Q2 2023 Stifel Financial Corp Earnings Call
Please standby.
Good day and welcome to the Stifel Financial's second 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. Please go ahead.
Thank you operator, I'd like to welcome everyone to Stifel Financial's second quarter Conference call I'm joined on the call today by our chairman and CEO , Ron Kruszewski, our co presidents, Victor and easy and Jim <unk> and our CFO , Jim Harrison earlier. This morning, we issued an earnings release and posted a slide deck and financial supplement to our website, which can be found on the investor relations page at <unk>.
W. W Dot Stifel Dot Com I would note that some of the numbers that we stay throughout our presentation are presented on a non-GAAP basis, and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release I would also remind listeners to refer to our earnings release financial supplement and our slide presentation for information on forward looking statements and non-GAAP measure.
<unk>.
This audiocast is copyrighted material of Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without the consent of Stifel financial I will now turn the call over to our chairman and CEO Ron Kruszewski.
Thanks, Joe So I guess good morning, and thank you for taking the time to listen to our second quarter Conference call.
We reported solid results in the second quarter as strength in wealth management was offset by the industry wide slowness in our institutional business.
Wanna be repetitive, but as I've said it is important to point out that over the years Stifel business model has proven its ability to navigate these types of markets and still generate solid returns simply put wealth management is consistent and provides balance to the cyclical institutional business in the institutional business could be at cyclical.
Overall revenue came in at a little over 1.15 billion with non-GAAP EPS of $1 20.
Despite a challenging environment, we generated pre tax margin of 19% and return on tangible common equity of 17%.
And we had some positive developments in the quarter worth highlighting first J D power ranked number one in its annual employee advisor satisfaction survey.
We also generated our 10th consecutive record revenue quarter in global wealth management recruiting was strong in the quarter and we're seeing further signs of improvement in the third quarter capital raising revenue was at its highest since the fourth quarter of 2021 and book value and tangible book value per share increased 6%.
Yeah.
Turning to the next slide comparing our second quarter results to consensus estimates I would note that revenue came in at approximately $20 million below. This was the result of four advisory transactions, which totaled approximately $18 million of fees, which were anticipated, but did not close this quarter I should note that we expect these.
Deals to close in the third quarter. Our transactional revenue was ahead of the street by $4 million as wealth management institutional equity revenues were slightly above estimates.
Net interest income came in 3 million below the street estimates primarily due to a modest sequential decline in average interest earning assets.
On the expense side, our non comp expenses were 4% above the street estimate this was driven primarily by increased FDIC insurance and investments in brand marketing.
Together these items, primarily the delay in advisory closings resulted in our results being 13 cents shy of consensus estimates.
As I said earlier wealth management had another record quarter one of the major drivers of our success the culture and service we provide our advisors in this effort. We have continued to invest in our resources support and technology to reduce bureaucracy and enable our advisers to drive.
This strategy was validated by our number one ranking in the most recent J D. Power survey of overall employee advisor satisfaction noteworthy is the fact that our overall score was more than 32% higher than the average score in the J D. Power survey since 2019, we've consistently improved and the survey.
On the Navy and not only our overall number one ranking this year, but also in the fact that we ranked number one in four of the six categories surveyed leadership and culture product and marketing operational support and compensation.
And I should also mention that we ranked number two in professional development.
The survey is especially meaningful because the results are derived from the feedback from our own advisers. You've heard me say that Stifel has a unique culture that puts the financial adviser firms to have our strategy validated with this award is not only satisfying but it illustrates why we've had great success in bringing in high quality advisors.
Onto our platform and I should note that this will help recruiting going forward.
Now, let me turn the call over to Jim Morrison to discuss our most recent quarter results. Thanks, Ryan and good morning, everyone.
Looking at the details of our second quarter results on slide four our revenue of 1.05 billion represented our third strongest second quarter.
Compared to the same period, a year ago, we saw growth in our net interest income trading and underwriting revenues.
However, this was more than offset declines in client facilitation and advisory revenues.
Combined with the modest increase in non comp expenses, we generated earnings per share of $1 20.
Moving on to our segment results.
