Q1 2023 Stifel Financial Corp. Earnings Call
Please standby.
Good day and welcome to the Stifel Financial first quarter Financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Joel Jeffrey head of Investor Relations. Please go ahead.
Thank you operator, I'd like to welcome everyone to Stifel Financial's first quarter 2023 conference call.
Joining the call today by our chairman and CEO , Ron Kruszewski, our co presidents, Victor Niecy, and gyms that Mike and our CFO Jim Morrison.
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 stayed throughout our presentation are presented on a non-GAAP basis 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 or <unk>.
Slide presentation for information about forward looking statements and non-GAAP measures.
Audiocast is copyrighted material of Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without the consent of Stifel.
I'll 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 first quarter conference call.
We had a strong first quarter Stifel generated our third highest first quarter revenue as record global wealth management revenues continue to drive our business and offset the market headwinds in our institutional group.
Revenue came in a little over $1 1 billion with non-GAAP earnings per share, but dollar 40, we generated pre tax margin of 21% and return on tangible common equity of 20% all things considered the these are solid numbers.
I would also note that these results include the impact of a loss on sub that we held in the bank bond portfolio that equated to five cents of earnings per share.
I believe this quarter's performance once again demonstrated our ability to generate strong returns in light of ever changing market conditions.
This is the direct result of the diversity of our business and our long term growth strategy.
Overall I'm pleased with the continued growth in wealth management, our recruiting and the performance of our bank frankly, the banking crisis had a bigger impact on our institutional business because of increased volatility and uncertainty than its impact on our bank, which frankly saw deposit inflows, although the events did put a higher focus on.
Cash sorting.
When the operating environment improves and I believe that well theres a lot of business to do in our institutional segment, whether in private markets capital raising or strategic advisory we are well positioned for this outcome.
That said all anyone wants to talk about his bank metrics and trends so that's still.
Over the past few years, we've deployed significant capital into growing our bank. It although we've grown our assets. We also effectively managed both credit risk and interest rate risk.
As you can see on slide two Stipo compares favorably to other regional banks Stifel Bank is designed to efficiently manage and redeploy client cash by providing banking products, primarily loans to our global wealth management and institutional clients.
Because our bank has a favorable efficiency ratio, we do not need to take additional risk to generate acceptable returns on invested capital as you can see we generate superior returns as compared to the average regional banks.
I would describe our business as follows first.
Paul has balanced earnings power across multiple business lines simply staples mix of business is both synergistic and balanced the stability of the wealth management and consistency of net interest income provides balance to the more cyclical institutional business.
Next point is is we have a well structured balance sheet, our balance sheet is 85% of its assets floating rate, 82% of our securities portfolio, which includes available for sale and held to maturity reprice within a year.
60% of our loans reprice or mature in under three months as a result, the yield on our assets has increased to 5.43% from 2.26, a year ago over that same period.
Consolidated net interest margin has increased to $3 five seven from 2.13.
Before I move onto the next point I want to note that with all the turbulence in the market and balance sheet concerns at regional banks I believe the fact that we are able to reaffirm our NII guidance for the full year, albeit at the low end of our prior guidance demonstrates just how well we manage our balance sheet Jim.
Jim will give more details around this later in the presentation.
Our next point highlights people strong capital levels, which are significantly in excess of regulatory requirements, our tier one and common equity tier one ratios rank in the top percentile when compared to the banks that comprised the K Rx.
Even when factoring potential unrealized losses from our Securities Holdings Steeples common equity tier one ratio declined to just 120 basis points to a still robust 12.7% comp.
Comparison purposes Silicon Valley Bank CET, one ratio of 12, 1% declined to a negative 0.2% when factoring in mark to market losses.
Besides a well structured balance sheet, our assets demonstrates superior credit quality. The majority of our securities portfolio. Besides being floating rate are rated double a or AAA equally important is the fact that our loan book has strong credit metrics as our nonperforming assets to total assets ratio is just four basis.
Points charge offs essentially zero.
