 58, 5% to 65 on.
On our non comp operating ratio forecast that and 18% to 20% should benefit from our expected growth and revenue.
The last thing I want to underscore is that Stifel is a growth company and our confidence and our outlook is not only based on current market conditions, but our track record of consistent and profitable growth.
And you can see from the table on the bottom on the slide we have a proven track record of substantial revenue and earnings per share growth that surpasses that of our peers, while our revenue growth has been better than our peer group and highlight the fact that our 259% earnings per share increase is more than double.
The average of our peers.
Despite significant absolute growth and both revenue and earnings per share.
Note that the current consensus consensus revenue estimate for next year is down compared to 2020 actual results now I don't want to jinx it but if that is the case it would be the first time and 2006 years that our revenue declined. Additionally, as a result of the decline and forward revenue estimates.
Our consensus EPS is down 3% from 2020 expectations and actually down 10% from our actual results.
And while our peer group is expected to see an average increase of 12%.
This doesn't make much sense to me given that we are all generally impacted by some similar market environment as well as Stifel tracker and a strong long term performance.
Given our record of growth and relatively modest and relatively modest expectations for us I believe our current valuation remains attractive.
Now before I turn the call over to the operator for questions. Let me just close by saying that I believe the outlook for Stifel is as strong as I've seen and my 25 years as CEO. The investments. We've made have generated increased scale on our business and made us more relevant and makes us more relevant to our clients.
Our pipelines for investment banking and recruiting are robust and we will continue to drive growth and lastly, we enter 2021 with substantial excess capital that will allow us to not only continue to return capital to our shareholders, but to continue to invest and growing and are growing our business and always be and.
On a position to take advantage of opportunities and.
And with that operator, please open the line for questions.
As a reminder, you may ask and audio question by pressing star and the number one on your telephone keypad again net of Star one we'll pause for just a moment.
The first question will come from the line of Ben and Ryan with JMP Securities.
Great. Good morning, and are you.
Ron.
So.
Just first question here I wanted to dig and a little bit more on.
The expense guidance and appreciate all the color that you provided but if you can give us a little more.
Color on how to think about maybe the absolute levels of non compensation and note that if you apply.
The range the revenues and it's a pretty broad range and I left you can help us maybe think about the absolute level I know.
$193 million.
Past quarter, so how to think about that relative to maybe some acceleration post pandemic and then.
On the comp ratio just the type of revenue environment that would put you towards the top end of that versus the bottom and.
Solid Jim.
Get into a little bit of the details on the comp to revenue. It is it is mix and level of business.
So obviously as we increased net interest income and Conversely, if we do.
Drive the kind of operating revenues that we believe as possible and that's going.
And to drive that comp ratio lower.
On the same things sort of applies to fixed expenses.
The extent that there are over.
The.
They are spread over a higher revenue base so.
To me, it's take 18% to 20% and times of low end of our range on the middle and have a range and the high end of our range and you'll get our absolute estimate non comp Opex, yes, I think Ron touched on a few of the details in his prepared remarks, obviously you were anticipating some pick up and more of a return to normalized levels for conference.
Tier type expenses really and the back half of 2021, and I think as well as we continue to recruit financial advisers and investment professionals are professionals within the institutional group you are going to see some growth on the occupancy and line as well as the communication expense line item that says we should see some benefit on the commission floor brokerage line is.
Well, if we are projecting some declines and that associated revenue line item as well as some of the cost savings and we're going to see with the the Ats product.
So I think that that.
And that kind of summarizes some of the puts and takes there.
Yes, Okay. That's helpful. Thanks, Jim and then just a follow up here a couple of parts in terms of the.
The 2 billion or up to $2 billion and bank growth and what type of incremental yields are you seeing and the.
The market across some of the products that you may.
It looked to expand here just trying to think about and maybe the stabilization or potential uplift on the NIM.
And then obviously, if we apply capital to that type of growth based on the amount of capital excess capital you have today and the capital.
And we expect it to be generated over the next year bank growth.
And we absorbed a small portion of that so just trying to think about other uses of capital and maybe Ron your comment about the stock.
And that May play and as well.
Great.
And I'll, let Jim and Jim come to the yield.
And we.
As it relates to use of capital we've always said that we.
And we will use our capital and various buckets, depending on risk adjusted returns.
We can and it's our dividend.
Return on capital versus via share repurchase is valid.
And to allocating capital to grow the bank.