Global wealth management revenue increased 9% to a record $758 million and our pre tax margins were 40% an increase of 450 basis points from a year ago.
During the quarter, we added a total of 46 advisers, including 28 experienced advisors with trailing 12 month production of nearly $25 million.
We ended the quarter with fee based assets of 155 billion and total client assets of 418 billion, which were both up 3% sequentially.
I would note that our asset growth was negatively impacted by the restructuring of a single office during the quarter.
This process was completed in May and we expect <unk> growth to return to historical levels going forward as we saw net new asset growth in the mid single digits in June .
Moving on to slide six.
Just a few of the bank overheat overview slides into one new summary slide.
So starting with deposits.
I would highlight the cash sorting continues to slow and sweep deposits are stabilizing.
As you can see on the chart the pace of sorting slowed in recent months.
That said sorting was slightly more elevated early in the second quarter than we had anticipated in addition to seeing lower non bank net interest income.
The combination of these items impacted our net interest income as it declined to $292 million.
While we still expect the rate of sorting will be relatively subdued in the back half of the year. This is highly dependent on a number of market factors.
Given the lower NII in the second quarter and the potential for additional cash sorting in the second half of the year. We are updating our full year NII guidance to approximately 1.1 dollars 7 billion.
Our outlook for the back half of the year includes various cash sorting scenarios.
Slightly lower NIM expectations and limited balance sheet growth.
While the market environment has impacted our net interest income our net interest margin has remained relatively stable at this performance has been driven by both sides of the balance sheet.
While deposit costs have risen we have benefited from the fact that our balance sheet is asset sensitive and our.
Assets are primarily floating rate.
While many similar sized banks with greater fixed rate asset exposures have seen their NIM declined by 30 to 40 basis points since the beginning of the year Staples has declined by only 11 basis points.
Going forward, we anticipate our NIM to remain relatively stable. There are further rate hikes and it would be more impacted by cash sorting and changes in rates.
Our credit metrics and reserve profile remains strong.
The nonperforming asset ratio stands at four basis points and charge offs were less than $600000.
I would note that only 1% of our loan portfolio is comprised of office CRE exposure were only nine loans, which are all class a space with average ltvs of 44%.
Our credit loss provision totaled $7 8 million for the quarter and our consolidated allowance to total loan ratio was 80 basis points.
The increase was as a result of some deterioration in the macroeconomic outlook additional reserves in our commercial book and a decline in loan balances.
Lastly, our balance sheet continues to be well capitalized tier one leverage capital increased 20 basis points sequentially to 11, 1%.
Even when incorporating the unrealized losses in our bond portfolio, our tier one capital ratio declined by only 70 basis points to 10, 4%.
On the next slide I will discuss our institutional group.
Total revenue for the segment was $276 million in the second quarter.
Firm wide investment banking revenue totaled $167 million, which was below our guidance noted in our may metrics release.
Ron mentioned earlier, the deviation from our guidance range was due to a few delays in closings at the end of the quarter.
Advisory revenue was $88 million again, the delayed closings were a factor in our revenue decline, but I would highlight our strongest verticals, we're seeing within health care and consumer groups.
Industry wide M&A announcements have showed some signs of improvement recently, but still remains relatively challenged.
We remain engaged with our clients and as the market improves we are well positioned to benefit given our increased scale.
Equity revenues totaled $76 million in the quarter, which is up 6% year on year, driven by improved capital raising activity.
Equity transactional revenue totaled $46 million, which is flat year on year as lower flow business was offset by lower trading losses.
Similar to recent quarters.
Seeing increase engagement in our electronic trading as we pick up market share as our clients embrace our electronic offerings and value are best in class research.
Fixed income generated net revenue of 113 million in the quarter, which was up 10% sequentially as capital raising increased 41%.
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 increased to nearly 16% in the first half of the year.
Transactional revenue declined 4% sequentially as we continue to experience difficult operating conditions for our rates business, but we did see some market share growth across our credit business.
On the next slide we go through expenses, our comp to revenue ratio in the first quarter was 58%, which was a 10 basis point decline year on year and was flat sequentially.
We continue to accrue compensation at conservative levels, and Ron will give additional thoughts on our compensation outlook later in the presentation.