Finally, it's noteworthy what our loan book does not have one our CRE office exposure is less than 2%. We have no consumer know autos frankly, we have nothing that we would want to exit by reclassifying to available for sale.
Lastly, we have a robust liquidity profile with abundant cash levels and low cost borrowing capacity as well as high quality relationship oriented deposits.
But with the all the best with low levels of uninsured deposits.
This leads to our next slide.
Much like the assets on our balance sheet or funding sources are equally important to our success. We have a highly diversified funding base, we're focused on providing our clients with the necessary products to help them best manage their financial situation, 90% of our deposits are generated by wealth management clients and more specifically the cafe.
Generate from their investment accounts.
Actual cash consist of more than 1 million accounts with an average balance of $15000.
It's also important to note that our clients' cash through all of that because it remained at Stifel.
We've managed to keep the vast majority of client cash at Stifel through programs like smart rate, our commercial lending products and our ability to offer enhanced levels of deposit insurance.
Smart rate balances increased from less than $500 million a year ago to nearly 11 billion as yield seeking client cash stayed at Stifel due to our competitive deals I believe it noteworthy that we anticipate the need for smart rate as we introduce this product over three years ago.
Commercial deposits more than doubled in the past year as we've invested in our B C banking business and more traditional commercial banking services.
85% of our deposits are insured as the benefits of our four bank charters and access to Ics have enabled clients incorporations with larger cash balances to keep their deposits with us in terms of liquidity, we have about three times coverage for our uninsured.
Indicated cash sorting has been the biggest driver of our deposit betas. The most significant pressure on our funding costs have come from moves out of client transactional cash and into smart right.
Look in times of low interest rates deposits that are considered savings versus those considered transactional we're essentially indistinguishable. However over the past year. The difference between the two has become clear as transactional balances have decreased by $8 billion in savings balances have increased by more than $10 billion.
The difference in yield on these deposits it's apparent what has driven our deposit betas.
As we sit here today, we believe that this cash sorting processes slowing and getting closer to its endpoint at that point. This process may reverse to a stage where bank balance sheet cash begins to grow as a result of our organic net new asset growth as well as new accounts that we attract.
Next I am consistently asked about the impact of a 100 basis point increase or decrease on our projected NII.
Forward curve is calling for the potential for interest rate cuts in the near future I am not as confident in this outcome as I see the fed pausing here that said 100 basis point reduction would reduce yield on Iraq assets, obviously, but it would all we would also see a benefit on deposit costs.
We would anticipate that 100 basis point rate cut would reduce would result in a $65 million annual decline in our NII as we anticipate very high deposit betas that are smart rate product and we don't see significant additional cash authority.
On the other hand, 100 basis point increase in rates would add approximately 100 million to NII.
That's next let's examine what has happened to client cash it's important to note. The following we offer clients choices for how they deploy their assets to manage their cash. This is illustrated by increased client holdings in money market funds and treasuries.
Party money market funds are up one 5 billion in the past year and while these funds didn't go into smart rate they stayed with Stifel.
Similarly, some of the decline in transactional cash has moved into short term treasuries.
This is something I first highlighted in 2022 as a strategy our advisors advise on for generating the best yields T bills maturing in less than one year have grown from a billion and a half to nearly 7 billion.
The Bottomline is that client cash has moved geography, but remains with Stifel.
The growth of the structure of our balance sheet has resulted in Stifel became being a significant beneficiary of the rise in interest rates, our increased scale and asset sensitivity resulted in a projected net interest income more than doubling since 2021, so what happens with the fed begins to cut short term rates.
As I indicated NII will be modestly impacted by a 100 basis point decline in rates and also get asked why we don't hedge against this possibility.
But I think it's overlooked is the highly complementary nature of our other revenue lines, particularly our institutional group.
As you can see on the chart higher rates had a positive impact on our net interest income yet arguably negatively impacted market conditions that drive our institutional group.
Specifically the increase in market volatility and higher financing costs have weighed on both the M&A and underwriting.
Markets.
However in periods when rates were either lower or just stable. Our institutional group revenues were a primary driver of growth in fact, a record return on tangible common equity and pretax margins occurred in 2021, when federal when the fed funds rate was essentially zero and investment banking activity sort.
