Q3 2022 Stifel Financial Corp Earnings Call
Please standby we're about to begin.
Good day and welcome to the Stifel Financial third quarter 2022 financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Joel Jeffrey head of Investor Relations at Stifel Financial. Please go ahead.
Thank you Katie I'd like to welcome everyone to Stifel Financial's third quarter financial results Conference call I'm joined on the call today by our chairman and CEO Ron Kruszewski.
Co presidents, Victor Niecy, and gyms that Mike and our CFO J Merrigan earlier. This morning, we issued an earnings release and posted a slide deck with financial supplement 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 that we state throughout our presentation are presented on a non-GAAP basis, and I would refer you to our reconciliation of GAAP to non-GAAP .
As disclosed in our press release I would also remind listeners to refer to our earnings release financial supplement and our slide presentation for information on forward looking statements and non-GAAP measures. This audiocast is copyrighted material of Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without <unk> without our consent I will now turn the call over to our chairman and CEO Ron Kruszewski.
Thanks, Joe So I guess good morning, and thank you for taking the time to listen to our third quarter results.
People posted a strong quarter as our global wealth management segment generated a seventh consecutive record quarter investments. We have made have diversified our revenue sources and continue to enable us to create solid results despite market headwinds.
First nine months revenue totaled $3 3 billion with earnings per share of $4 17, and we are on track to record our second strongest annual revenue and earnings per share. This book. This performance is despite market conditions that included a 25% decline in the S&P 500 nearly nonexistent.
And capital raising activity and subdued trading markets. Our results prove that our diverse business model is capable of generating consistent top and bottom line results as well as solid book value growth as our year to date tangible book value per share is up 5% and our book value per share increased 3%.
Looking at the details of our third quarter results on slide two revenue totaled nearly 1.15 billion and earnings per share came in at $1 29.
I'd highlight that our pre tax margin of almost 21% was our eighth consecutive quarter with operating margins above 20%, our tangible book value of $29 63 increased by nearly $1 share sequentially and is up 90%. Since 2017. In addition, our return on tangible book.
Equity has exceeded 20% in each year since 2017, and the end is that 21, 5% year to date on an annualized basis as.
As we did last quarter. We included a year on year revenue bridge two illustrates the changes in revenue in the third quarter of <unk> 22, compared to 2021 simply our increase in net interest income was more than offset by by about $100 million by the absence of underwriting and reduced trading.
Looking at our segments Global wealth management revenue increased 7% to a record $702 million with pre tax margins of 40% an increase of 380 basis points sequentially.
Noted earlier the increase in net interest income was the primary driver of revenue growth, while Jim will get into the details of our net interest income later in the presentation I want to highlight that our third quarter NII was up 86% compared to the prior year's quarter and year to date is up 60%.
We continue to invest in our wealth business to recruiting and improving our technology. We now have hundreds of thousands of accounts using our wall tracker App, our advisors are using well tracker to not only deepen our relationships with existing clients.
And we're and to review relationships Holistically, but also to attract new clients to Stifel development of Wild tracker is a great example of our fundamental approach to the business.
If an adviser focused firm that offers a platform and culture that enables financial advisors to grow their business without the bureaucracy that plagues many other firms.
This advisor first culture resulted in steam coal being ranked number two by J D powers and their 2022 U S financial advisor satisfaction survey.
As a testament not only to our culture, but the investments we've made into the business. Our continuous improvement is on display at our J D. Power ranked have improved every year since 2019 imports.
Importantly, we ranked number one in the survey in three categories leadership, and culture customer service and marketing customer service and marketing I would also note that these rankings are based on feedback from the advisors themselves.
Underscores the quality of the cultural we've felt that here at Stifel, which is a vital aspect of our ability to continue recruiting high quality advisors.
Speaking of recruiting we added 36 advisers I would say that recruiting activity remains strong, but we've seen throughout the year that the pullback in market to slow the actual transition of advisors, while also accelerating the retirement of others.