Non comp opex, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $230 million.
Our non comp opex as a percentage of revenue was 21, 9% increase.
The increase over the prior quarter was primarily driven by higher FDIC insurance expense and an increase in marketing related expenses.
The effective tax rate during the quarter came in at 25, 9%, which is slightly higher than our.
Than anticipated as a result of losses incurred in some of our foreign operations.
Before I turn the call back over to Ron Let me discuss our capital position, we have approximately $400 million of excess capital based on a 10% tier one leverage target. Additionally, if you simply run rate our first half net income we generate an additional $600 million in 2023.
Based on these capital levels, our share repurchase program remains a key part of our capital allocation strategy.
During the quarter, our average fully diluted share count came in at $113 9 million, we repurchased one 5 million shares in the quarter and we have approximately 6 million shares remaining on our current authorization.
Absent any assumption for additional share repurchases.
And assuming a stable stock price, we would expect the third quarter fully diluted share count to be flat and $113 9 million shares.
Note that the increase in our share price is essentially offset some of our recent share repurchases.
And with that let me turn the call back over to Rod.
Jim.
Remains a good bit of uncertainty in the market for the remainder of 2023 and possibly into 2024, therefore, I would like to comment on our outlook. So starting with 2023, our revenue expectations for the full year are relatively in line with the Street, which is currently four 5 billion our revenue guidance for the back half.
For the year of approximately $2 4 billion implies that operating revenue for our wealth management and institutional business will increase roughly 7% and 23% respectively. While net interest income remains flat to slightly down.
The 23% increase in our institutional business is based upon our visible pipeline for investment banking as well as the expected seasonal benefits in our transactional business.
We expect our compensation ratio will come in at the upper end of our original guidance due to a couple of factors. The first is the lower revenue environment that we've seen year to date second the impact of the investments we've made in the business as well as our efforts to improve efficiency in our businesses as you recall, we made some significant hires following the <unk>.
<unk> crisis in March teams from credit Suisse in Silicon Valley Bank have joined Stifel and are in the process of ramping up production and while we have and continue to incur expenses associated with these individuals and their businesses. We haven't benefited from the expected revenue.
The other factor is the impact of right sizing the business. We don't believe the current market for investment banking as the new normal we are focused on making our business more streamline and as such we are including the cost of this right sizing into our comp outlook for the remainder of 2023.
These two back these two factors combined will account for roughly $45 million of compensation expense and are excluded from our 2023 results, we would likely be at the midpoint of our initial comp ratio guidance.
Think about the future. It's clear that we are a substantial operating leverage within our business given the potential for uncertainty in the market I'm not ready to give specific guidance for 2024, but I think it makes sense to talk about our outlook in terms of the current consensus number in terms of revenues. The street has us generating for 2024 four.
9 billion with approximately $3 4 billion, including $1 2 billion of NII from wealth management, and $1 5 billion from institutional and wealth management. We believe this is certainly attainable with continued strength in small market appreciation.
The institutional business is also attainable for example in 2020 and in 2022, we generated roughly $1 5 billion in net revenue.
2024 is also in line with our forecast for the second half of the year of 2023 on an annualized basis.
In terms of expenses in particular compensation I believe that given these revenue assumptions for 2024th Street estimate for compensation ratio of 57% is a reasonable one.
I'm optimistic about the future of steeper remains well positioned to continue our long history of profitable growth with that operator. Please open the line for questions.
Thank you.
We'd like to signal with questions. Please press star one on your Touchtone telephone.
Joining us today use a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again that is star one if you would like to signal what questions Star one.
First question will come from Steven <unk> with Wolfe Research.
Okay.
Hey, good morning, Ron and good morning again.
Thanks, Stephen Good morning.
So wanted to start off with a question on capital return.
You noted you are running with significant excess the buyback in this quarter felt pretty light relative to expectations.
You laid this out really well in slide nine.
It's showing the cadence of capital deployment over the last few years I mean, it's been pretty muted year to date, despite strong capital generation and more notably the contraction in bank balance sheet I just wanted to get your thoughts as to why you're not stepping up the buyback here as I think about what's becoming less accretive.