So the belief that our margins will significantly decline in AR.
As rates are cut seems a little misplaced to me. The bottom line is that we have built a diversified business in order to succeed in an ever changing market environments and given our past performance. We believe that our business will continue to prosper despite the potential for lower interest rates.
As we think about our long term strategic objectives I go back to a statement I've made a number of times past is prologue, we built a diversified business in order to succeed in ever changing market conditions. As you saw on the previous slide our net interest income and institutional group revenue are highly complementary and essentially.
And because they hedged to each other with this in mind, we will continue to do what we've always done which is in brief is which is to reinvest our considerable excess capital into the business with a focus on generating the best risk adjusted returns and becoming more relevant to our clients.
Wealth management will continue to recruit high quality financial advisers that chose to make Stifel. Their firm of choice due to our advisor friendly culture expansive products excellent technology and industry, leading yet simple and fair compensation plan with this approach we believe that our target of one trillion of assets under management is.
Hannibal.
As our client assets increase will experience a corresponding growth in our bank deposits, which will further enhance our ability to grow our bank balance sheet and the same conservative way as we always have we will continue to build out additional capabilities on the commercial side of the business. For example on the first court quarter, we hired a number of high quality individuals from.
Silicon Valley Bank. This again illustrates our strategy of taking advantage of market disruptions to make opportunistic hires that enhance our long term growth.
Although we believe that our global wealth management segment will continue to represent an increasing percentage of our total revenue. Our institutional group is a vital component to our strategy and we will continue to opportunistically invest in this segment in the first quarter. We added a number of talented individuals from credit Suisse and continue to invest.
In our fixed income trading technology.
Now, let me turn the call over to Jim Marish and to discuss our most recent quarter results. Thanks, Ron and good morning, everyone.
Looking at the details of our first quarter results on slide six our revenue of $1 1 billion represented our third strongest first quarter. It was essentially in line with our average revenue during the prior four quarters.
The consistency of our revenue over the past year was a result of the diversity of our business and primarily the investments we've made in our global wealth management segment, and particularly in our bank.
This has resulted in our 10th consecutive quarter of pre tax margins above 20% despite headwinds with some of our businesses as you can see from the revenue bridge on the slide.
All of this produced earnings per share of $1 46.
Moving on to our segment results Global wealth management revenue increased 11% to a record $757 million and a pre tax margins were 42%.
An increase of 860 basis points from a year ago.
During the quarter, we added a total of 49 advisors, including 20 experienced advisors with trailing 12 month 12 month production of more than $12 million a recruiting.
<unk> remains robust and we believe that the stability of our platform will further enhance our position as a premier destination for high caliber financial advisors.
We ended the quarter with fee based assets of $150 billion and total client assets of 406 billion is there a net new asset growth in the quarter was in the mid single digits.
We highlight our long term growth drivers of our wealth management business on slide eight.
The continued growth in the contribution from our asset management revenue and net interest income further drove our wealth management revenues towards more recurring sources.
In the first quarter, our recurring revenue reached a record, 78%, which continues to drive greater stability in our results.
Moving on to slide nine.
Net interest income totaled $297 million, which came in within our guidance range.
The decline was attributable to a one time $5 million benefit in the fourth quarter related to our mortgage portfolio that we highlighted on our last earnings call.
Bank NIM of 374% was below our guidance due to an additional $1 billion of cash that we carried on our balance sheet and respond to the market volatility that occurred in March.
Further we experienced more cash sorting than anticipated, which we also attribute to March market environment.
As we look forward to the rest of 2023, we continue to see a widening range of possible outcomes when projecting NII given changing market dynamics.
Based upon the forward curve and our assumption for additional cash sorting, we're now projecting <unk> consolidated NII to be approximately flat compared to <unk> NII.
As Ron referenced earlier in the presentation, assuming that we do not see any further material cash sorting and the second half of 2023, we would project our full year consolidated NII to be approximately $1 2 billion.