As we look forward to more stable markets, we anticipate meaningful increases in recruiting level. The markets have also influenced our transactional and asset management revenues, regardless, we ended the quarter with fee based assets of 136 billion and total client assets of 365 billion.
Our growth or net new assets increased 6% in both the third quarter and over the trailing 12 months.
On the next slide you see some of the longer term trends within our global wealth franchise as I mentioned earlier, we continue to see the benefits of investing the business through recruiting and bank growth, which has not only led to revenue growth, but also a significant increase in the percentage of recurring revenue.
For the quarter and as and a foundation of our long term strategy 16 experienced advisors joined Stifel at their firm of choice choosing us because of our friendly culture expansive products industry, leading yet simple and fair compensation plans and excellent technology. These new advisors brought trailing 12.
Mass production of $14 million since the beginning of 2019, we've recruited nearly 500 advisors to our platform.
Total trailing 12 month productivity of more than $350 million, our recruiting pipeline remains strong and we are encouraged by the traction we're gaining in the independent channel.
One of the many benefits of our increased NII is the increased percentage of recurring revenue, which adds to greater stability and predictability of results are recurring revenue reached 75% for the first nine months of the year, which surpassed our previous full year high by 900 basis points, we achieved this high watermark while <unk>.
<unk> record revenue in this segment, but it makes us more impressive is that we did this in light of the fact that our asset management revenues, which accounts for the majority of our recurring revenue has been impacted by market valuation.
Our loan portfolio by $1 7 billion during the quarter up 9% sequentially.
Total firm wide assets on September 30, or 37, 6 billion up three 6 billion year to date.
Starting in November we will publish monthly metrics for wealth management. This will include commentary on our business during the month as well as metrics such as total client assets fee based asset client cash balances in total while we believe that by updating the street on a monthly basis, we can now better align expectations with our quarterly results.
Moving onto our institutional group, we built a dirt diversified business that has made us more relevant to our clients and we are well positioned for future growth when the operating environment stabilizes.
As always we will also work to continue for additional growth opportunities.
Quarter revenue was $339 million year to date revenue was $1 2 billion led by record advisory revenue and represented our second strongest first nine months only trailing last year.
However, the 75% decline in capital raising activity across the industry and the reduction of sequential trading volumes have more than offset the strength of our advisory business.
Investment banking revenue totaled 222 million.
Marcus on advisory business for the remainder of the slide and discuss our underwriting business.
On slide <unk>.
Advisory revenue of $167 million, an acceptable result was negatively impacted by delays in deal closing I, particularly highlight the impact that we've seen in our financials vertical as regulators have slowed approval of bank transactions, including a few of our deals while we believe these deals could close.
In the fourth quarter, who of course cannot be certain.
Looking at advisory fees and other business verticals, we had a relatively strong quarter as we saw strength in the U S M&A market, particularly in technology healthcare consumer and real estate as well as restructuring. Additionally, we have increased the number of high fee assignments as we continue to deepen our relationships with our <unk>.
Clients.
Overall closings have slowed we continue to see positive signs in our business as client engagement remains high and our investment banking pipelines remain solid.
On the next slide we look at the remainder of our institutional business looking through the lens of equities and fixed income fixed income generated net revenue of $101 million in the quarter and posted our third highest revenue for the first three quarters of the year.
Our equities business was down 50%.
Again, due primarily to the industry wide drop in capital raising.
First income transactional revenue totaled $74 million with lower activity in our rates business. Our bank clients continue to face a lack of liquidity on their balance sheets as they can tangibly lower deposit levels, which has resulted in lower trading activity in their investment portfolio.
Fixed income capital raising came in at $27 million. The sequential decline was due in part to a slowdown in industry wide public finance volumes, which for the record were down 16%.
As interest rates have risen refunding transactions has essentially ceased and new money bond by them is still being impacted by the unspent federal ARPA funds. Additionally, we had lower activity in our taxable debt capital markets business.
Looking at public Finance business Stifel has increased its market share, which we calculate based on the total number of transactions to approximately 15% up from 13% in 2021.