Increasingly bank growth with higher beta <unk> is generating a lower return on capital given.
Given the valuation discount it doesn't even make more sense to be a bit more aggressive here in terms of buyback.
Yeah, Stephen I'll address this is Jim I think the thing you need to remember is that we were out of the market up until after earnings in April so really almost the entire month of April we weren't in the market and you think we did repurchase $87 million during the quarter, that's roughly 70% of our GAAP net income for the quarter. If you think if we were in for the.
The entire period that could have been slightly higher but again those are all factors you've got to consider when you think about the pace of the buyback.
Yes, and look you make a good point, okay, I mean in terms of.
The environment limited our view about muting balance sheet growth in this environment, both just from an economic outlook and what's going on on the deposit side. So your point your point's well taken and it's not it's not lost on us in terms of the cap.
The appointment.
Alright, thanks for that color, Ron and just for my follow up a clarifying question on the NII comment you made Ron I think you noted that you felt that the NII that was being modeled by the street for next year actually seem reasonable.
It does imply a run rate that's not wholly dissimilar to where we are today. So I just wanted to get general thoughts on what are some of the assumptions underpinning your NII expectations and does that contemplate any rate cuts as we look out to next year.
I'll, let Jim I'll, let Jim answer that.
We do have in our forward forecast model on rates.
Remember that we have had in.
In fact, we've had a decline in interest earning assets. So when you look at NII you looking forward 18 months I don't expect that to continue, especially considering the hires we've made and so where we can see some increase.
Net interest earning assets driving.
NII can increase even if NIM contracts.
Somewhat so the bake all that in and that's that's how I got to that comment, but Jim I know whenever we're giving kind of thoughts on the forward outlook. We're always using the forward rate curve. So we are assuming what you see out there publicly and I think Ryan address the rest of it just right. When you think about the investments, we made and the capabilities of generating not only.
Asset generation capabilities, but the ability to generate deposits outside of the wealth business. In addition to the recruiting that we're doing in generating additional deposits. There we see an environment set up for more potential growth than we do in the near term.
Theres, a little bit alright, resorting theres, a little bit of restarting that goes on on the asset side too.
Okay, it's not just on the liability side so anyway we're.
We're comfortable with that number.
Got it.
Very fair point. Thanks, so much for taking my questions I'll hop back in the queue.
Thank you.
And our next question will come from Devin Ryan with JMP Securities.
Good morning Devin.
I think I'll start on the institutional.
On the institutional.
Side of the business and Youre, just thinking about whether were perhaps a cyclical lows and ready for a recovery here and so what I want to think about is what you guys see as kind of a scenario of recovery between investment banking and then also a brokerage kind of split those two Atkins investment banking.
We're kind of a cyclical lows and then you've added some capacity with talent. So it would seem that.
That should show up in our recoveries, we want to think about what that might look like and then brokerage we're off well off of kind of the pace of kind of.
Pre <unk>.
Downturn, but that seems like it might be a little bit of a different type of recovery. So maybe kind of parse those two out separately.
Yeah.
Yes, well.
I mean.
On investment banking.
Our call some of our larger brother and who have.
Talked about green shoots in improving markets I will just say in general I can I can echo or repeat what they've said because.
In this business a rising tide lifts all ships, alright, where we certainly.
Half have been in line, if not even slightly better than that in.
As it relates to the overall market and.
As we look forward certainly in the back half of the year, even in this environment, we see we see an improvement.
One just to believe that there is a lot of.
Pent up activity in the marketplace, whether it's in private equity whether it's in strategic decisions. There's been a lot of things that are muted this market and we do not believe the current business.
Is the new normal for banking and I would note I'd like to just say that our results.
Frankly are in our business that essentially broke even that a couple of years ago generated $400 million of.
Contribution so theres a lot of leverage in this business and I want to point that out so that people do not miss.
The rebound in this business, which I believe is coming I just wont.
Put a timeframe on it as it relates to parsing out the difference between trading and banking, while we see banking improve I will say that they are linked.
Level of trading and what happens when we get back into capital Raisings significantly impacts our flow business, we trade the deals we trade in the middle market, we trade with.