Given market dynamics today, we are pleased to be projecting results within the lower band of our original full year guidance.
Moving on to the next slide.
A quick review of the bank's loan and investment portfolios.
We ended the quarter with total loans of approximately $21 billion.
Up modestly from the prior quarter due to growth in our residential mortgage portfolio and our fund banking business more than offset sequential declines in our C&I and securities based loan portfolios.
But also note as Ron mentioned earlier, the bank realized a five cent a share loss on a bank sub debt position. This roughly $7 5 million or loss was recognized within other revenues and was the reason we reported negative $2 million of other revenues during the first quarter.
Turning to credit metrics.
Credit loss provision totaled $4 9 million and our consolidated allowance to total loan ratio was 75 basis points.
Overall, our credit metrics remain very strong.
Our nonperforming assets as a percentage of total assets were four basis points.
Our nonperforming loans were five basis points.
The next couple of slides I will discuss our institutional group.
Total revenue for the segment was $333 million in the first quarter.
Firm wide investment banking revenue totaled $212 million, which was in line with the high end of our guidance noted in our February metrics release.
Advisory revenue was $151 million the quarter benefited from a couple of larger fees that helped to offset some of the seasonal decline we typically experience in the first quarter.
That said the increased volatility in March further delayed some transactions.
While new M&A announcements has slowed our engagement with our clients remains robust given.
Given the increased scale of our business, we are well positioned to capitalize on the rebound in advisory activity when markets stabilize.
The remainder of our institutional group is comprised of our equity and fixed income businesses.
Equities revenues totaled 77 million in the quarter, which is a slight increase from the fourth quarter as both transactional and capital raising revenue increased modestly.
Equity transactional revenue totaled $52 million, which was up 1% sequentially as increased low business more than offset declines in trading profits.
As I noted last quarter, we see increased engagement and electronic trading as we continue to gain market share as our clients embrace our electronic offerings and value our best in class research.
In terms of equity underwriting revenues were up 2% sequentially.
We began to see some signs of improvements early in the quarter, but given the volatility in markets in March activity levels have slowed again.
Fixed income generated net revenue of $103 million during the quarter, which is roughly in line with the prior quarter as increased capital raising activity was more than offset by a decline in transactional revenue.
Transactional revenue declined by 8% sequentially as we continue to experience difficult operating conditions for our rates business. We did see some market share growth in our credit business.
Fixed income capital raising improved 15% sequentially.
We continue to be a leader in the municipal underwriting business as we ranked number one in the number of negotiated transactions and our market share was 15%.
That said the number of transactions in the first quarter industry wide was well below normal levels. We started to see increased activity levels in the past two months, it's hard to say how sustainable this momentum is given current market conditions.
On the next slide we go through expenses.
Our comp to revenue ratio in the first quarter was 58% 150 basis point decline year on year as we continue to benefit from increased NII contributions.
Non compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $227 million.
Our non comp opex as a percentage of revenue was 25%.
The increase over the prior year was driven by the normalization of travel Entertainment and conference expenses. In addition to certain legal and compliance related costs incurred during the quarter.
The effective tax rate during the quarter came in at 24, 9%.
We benefited from the excess tax benefit related to the vesting of deferred stock based compensation.
Finally, our average fully diluted share count came in at $115 4 million.
We repurchased one 5 million shares during the quarter through March 8th.
We have seven 6 million shares remaining on our current authorization.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted share count to be $114 7 million shares.
Before I turn the call back over to Ron Let me discuss our capital position.
We have approximately $330 million of excess capital based on our current capital ratios.
Additionally, if you simply run rate our first quarter net income we would generate an additional $600 million in 2023.
As Ron noted earlier, our strategy of Opportunistically acquiring new businesses in times of market stress is a direct result of our focus on carrying sizeable amounts of excess capital.
It resulted in much of our growth.
While we continue to carry excess capital, we also look to redeploy it through share repurchases.
With that let me turn the call back over to Rod.
Thanks, Jim.
As I stated last quarter, there's a significant amount of uncertainty in the operating environment. So far in 2023 and I don't think anything we saw in the first quarter has changed my opinion. However, as we detailed in our earnings call Stifel is well positioned to perform through these economic cycles.