And its acquisition.
And we've always said, we're opportunistic and Devin I'd like to point Ben.
Two to answer that question over last year and the previous share is what we've done in our return on tangible equity is 25% and I think that that capital management strategy that we do is proven out and those numbers and so we.
And I am certainly.
Always looking at the fact that we should buy back stock to buyback dilution from employee based grants.
And that's always on our list, but after that it depends on the environment credit spreads interest rates spreads acquisition opportunities and all of those things, which.
We are as we always are opportunistic to the market and what we think the risk adjusted returns are and Jim as it related to the market and so in terms of yield and the opportunity with NIM and the prepared remarks, we talked a little bit about the remix bonds and loans and I think the real simple math. There is if you look at the yield table our loan portfolio is yielding about 100 days.
And this points north of the bond portfolio, so call it a little over $2 80 versus around 180 basis points and then if you kind of drill down further some of those are a larger opportunity for yield expansion and the C&I book is north of 3% angles, we're on the $3 one 1%.
And in the current quarter so.
Finding costs of a couple of basis points I think you kind of get a sense for what that could mean in terms of additional $2 billion of balance sheet growth.
That could involve some additional growth within the bond portfolio and today I'd say, the CLO book and it would be yielding around 2% or just under 2%. So you can kind of take a mix of those.
And as different asset classes and apply roughly speaking that $2 billion of growth.
Yes that makes sense, we will really appreciate it guys I'll leave it there, but thank you for the comprehensive outlook very helpful.
The next question will come from the line of Chris Allen with Compass point.
I was wondering if you could comment on the competitive dynamic and the recruiting environment yesterday.
A large competitor yesterday, just noted health challenges suddenly employee side and.
And their plans to kind of ramp up their transition assistance that just I'm wondering how you're thinking about that and.
And expectations for future change.
Well recruiting.
And it's always competitive.
So not not sure who you're referring to.
And I don't want to get and other management.
Discussions I would like to think that one of the reasons that Scott and very competitive is that we've got very active and so I think where we are.
Adding to that competition not not on the financial transition aspects of it but just on our overall offering.
We hired a very large team this morning.
And that will be announced as you can see that on our so our recruiting is robust and.
And my.
My perspective is that I hear a lot of times.
And I never hear about anyone who's, saying, they're playing above market.
And I only hear about everyone and a lot of people staying there.
Sure.
Paying below market, yes, when we're on competitive situations and it seems like everyone's paying and saying so.
And that everyone is paying the same sort of competitive I would say it's elevated today.
Versus maybe historical average but.
The overall.
And im not going to say that that that's negatively impacting our recruiting it sometimes.
Impacts are expected.
Return on investment over 10 years, but there's a whole bunch of factors that go on to that so about recruiting and competitive.
We welcome the competition.
And it makes us a better firm and.
And I'll just leave it at that.
Got it and just one quick follow up.
Any thoughts on on.
And just for regulatory changes, obviously, new administration, new FCC had coming in and.
Some craziness going on to the direct retail world at the moment. So how are you thinking about the the radio channel.
And you can.
Expected changes there thanks.
So that's a long question or a long answer to a complicated question.
At the highest level, we do expect regulatory changes to occur I would note that in my 25 years of being CEO.
Through two Democratic administrations to Republican administrations.
Dodd Frank GAAP.
Implementation and all the rules regarding Basel, all that stopped and now were and what will be the third Democratic.
Administrations I think about it on the Treasury Secretary side, I know Treasury Secretary Yellen, and all are quite well.
And I think she is very bright.
And from my perspective.
She has proven over time to be garbage I think she'll be supportive.
Higher spending.
I think she said go big.
And so we need to factor that into.
Our view of market conditions with.
Somewhat on that position and being very supportive.
The big Big stimulus.
And probably bleeds over to the federal reserve that will continue quantitative easing that goes to my remarks as to why I think 2021, we will see strong GDP growth of course this trade eventually balances and.
<unk> be some reckoning at some point, but I don't think it's on 2021.
Gary Gensler, I don't know that well I would say that the FCC is going to increase enforcement look at a number of rules.
Probably including by <unk> on the books it needs to be changed through the administrative procedures Act.
And it's relatively difficult and time consuming to do so I expect that there'll be some additional guidance and and enforcement, but and the and I think that.
<unk> is a good rule properly implemented that.
And we'll just see some more.
And the enforcement.
Last question about what chemical potentially happen now.