Transactional revenue totaled $46 million up modestly from the prior quarter. The increase compares favorably to industry wide volumes that were down 12% overall, we see increased engagement in electronic trading also we've generated modest trading profits compared to the trading losses that we did.
Scott last quarter in.
In terms of equity underwriting steeples activity is really no different than what's happening industry wide. However, I do believe that this business will rebound as many transactions are delayed as opposed to being cancelled and we have seen some green shoots from the technology and healthcare verticals and with that let me turn the call over.
To our CFO , Jim Morrison Thanks.
Thanks, Ron and good morning, everyone.
I'll start by addressing net interest income NII was up 25% sequentially to $244 million and came in at the high end of our guidance.
The growth was driven by a 40 basis point increase in our bank NIM to 328 basis points and a 5% increase in our interest earning assets.
We continue to see further upside from the recent fed fund increases we anticipate that the 75 basis point increases that occurred in July and September we will further benefit our fourth quarter results.
As such we project net interest income in the fourth quarter in a range of $290 million to $300 million in the bank NIM of 375 basis points to three 375 to 385 basis points.
Based on our fourth quarter NII guidance, we expect our full year NII to be between 885 and $895 million.
Year to date, we've increased our average interest earning assets by nearly $6 billion.
Which is at the high end of our full year guidance as.
As such we expect limited balance sheet growth in the fourth quarter.
I'll address our 2023 expectations on our fourth quarter call, but as I said last quarter, we anticipate exiting 2022 with a full year NII run rate of $1 2 billion.
Thus far through the current interest rate cycle, we've experienced a 38% deposit beta which is consistent with our original guidance range of 25% to 50%.
Moving onto the next slide a quick review of the bank's loan and investment portfolios.
We ended the quarter with total loans of $21 billion, which was up approximately $1 7 billion from the prior quarter.
Our commercial portfolio increased by $1 4 billion with particular strength in the fund banking and industrial sectors.
Consumer side, our mortgage portfolio increased by $400 million.
While our securities based loan portfolio fell by $200 million.
Moving on to the investment portfolio total investment book value decreased by approximately $40 million sequentially, most of which was driven by portfolio amortization and maturities.
Turning to credit metrics, our credit loss provision totaled $6 $5 million.
Loan growth in residential mortgages and fund banking.
Primary driver and given the lower expected loss levels, our allowance to total loans ratio declined to 70 basis points.
Overall, our credit metrics remain very strong.
Our nonperforming assets as a percentage of total assets were four basis points, while our nonperforming loans were five basis points.
Moving on to capital and liquidity are risk based and leverage capital ratios remained strong at 17% and 11, 1% respectively.
The modest decreases in our capital ratios were the result of loan growth.
Our funding base increased modestly in the third quarter and TCG client cash, which consists of sweep deposits and smart rate deposits were essentially flat at $26 billion and I would note have increased since quarter end.
The products that we launched in order to keep client cash within Stifel have proved successful and consequently, we have not been as impacted by many of the recent cash sorting trends in the industry.
Specifically, our smart rate program is approximately $4 7 billion in deposits.
From approximately $1 5 billion as of the time of our last earnings call.
These are yield seeking deposits they would have historically gone into third party money market funds.
It's projects like this that have enabled us to grow our balance sheet without reliance on wholesale funding.
As I stated earlier, we will likely see limited balance sheet growth in the fourth quarter as we think about future growth, but so that will be driven by growth in assets from advisor recruiting and we can potentially tap into some of the $6 billion.
And additional money market fund balances.
On the next slide we go through expenses, our comp to revenue ratio of 58% was down 10 basis points sequentially as the benefits from increased NII contributions have been partially offset by slower institutional activity.
Non compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $209 million, which was flat sequentially.
This represented 20% of our net revenue.
While the absolute amount of our non comp operating expenses were in line with our expectations. It came in above our guidance as a percentage of revenue due to lower than expected revenue.
The effective tax rate during the quarter came in at 26, 5%, which was above our guidance due to our foreign operations.
Finally, our average fully diluted share count came in below our guidance due to our lower share price. We currently have approximately $10 3 million shares remaining on our share repurchase authorization.