While the markets remain uncertain I remain optimistic we will benefit from strong net interest income in our asset management revenue continues to benefit from our recruiting efforts and market appreciation.
The cyclicality of our institutional business remains well positioned to benefit from increased market stability and will provide a hedge against any decline in interest rates and with that operator. Please open the lines for questions.
Thank you very much Sir ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment and again that is star one to ask a question. We will take our very first question from Stephen <unk> from Wolfe Research. Please go ahead.
First off I can view their outcome health there.
Steve you cut out a little bit we didn't hear what you first said there.
I'm sorry can you hear me now.
Yes.
Okay, perfect well first of all that involves trying to give you guys a combo, Matt really just the best cash deposit disclosure we've.
We've come across this earnings season. So really appreciate you guys, taking the time to provide that.
The piece I did want to dig into is attacking the NII guidance and the fact that youre expecting NII to come in at the lower end of the range. It's definitely better outcome that we have many investors were anticipating at the same time annualizing that <unk> and <unk>.
Actually the first half it's below the guidance and NII declined sequentially, just suggesting a less favorable trends. So I was hoping you could spend some time on packing euro assumptions across a whole host of variables just in terms of fed policy actions loan growth deposit beta sweep remixing that's it.
Ports at higher NII run rate over the course of the year.
Uh huh.
Steve I know there are a lot of factors that you just pointed out and a lot of lot of people are trying to avoid that we're not.
We're trying to give our best look at this I think we came and Jim NII of $2 97, correct.
One of the things that happened in the quarter was in the last part of that March I'll. Just tell you. We got a lot of cash coming our way and because of the uncertainty we held some cash.
In the quarter, which would you know what.
Probably account for.
Some of it.
That shortfall from the $300 million.
We're at $300 million and we.
I think that for the first half we're going to be at $600 million based on everything we're saying that that supports the low end of our range of 1 billion to now there's there's many things that can happen in terms of policy.
But our best guess is that today, our best estimate is that we would be at the low end of our guidance range for NII.
In to add a little bit to that obviously, we talked a little bit about our thoughts in terms of cash sorting, we've kind of broken through historical lows in terms of transactional cash as a percentage of AUM were still assuming some additional sorting and <unk>, but basically saying from there forward, we've kind of reached near the end of it and no <unk>.
Cereal further sorting and then another thing to think about is we were a little bit early when we move smartly to four 5% I think with the potential for the next rate hikes, given the forward curve youre not going to see nearly as high as the data on those if we do get to the point, where you do see rate cuts youre going to see a higher beta on the way down particularly.
On the smart rate program. The other piece I would highlight is our original guidance came out before we hired the individuals' from SBB, they're going to provide additional liquidity and some loans and so that's going to have an impact on this and then I'd say as well as we have.
Come in a little bit higher than we originally were projecting in some of the nonbank NII, particularly in our broker dealer than we originally expected. So you combine all those factors together, that's really what's driving it to the $1 2 billion.
Last thing I'll add is that.
As I sat in my <unk>.
Remarks, Steve on that.
We were really early with smart right.
Thinking about having that product as I said, we get a three years ago and if you look at our <unk>.
Consolidated interest bearing deposits, that's about two O too to point out too, which is higher than if you benchmark that and the reason for that is because we got ahead of the cash sorting. So no matter, where we are we think we're farther along than than whatever is going on across the mass.
Hum of client cash.
No. It makes complete sense and for my follow up just a broader question on capital management.
Certainly active in terms of buyback, which is great to see given the strength of your excess capital position that you cited expectations for a more tepid balance sheet growth.
Is this 170 million a reasonable cadence of run rate for us to be contemplating at least for the near term but.
And as far as M&A opportunities are concerned do you see the recent banks fall out as providing some attractive opportunities to be more active on the M&A front.
M&A.
For banks, specifically burbank's, yes.
Would you have done.
Yeah.
The bank the bank environment is clearly uncertain and and the fallout.