And so on this online trading.
It's Chris I don't think it's a phenomenon and I think it's been going on for 100 years.
And it's short squeezes happened.
GAAP and prior to the formation of the FCC and they've been going on.
For for some time and when you see markets shutting down.
And simply shutting down people, saying, we can't take by orders that's not system problems. That's the system working.
The clearinghouses.
Primarily DTC and.
And the options clearing corp, calling these firms and saying hey, we need more large on the systems at risk and.
And and.
And firms, especially maybe newer firms or with less capital. They will they will shut down whatever side of the trade is driving our margin requirement and thats. What I think is going on and ultimately there's going to be some questions over time I believe about the game of vacation of trading and.
And whether or not you.
Using AI to encourage behavior triggers some best interest rule and that will be that will be a debate I personally hope that we don't try to.
To curve.
<unk> selling or curb any kind of trading we have the best and B markets and the world. We just have to make sure that what's going on.
On front running our market manipulation, but I think we said, we'll get to the bottom of that so we will get through that.
Sure.
And classic short squeeze and going on.
I would note that this trade isn't done over and done yet either when this all gets set and done there'll be a balance of winners and losers and the losers I can assure you will not just be the shorts and theyre going to be some longs that bought the stock.
And we wonder what happened and that money.
But none of that.
Thanks, guys.
The next question will come from the line and Stephen Chewbacca Cool great.
Hey, good morning, Ron.
So wanted to start start off with a question just on the fee pool outlook.
You talked about the fact that you are coming into this year with higher backlogs and you did a year ago period.
So it certainly would support a more constructive outlook just in terms of investment banking revenue I'm curious what your underwriting just in terms of like industry fee pool growth expectations I mean, just given the.
The share degree of strength that we saw and ECM and particular I think expectations are that as that normalizes, there could be a pretty meaningful reset. So I was hoping you can give us some perspective in terms of what your expectations are for the broader industry and maybe some idiosyncratic factors that could drive greater resiliency and your particular business.
Well first of all I think.
One of the greater resiliency and our business is as I've said, a number of times is the diversification on our business as I said we started.
2020, and view that told me and Im not saying, our big vertical had a good year, but we thought it was going to be a much better year. We thought the net interest income was going to be much better and on the banking side with on our fund business and it turned around and that those businesses underperform underperformed relative to our expectations and then other.
Articles, such as health care capital raising.
As a segment of what we're going on.
And what what's going on with <unk>, but that can also change type yields on a number of things those things all picked up.
Joe The first thing I want to say is that as we look forward.
One vertical could slow down and and.
And in fact, we expect financials to pick up.
As we look at backlog and activity as it relates to the overall industry and what I see I think it's I think it's pretty clear that when you put.
Assuming a trillion nine of stimulus gets put into the economy.
Assuming that the fed continues QE and at some level that they've been doing and that was quite substantial and that is that's a recipe for berry.
Robust economic growth and when you throw into that the reshuffling of the economy. That's occurred because of the digitization of many businesses and that crosses all sectors. It's just not technology.
Crosses into transportation across is that the energy and crosses and all of these sectors and what we're seeing is a tremendous amount of economic activity as firms restructure to what's going to be.
And what's going to be what we thought it was going to be and five years, but we accelerated that within a year because of the pandemic and that means the investment banks are very busy and I think are going to continue to be very busy.
Because there's just a lot to do and we are we are very busy I expect my peers are also very busy.
And we benefit because we're not we're not monolithic when it comes to just a product.
We have something can pick up and and we're going to get our share of the <unk>.
Wallet, so I am optimistic and I think that.
In general.
And our people look at the short term over the last six months of market activity as an aberration and I think it is.
Sustainable.
And this kind of.
Fiscal and monetary stimulus fed environment.
Thanks for those insights Ron and just one follow up I had is just on capital management priorities. I know you had touched on this and the response to Devin is earlier question.
And just given the fact that your recent acquisitions are punching above your initial guidance.
How has your thinking evolved around M&A opportunities and your appetite to do more deals here recognizing that you've just integrated six and then Joe.
And separately in terms of the excess capital position you talked about the 500 million and and should we infer that 9% tier one leverage 18% total capital those are targets and you guys are comfortable managing to over the long term.
I think that.
We're always going to manage our capital to appropriate levels, it's hard to just pick a number and say at 9% and <unk> I think that those are all things being equal.
Those are targets that we say.