Absent any assumption for additional share repurchases and assuming a stable stock price, we would expect the fourth quarter fully diluted share count to be $116 8 million shares.
Before I turn the presentation back to Ron I wanted to give some additional color on our expectations for the fourth quarter and the full year.
The market so far this year haven't rebounded as much as we had expected and as a result, we now forecast net revenue to come in at the low end of last quarter's guidance for 2022. Despite continued strength in our net interest income. So by definition. If our revenues are down this puts pressure on our expense ratios as such we expect our comp ratio to come in at a <unk>.
High end of our prior guidance.
Our non comp expenses have essentially been in line with our initial forecast, but due to lower revenues, we've increased our expectations for operating non compensation ratio to 18% to 20%.
And with that I'll turn the call back to Ron.
Thanks, Thanks, Jim.
Look it's been a tough year as financial conditions have tightened significantly and market returns have been dismal pretty much regardless of asset class, yes, I am optimistic we have built a strong and balanced business, which remains well positioned to gain market share and deliver for our shareholders and associates alike.
Lose side of the fact that Stifel is having its second best year with operating margins and return on tangible common equity, both exceeding 20% and very strong credit and capital metrics as Jim detailed we anticipate net interest income to exit 2022, with a run rate of $1 2 billion.
Assuming no and then assuming that assumes no growth in interest, earning asset. It is noteworthy that NII totaled only 500 million for all of 2021.
We will continue to build our wealth management business through strategic investments and our continued focused on recruiting.
Everyone is concerned about the state of the institutional business and I see this is a business that will continue its strong growth and we will look back at 2022 is a difficult yet temporary operating environment as.
As we've often stated our strategy is to use our excess capital in a variety of ways to benefit our shareholders at different moments in the cycle in order to effectively deploy capital we may elect to organic growth acquisition increased dividends for share repurchase.
At this point it is our expectation given the economic outlook and our App.
Asset growth is likely to flow so given our high level of profit profitability. The fact that our capital ratios are well above our target levels and the fact that we will file our balance sheet growth. It is likely that our capital deployment will focus more on dividend increases share repurchase and share repurchases.
And if appropriate acquisitions.
That operator, please open the line for questions.
Thank you if you would like to ask a question you may signal by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment once again star one for questions.
We will take our first question from Steven <unk> with Wolfe Research.
Hey, good morning, Marty.
And Jim.
It's Michael and I can stock is on for Steven Good morning.
So I guess I guess starting off on the.
On maybe cash sorting here.
I was just trying to dig into the numbers here a little bit more I guess.
<unk> rolled out the smart program that has been an attractive way to retain deposits how much of that yield seeking activity have you seen thus far and maybe if you could provide any thoughts around the incremental.
Here you may see as cash continues to migrate into that program.
And also noted 40% to 50% betas and the NII guidance I guess is that is that a through the cycle expectation or is that on further rate hikes.
I'm just trying to think about the deposit trajectory of deposits and the incremental deposit costs there. Thanks.
I'll, let Jim.
At this time, yes, so we talked about smart rate program at the end of the quarter at $4 7 billion.
And it has increased since then we have seen some additional cash sorting, but I think most of what we've seen is the decline in the sweep program has ended up being retained via smart rates. So we're able to retain those deposits and when we think about the total deposit beta here in the asset yields we're getting we're able to generate a return that it makes.
Sense to continue to capture those deposits we ended the quarter with if you look at the end of period book yield on our bonds and our loan portfolio was north of 475 basis points and inherent when we talked about a 38% deposit beta through the end of the period. So ignore the lag you are at about 114 basis points.
Cost of funds and so you think about yes, do we think the deposit beta will go up from here, Yes, we do we still feel over the life that we're comfortable saying somewhere between the 25% to 50% deposit data and as we look forward. We've tried to illustrate some of the impact of that on the 2023 results and I think without growth.
And the ability to retain those deposits.