But anyway.
<unk> some holes in banks' capital positions are especially if you try to do an acquisition.
That becomes crystallized, so I'm not I'm not sure that I would obviously if the right opportunity comes along we always look at everything, but but it's a tough environment to assume someone else's liquidity or capital shortfall issues in this environment and certainly the accounting.
Help.
So I would say I would say that.
And as it relates to buybacks, yeah, we will get it as an effective tool for returning capital. We've always said, it's a lever. The fact remains that in terms of uncertainty like this in times of uncertainty.
The board and everyone has been our capital a little bit and that's that's what we've been doing but we havent suspended our buyback.
Great color, thanks for taking my questions.
Sure Steven.
Thank you. Our next question comes from Alex <unk> from Goldman Sachs.
Hey, guys. Good morning. Thanks for the question. So maybe just picking up on the topic of sorting again, it's encouraging to hear your comments that you're starting to see maybe a little bit of a slowdown and I think the general market Convention is that most people anticipate things sort of trough out in the middle of the year kind of consistent with your comments, but I guess one maybe.
Give us an update on where sweep deposits stand today, and where the smart deposit smart grade deposit stand today.
And more of it I guess philosophical question when organic growth.
Resumes or where the organic deposit growth resumed <unk> call out in the back half of the year.
Why would they go into the sweep program and not remain in a higher rate option as I understand new client money comes in but what kind of gives you confidence that all of that effectively will accrue to the sweet program at a lower rate when the underlying kind of market rates will continue to be at a pretty widespread to that.
Well I'll take your last part first.
There's no really no.
Better environment, if you will for cash sorting than what we're sitting in today alright.
We have a yield curve inverted.
And just a tremendous amount of focus when.
When you can get short term rates near 5% in the 10 years, where it is it just it's just a lot of focus on that and frankly, it's a pretty good investment.
Uh huh.
Alternative for clients that just aren't sure what to do and so all of that leads to a lot of cash sorting. If you normalized say get to a 3% fed funds.
Steepening yield curve.
That will that will take some of that focus off of that just historically speaking so I think it's a unique environment.
We are we are at historical lows of transactional cash to our AUM I don't think we're alone.
But I believe that as the yield curve normalizes youll actually see.
The transactional cash, which is which is dividends and liquidity in all of the things that have been historical I believe that it will begin to normalize back.
The other thing to note. There is we are seeing increase inflows and other bank deposits not necessarily within the wealth channel, but with N V C and other traditional commercial and Thats supplementing the liquidity of the bank. When you think forward and obviously there is a differential in the cost there relative to sweep, but it's cheaper than smart rate in general and so I think you need to keep that in mind as you.
Think about the potential liquidity for bank growth.
Great. Thanks for that Jim you actually saved me my follow up on that other bank deposit so.
I'll I'll pivot a little bit maybe to lending.
You guys I think previously you talked about slowing down the bank growth and we've seen that for the last couple of quarters.
The fund finance side of things Theres been definitely capacity, that's come out of that market and it may be somewhat concentrated in parts of the private equity and VC world. So how are you thinking about growth and the fund finance space I don't know if you could break down between subscription lines at Nab lending kind of what does that business look like for you today.
And could that.
Change sort of your view on the overall loan growth for the rest of the year if that business continues to pick up.
Okay.
I think in terms of fund baked on the bilateral lines, we're doing more of that activity were participating lessen some of the larger transactions, but more of the direct transactions, we see opportunities and we also see terms tightening there and the overall return prospects of that improving relative to where we were before March.
Yeah look I think we look at we look at fund banking and what we're doing in venture banking by the way we were in these businesses Alex we just.
We see obviously opportunity with.
A lot of the players obviously are exited and.
This business is highly integrated with our investment bank and so.
We get the opportunity on on both the fund banking and on the.
Yeah.
On the venture side.
But boy Theres been some capacity brought out of Colorado those beds or so from my perspective kind of a good time to get in.
Yes for sure that's why I asked great Alright, Thank you guys.
Yeah.
Thank you and we'll take our next question from Devin Ryan from JMP Securities.