And can keep us well capitalized keep us.
By our credit and provide.
Market clearing returns on invested capital and that's what we do and we run those numbers.
At any point in time, our viewpoint is is changing at this point, we believe theres going to be some opportunities. We believe that holding some capital is is appropriate because we think the opportunity we have could exceed.
And just either on a special dividend or buying back stock again, we do we will be buying back stock I do have a philosophy of buying back dilution, but.
I know everyone wants me to say, you've got X amount of excess capital and how much are you going to do on buybacks and how much you can do on dividends and I and I would actually tell you if I knew but I don't.
So I do know what our fixed dividend is I do know that we'll buyback some dilution and after that it's going to be opportunistic and based on market conditions and I will say again that I believe that our track record of being stewards of capital and getting returning capital yet earning.
The proper return on equity.
Has proven out.
Thanks, and one final one for me if you'll indulge me just on there.
Guidance. So it certainly came in quite a bit better than what we and just more broadly was forecasting for this year.
Arguably both a combination of better volume growth and you.
You could certainly see the cash build and the balance sheet growth you've seen so far but also greater NIM resiliency on the NIM, specifically you talked about Ben its financials benefiting from a steeper yield curve do you guys have heightened sensitivity to the short and specifically and wanted to better understand what's driving greater NIM resiliency are you going on.
Take more duration risk is it simply higher reinvestment yields on the CLO portfolio, because that's the one piece that we're still struggling to reconcile a bit.
A lot of I think a lot of to me a lot of the NIM resiliency that I say item and let Jim get into the details and Jim I think.
As our portfolio it doesn't have a level of prepayments, which has sort of locked our NIM. We said that two quarters ago, and said that last quarter. So we're not facing tremendous repayments that we're needing to reinvest into a flattish yield curve, which obviously would compress.
NIM.
And then.
That's kind of what I look at Q1.
Maybe expanding a little bit on when we talked about earlier I think the remix is a good portion of that as well when you think about the 100 plus basis point pickup when we were able to grow loans, that's fairly significant and I think thats something that can drive quite a bit of what we're projecting in terms of NII I think there's also some opportunities with <unk>.
And things we're doing around the PPP program is going to help that and I would say the other thing I would just say when we think of interest rate sensitivity and this base case, we're assuming essentially flat rates, but we often get questions about what our rate sensitivity is and I would say.
When we put that disclosure into our quarterly documents, we've historically been very conservative with kind of what that deposit beta would look like we have typically shown about a 75% deposit beta and reality and the last rate cycle that was really about a 30% deposit beta and so and.
And it was very backend loaded so just on a hypothetical 100 basis point increase and rate tier.
You would see NII and net and sweep fees increase about $150 million and I think that's that's not in our base case, but that is another opportunity here with our rate sensitivity.
And Jim what about the curve simply steepens, because I think that most people as base case that they're underwriting at the moment and what's your sensitivity you have.
So and Zurich, but 100 basis point incremental steepening and the curve.
And so thats and have less of an impact on us I think I'd go back to it's just the remix out of out of your proportion and your bond portfolio into the loan portfolio because thats, a 100 100 to 100 plus basis point difference right there.
And it gives the steepening yield curve would give us flexibility to manage the portfolio and because of reinvestment rate.
I mean, we're clearly assets sensitive and has a financial institution.
No very fair point and thank you so much for taking my questions.
The next question will come from the line of Alex <unk> with Goldman Sachs.
Hi, Good morning since day, one jacoby filling in for Alex. Thanks for taking my questions just a bigger picture margin question by sulfur margins.
Based on the guidance you guys provided on Chicago is slightly north to south.
And the 20% range.
Representative is that on the run rate margin.
Assuming no rate hikes and.
We have your NII guidance for the year, but assuming a debt.
It doesn't you know appreciate and materially.
Into 2022, so I guess, I'm, saying kind of no significant changes to the balance sheet kind of beyond.
2021.
Representing David is that kind of twentyish percent.
Margin implied by the guidance on kind of B b.
Longer term run rate.
Well I mean.
I think I think it's very representative within the guidance we gave.
So.
If you if you want to take net interest income to zero and I'm not suggesting you are saying that but that margin number would change and.
And so.
We think it's.
Realistic.
And as to.
Whatever numbers, you ran out and where you ran them at the midpoint or whatever but if you if you take our guidance and and apply.
Our guidance across the board.
We believe that that is.