Pretty impactful and then I would I would just add from from a client behavior perspective, I think we've always said and we've been consistent that we felt in this cycle that cash sorting would ultimately be greater than what we've seen in the past I mean look one year set for 60.
And effective fed funds is at three O eight.
In our case.
Which is what the question should be is what is our total cost of funds. That's about 112014 114 and that's the real question we see are.
NIM are margins actually expanding even with the cash sorting that we're anticipating so.
That's how I would do it but.
It's different this time around in terms of the alternatives that client phase four idle cash.
Got it.
Extremely helpful.
So pivoting to the institutional side I, just wanted to dig into the business a little bit more.
Understanding that business is different from the bulge bracket in terms of mix.
A bit surprised to see that business come down on a year over year basis, following that vining Sparks deal that you guys completed.
Given that the fed balance sheet Hasnt began shrinking at this juncture should we expect that business to continue to come in from here.
Maybe you could just speak to some of the drivers of that.
The decline in a little bit greater detail that that would be great. Thank you.
Sure well in fixed income there is there are you can think of it as really three.
Sleeves that business that we do.
One is our capital raising on fixed income.
And I spoke to what's been going on in public finance frankly tactical underwriting like equity underwriting has been very slow.
In terms of.
Yes.
That activity with corporations, not not really engaging that much in the capital raising side.
Yes look in to our rates business is a big business for us our rates business is dominated by depository institutions that I have said these issues with deposit.
And liquidity at banks impacts banks portfolio. So we've seen that slow I don't I don't see that turning on a dime, but I think we're near the lows of that activity.
Then of course, the credit does not have.
Has been impacted.
As credit Wides of release spread and especially what's going on in the high yield market. So.
For us that business I think the results have been pretty good at getting.
Better from here or narrow the law then than we are.
<unk>.
At the top sure but for US we don't offer we don't participate and commodities and currencies like our bigger brethren do and Theres been a lot of activity and a lot of volatility driven those results, which we don't do.
Thanks, so much for taking my questions.
Thank you we'll take our next question from Devin Ryan with JMP Securities.
Good morning, Kevin.
How are you.
Doing great. Thanks, Ron.
Maybe first one here for Jim just coming back to the balance sheet.
Maybe focusing on the asset side of it so.
Clearly appreciate the dynamics around growth from here.
Is there any room or opportunity to be opportunistic around just optimization on the asset side or do you guys.
Like the current mix I'm, just curious if theres any.
Places, where you can maybe pick up some more spread by.
Recalibrating that a little bit.
So I think there is always opportunities for optimization and I think you look at both the loan and the bond portfolio.
There is opportunities in both.
Think where it's going to be limited to two is more so of how we're generating deposits to support that but theres a number of different lending verticals across fund banking various different C&I channels that offer a pretty attractive yields today and you think about on the bond side as well CLO, they're being priced anywhere from <unk> to plus $2 10 to $3 50.
And so from a yield perspective.
Offer some pretty attractive yields compared to where we're at today.
Okay.
I appreciate that and then a quick follow up here on.
The gws just can.
<unk> I just want to parse that a little bit is the.
Decline that we've been seeing the last several quarters is that primarily just driven by lower trailing commissions, just kind of the mark to market.
On what's already kind of in the book or is that just a lot more subdued engagement I'm just trying to think about with markets come back versus engagement.
Coming back.
I think a good portion of that is being driven by just lower client engagement. There is some fund placement business that goes on through that transactional line that has been slowed as well and that's impacted the results from a.
Retail transactional results yes.
I think thats consistent across the industry.
I want to go back a little bit to your question about growth in the balance sheet.
We've been we've been growing our balance sheet quite quite large we've grown loans through nine months, 25%.
And we see demand there is the remixing opportunities. It's just in this environment, where we are or everyone's talking about potential recession.
Forecasts are changing and we did this a few years ago, our belief is that.
With.
The cash that we're generating which is substantial cash.
It's an opportunity to remix the balance sheet, but it's also where we are at the best investment for the substantial amount of cash that we're generating.
You know frankly on a daily basis.
Yeah, no I appreciate that in.