Hey, good morning, good morning, Ron and Jim morning.
Okay.
So I just wanted to dig in a little more on kind of the intermediate term out BBW doing just whether maybe coming better or more challenged March and then also in a related due to the fixed income book.
Probably where youre, helping banks manage their securities portfolios.
You see that environment, and evolving and does that improve from here as well.
Yeah, well look I think the I think the environment, there's a lot to do.
And the bank I'll take the fixed income side first.
Clearly that that really slowed down as everyone just almost throws a little bit with looking at our portfolio and trying to understand.
The available for sale the marks in the HTM, but theres a lot of restructuring.
Needs to be done in bank portfolios, and we see that activity certainly picking up from here with respect to keyw.
There's a lot to do on bank line to it and M&A we.
I think we're in one of those periods, where we're completing our backlog from prior deals and a little bit of a lull and then we'll pick up.
Strategic advisory in.
In the banking space I don't think Theres any question that the recent grads.
Is going to spur.
Strategic activity in the banking space.
Yep got it thanks, Ron makes sense.
A follow up.
Don't expect any.
At some level capital.
Well go ahead, yes, yes, and I appreciate that thanks Ron.
I guess a follow up for Jim just on expense management.
And just given some of the shifting and the.
The revenue environment here.
Anything that you guys are looking to do differently on expenses and then also how the.
Evolution is impacting your comp ratio leverage and expectations for the full year would be.
So in regards to expenses, we originally guided to an adjusted non comp opex of 18% to 19% and obviously, we are higher than that at 25% a lot of that is a higher ratio within the institutional business given some of the challenges from a revenue perspective now when we talked about original guidance, we're talking roughly flat opera.
Getting revenues and so if you think about extrapolating out the first quarter for the institutional group that would be more like a $1 3 billion run rate 15 ish percent decline and we're not managing the business with that expectation and so I think some of these things will normalize as we pick up some revenues through the back half of the year, particularly on the institutional group in terms of the comp ratio.
We still feel very comfortable with the numbers, we talked about for the full year guidance. Obviously, we've brought down our starting point you can go back over time and look how we've kind of stair step down the comp ratio throughout the first quarter through fourth quarter on an annual basis and I think.
Given the affirmation of still being in the range of NII. It should give some confidence in what we can do from a comp ratio expectation.
Yeah, Let me, let me just supplement that will be.
By saying and I agree with all of that obviously.
Yet.
It's times like this over certainly my career that we have been able to add.
<unk>.
Talented individuals and businesses I've mentioned the people we've hired.
Just this disruption creates opportunity.
<unk>.
Hi, I am focused on adding to our.
<unk> growth and I guess.
Do not want to leave an impression that we're just going to manage to a comp ratio without.
Taking advantage of what we see some real real opportunity to build our client franchise here.
Total interest that Ron you guys have.
Very opportunistic over the years, so I appreciate that and maybe if I could just.
Interrelated just.
You touched on it the financial advisor movement.
The environment, you had a nice quarter there sounds like the pipeline is still good.
The department for people to move.
What are you seeing.
In that part of the business and kind of the outlook for the ability to continue to recruit.
Financial advisors.
Look I think it is good our pipeline is good I've always.
I always say that are you know.
Our recruiting if anything mutes, our recruiting it's our guests a plan.
On how we view cash on cash returns.
So.
It'll generally.
See more.
Related to how the competitive market for transition deals again.
Now the time frankly with with some of the upheaval in some of the players that have exited that where some of the higher payer.
And it's going to be an opportunity for us to pick up recruiting.
Okay perfect. Okay. Thanks, so much.
Thank you and our next question comes from Brennan Hawken from UBS.
Hi, Good morning, Thanks for taking my question Hey, how are you.
I'd I'd actually like to reiterate Stephen's comments, thanks, a lot for the additional deposit disclosure.
I guess one question is that going to be a one off disclosure or are we going to see it regularly and then how should we think about the three 5%.
Of that sweep deposits represent of client assets I believe you said, it's below trough, but how far below trough where was the prior trough for that metric.