Is certainly.
Representative now if you if you want to and.
Eventually talk about inverted yield curves and things that are not in our base case of thought net.
Negative rates than that I think margins can change on Jim David.
And I would just point to where we've been the last two years as well we've been in the mid 19% pre tax margin range. So that's not a material pickup from what we've produced the last series of years here.
Got it okay that makes sense and then maybe just kind of circling back to the recruiting discussion and.
And just putting some numbers around it if I take a look at the annual trailing 12 month production that you guys have recruited over the last two years. It looks like that number has been somewhere within the $100 million to $120 million.
Production recruited a year.
And any any thoughts on how you expect that to trend over the next couple of years.
I mean I.
And I expect recruiting to accelerate.
Now.
And I know you wanted to say how much and then I have to say I can't tell you but.
And that's what I expect it to accelerate so we can touch on.
And a cut through that pretty quick okay.
Okay.
And then.
Yes.
<unk>.
The next question will come from the line of Chris Harris with Wells Fargo.
Thanks, guys.
So the outlook for 2021, and gosh sounds really good.
Yeah, I guess, the one area, that's a little uncertain as brokerage and you mentioned the prospect for lower volatility.
And how do you think we should be sort of thinking about like the normalized run rate for that part of your business and a lower volatility environment I mean, it feels like.
It should be quite a bit north of.
Where you were in 2019.
But.
Curious to get your thoughts on that.
Again, we don't give guidance as to brokerage and trading what what we've said.
Is that within our overall guidance and as we look at it.
We have.
And.
And at the trading volumes will not have the volatility and so you can read into that as to what you think we're doing with our brokerage line item. We don't give you that line item, but but we talk about volumes being down. We also talk about having new products on fixed income and equity that we're seeing market share gains on.
And so.
Certainly we're not sitting here thinking that.
Brokerage and trading revenues are going to significantly increase and the industry, let alone with Stifel.
And at levels above above.
And that those factors are built into our guidance. So trading volumes could could end up being very good there is a lot going on but I would say overall the other thing that we're even though we see strength and we see strength across other verticals on institutional business as we've said is relatively.
And now flat and.
Our guidance and.
And and.
And if I look over the years and I look at the investments. We've made we've consistently grown that business throughout the series of market cycles. So.
As we've tried and as you look on the last few years.
We tried to provide appropriate guidance and.
And we believe that our outlook is.
And those and of course.
And I hope we exceed this guidance as we did last year.
Okay.
Yes, okay.
Quick unrelated follow up and in equity underwriting.
You did mentioned.
<unk> being a positive contributor.
Maybe you guys can talk to us a little bit about how you're positioned.
To capitalize on specs and and.
David you had a little color about about how big this is relative to.
The overall equity underwriting bucket.
I don't I don't know if we disclose the percentage of our underwriting those back so I guess I can't answer that I think you can look at industry.
Total <unk> and look at what's going on and what's backs I feel that.
We've looked at the facts back when they were getting started and we made an investment believing that the the ability.
For what we would think would be a rush of companies. So the old maybe unicorns year sitting on private equity. We believe that this back merging into a pump company and going public that way we would.
And.
It would be an attractive alternative I think that the business is going to evolve and.
In terms of the whole structure over time and always does.
And I believe that Spacs are.
Ron and they May change.
And again and.
The warrants and the.
And the coverage and how you piece back but.
It's a business that we're part of and we see it as part of making us more relevant to clients. We can we can also do a traditional IPO and we can do on traditional M&A transaction and we can do a traditional 140 for a transaction or we can raise debt for our company. So I look at it and say, yes expect decline will do more IP.
And.
And if or we can do more 144 ace and.
I say that because I just want to illustrate but that capability that we have that allows us to be resilient through market conditions is not capabilities that we had.
Four years ago, I wouldn't have been able to say that and I say that to underscore.
What we've built and why we have some resiliency to changing market conditions.
And interesting thanks.
With that we are showing no further audio questions. At this time do you have any closing remarks.
Hi.
And on my closing remarks is that I would like to thank our investors shareholders saw our analyst community for.
Operating on our calls to my associates to congratulate them on a good a challenging year.
And to everyone on the call.
And I wish everyone to stay safe.
Safe and healthy and.
May 2021.
Prove to be the year that we can look and on.
And near at the negative impacts of this pandemic with that I'm excited to talk to you and the first quarter of 2021 and I hope that everyone has a great day.
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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