It makes sense and I think people will like to see buybacks here. So thank you.
Thank you once again star one if you would like to ask a question. We will take our next question from Alex Blaustein with Goldman Sachs Goldman Sachs.
Hey, guys.
Hey.
So just another one on the balance sheet for you guys. So if you look at the loan mix.
Stifel has a fairly outsized balance with P and debt capital commitments capital commitment lines.
How does that business perform in this environment and as you think about any risk of sort of paydowns.
In those balances or any other kind of loan buckets that you have as you look out into 2023, so should we be thinking of that as an incremental headwind to loan growth and therefore you'd have to remix into securities portfolio. I know you mentioned yellows.
And maybe as a follow up to that obviously the yield curve is flat, but the absolute level of yield is reasonably attractive, especially if it gets if you believe the forward curve and that will get rate cuts at some point of time in the next 12 to 18 months, so any appetite to extend duration to lock in some of these wider spreads.
Well. The first question is two questions there.
First question around fund banking and look I think it's a good question asked too.
As to the growth in that business considering capital raise is that all tied together.
Those loans come off a p/e firms actually raising our capital and then taking those commitments and pre funding them sort of with the banks.
What we and other banks too.
What I would say to you as we sit here today, we don't really view that as a risk of prepayment success, because we do have a lot of on demand.
And and so.
So if anything we would see a pickup in yield those are those are great long, but.
They are not our highest yielding loans or they are very safe. So as we look at them, but I think it's a great question I don't view that.
As a headwind.
If that prepayments would occur we would be remixing, our balance sheet and our loan portfolio.
With equally.
City assets so.
That's not the issue with respect to duration.
No.
That's.
It's a great question.
Thanks.
Like we do everything we'll probably have some balancing that I think it makes some sense to extend some duration here but.
As we saw with our friends over in Britain.
Incrementally here for sure yeah.
Yeah, Great and then just to follow up to your discussion earlier about sort of a capital returns and obviously sounds like there's a appetite for a bigger buyback you guys have always been opportunistic of course on them and a front as well. So if they are opportunities to do deals, especially some of the other players might be a little bit more pressured.
Any sense of which way you will be sort of pivoting, whether it's on the institutional side of the wealth side or maybe the asset management side again, presumably nothing imminent, but if you were to consider M&A, what part of the model would be more interesting to do deals right now.
Yeah, well I think that we're allocating certainly and if it's it's an efficient capital allocation model, but we're allocating to recruiting are hurting is strong a number of the things that we have done have made that a very attractive area for us to put investment and you're gonna see us.
Really focusing on building wealth management throw a recruiting.
I mean other acquisition problems, we we've been focusing on advisory type businesses. So capital light type of businesses and that would that would that would certainly be on the advisory front on the institutional side, you know that there's always a lot of opportunities that.
Present themselves and Mark like the what I would say on balance is that if you think about it you know we we grew our <unk> so far about $4 billion, that's $400 million of use of capital as we slow that that's that's.
That's capital that can be used for deployment back to shareholders and frankly, our stock price for it since today is a very attractive alternative for our excess cap and maybe another couple of numbers around there. You know you think we've been have we've had trailing 12 net income of <unk>.
Around $700 million, we pay out about 185 in common and preferred dividend. So you can think about the excess there and on top of that you have about $400 million inaccessible a tier one leveraged target. So that kind of gives you. Some additional numbers around where we have access capital to to deploy yeah, and we've and we've we've been.
Growing.
Alex and we've been deploying our capital.
As I sat $4 billion, a growth, but one of the best investments I see out there right now has a symbol us up so that's that's how I see it.
Got it alright, perfect. Thanks very much.
With no additional questions and Q I'd like to turn the call back over to our speakers for any additional or closing remarks.
Well I appreciate every one joining in in this month of October we look forward to reporting on our fourth quarter late January and will give everyone.
Look forward into 2023, but with that thank you for your time and attention and look forward to communicating again. Thank you.
[noise]. Thank you and that will conclude today's call. We appreciate your participation.
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