Now that is the new trucks okay.
That's a little of that is so let's take them in order a little bit yes. The deposits disclosure will continue when youre calculating that number out you need to separate out <unk> assets. The number is actually a little bit higher than that I can point you to the supplement where you can see kind of the bifurcation of those assets. So it's higher than three 5%, but obviously you know we had talked historically.
Five is four 5% and we've gotten now so below four and so again, we're reiterating that we're taking additional cash sorting from here in our guidance and still able to get to the NII levels, we're talking about.
Okay, great. Thank you and just a follow up on that point Jim.
When you you said you were taking a little bit of additional sorting here in to Q is Ron referenced the some expectation for a reversal of sorting is there a reversal of some of that embedded in the back half given that the forward curve is calling for some cuts.
No we're not talking about reversal of sorting in the back half more so the potential cuts, resulting in a higher beta on the way down and I think thats. The point were trying to get across there.
Okay.
What I was saying, Brian I'm, just saying that we're at that that's our focus that's inversion of the yield curve everything today that makes us one of the great investment opportunities here to just invest in the short end of the curve when that changes, we will get back to a more traditional mix.
Transactional class cash and that's all I'm trying to say and I think that's good.
Yes to most wealth management firms.
Say that.
In a more normalized yield curve environment.
Okay. Thanks for clarifying that appreciate it.
And then one on the point around the institutional business and end up being that counterbalance with rates I hear that I think that's I think that's an important point to make one of the things that I've been trying to think about is we probably the it seems as the regional banks are a big constituent.
Around your client base in the fixed income business.
That theres likely to be changes in the capital rules.
What would you if if you end up seeing.
Less of an ability to hold it longer duration of buy purchase longer duration securities and they end up shorter.
And the types of impacts that would happen if they're subject to the OCR.
What kind of a of a headwind do you think that could represent to the institutional revenue, obviously not headwind from current levels, because they're very very low, but when we think about the chance of it normalizing how do you think we should factor that in in considering.
That is a potential to limit our full normalization.
Brian I'm not sitting on the desk, but Jeff.
Just if you talk about the need for bank management.
Suddenly manage more liquidity and shorter term liquidity and reexamined their portfolios and how they're structured and potentially with new regulatory things that might be somewhat of LCR and liquidity, that's a tailwind and not a headwind. Okay. That's absolutely going to be a lot of.
Activity.
For a tailwind.
And again all of those things as well.
Are going to be a tailwind for what's going on in K VW certainly from this point I know youre not note also that one of the other big things that are going on and Hasnt been going on that we.
Have made an investment in a fintech.
Fintech not far removed from all of our expertise in the depository.
We see a fair amount of activity there so that portion of our business I think.
It's going to have some tailwind coming versus headwinds I think I would also say that you are probably never going to see banks use HTM as much as they have historically and the more securities NFS the more trading youre going to see so that's that's helpful. And I think there is also probably going to be a lot more active hedging of these blow out and thats an opportunity as well.
And as it relates to the.
Grant I also want to say it because I think this is important as to our market share.
Just not order takers on the fixed income desk or our business.
Primarily insignificantly as balance sheet advisors.
Due to banks and Cfos and we do a lot of their reporting and we do a lot of there.
Alco.
And then then we help them position their balance sheet. So we we not only have sales and traders we have.
We have <unk>.
Analysts and in balance.
Balance sheet strategist. So we have a pretty holistic approach to our business, which frankly has been really really slow.
Yes, no. The premise of the question was more around the idea that may be shorter duration, the economics aren't as good as trading it but it's a really good points about <unk> and the hedging thanks for that.
Yes.
Yeah.
And we have no further questions at this time.
Well very good.
Three good questions from from our analyst I appreciate thoughts and I appreciate everyone, taking the time to listen to our results and we look forward to reporting to you.
Hugh I believe in August for our second quarter results.
Actually July Joe's just reminding me so.
Thank you very much and have a great day.
Okay.
Thank you ladies and gentlemen that does conclude today's conference. We appreciate your participation have a wonderful day.
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