Trade the activity that happens in our investment banking.
By the same token it will get a boost as capital raising increases.
<unk>.
For sure and the other thing in in transactional.
Our fixed income transactional, which has really been impacted by our rates business and the yield curve as it as it impacted our rates business and so as that normalizes youll see we believe a meaningful pick up in our rates business, which will help drive transactional as well I hope that answered your.
Jim you got anything to add no I think you've covered everything there okay.
Yes, thanks, Ron those through.
And then just a follow up on wealth management first off congratulations on the J D power results.
Are meaningful.
I just want to talk about the recruiting momentum you had a nice another nice quarter there.
So just talk about kind of what the tone is in the market and it does feel like there is a little bit higher churn going on for whatever reason.
Or maybe or maybe it's a normalization in churn and so I would think there's some opportunities for you guys could talk a bit about that and then <unk>.
Queen the channels, so independent contractors do you had a.
Higher growth there off of a very low base, but whether you guys are making any more of a concerted effort to kind of accelerate recruiting does that channel as well. Thanks.
Yeah look overall recruiting.
Has has been strong primarily on the employee side on the larger teams.
A noticeable impact.
On on larger teams and I'll.
I will tell you I I.
I believe and you don't always want to say that things like J D power make a difference but in this case. It does so I just wanted to say that I've known for years that the culture, and the technology and the support and everything that dry out draws.
People looking for a new home to Stifel I, certainly known about it and our advisers have known about it in now.
Just just since that's come out we're getting phone calls.
<unk> that we use to mess.
So that's been important it's going to come through you'll see it I believe in.
Our recruiting numbers, primarily the average production of who we're talking to so I'm quite optimistic about that part of our business and on the independent side look we're just.
We're just building that business slowly and sorting.
Sorting out all the economics in that business for a while in my opinion, the economics of that business was driven primarily by net interest in the spreads in that business that that debt.
Growth some of the economics in that business as re rating in my opinion, and we're not just rushing in under the old.
Economic paradigm, which I think is under stress in that business. So.
We're I would say less aggressive in terms of our recruiting because the economics were highly skewed toward.
And interest rate environment that has changed and so.
That'd be my overall comment.
Alright, perfect I waited there. Thank you so much.
Yes. Thank you.
Next is Brendan Brennan hawken with UBS.
Oh, good morning, guys. Thanks, Hey, how are you Ron good morning.
<unk>.
Curious on deposits. So we saw a decline in the commercial deposits I believe.
Down.
Nearly $1 billion quarter over quarter.
Could you maybe give some color on that I had thought that was tied to the team that came in from C. B.
So if you could confirm that's right and whether or not that might have just been a little bit of friction with them coming on board.
And that led to some of those balances declining and whether or not you can thank you.
Do you recover that.
It's a great question and the answer is that it wasn't it was actually.
If you will a decline in what you might otherwise characterized as wholesale deposits.
During the crisis, we had many firms took in.
Deposits that you know where.
Call It one way.
Broker and effectively.
And.
We quickly found out during the quarter that we didn't really need those okay. They were high cost and so we just they were in the balances and they're not in the balances and that's about just under one.
$1 billion that we took in in short term and took out.
Overall deposits have been stable one of the things I would note I think as.
It's something that we are.
It's positive for us or negative depends what your viewpoint is is that because of our primary retail nature and the fact that we're just building up our commercial is that we are not facing a lot of what the industry spacing, which is a repricing of zero rate.
Corporate deposits, which.
Everyone's trying to figure out where those are going to settle in at what rate.
We really are.
Are not looking at that in most of our deposits are.
Right competitive for the type of balances they are whether they're transactional or savings.
But the biggest.
One question I, just would say is that we've seen growth in the deposits relating to the businesses that we're entering into and it's being masked by our taking of a short term deposits during the crisis.
Immediately sending it back.
I think the only other comment I would make there, particularly to the venture teams that we've brought on it is going to take a little bit of time to get momentum there with so much activity happening post March and so many deposits moving quickly thereafter, there was a bit of fatigue within the portfolio companies, creating new book deposit relationships et cetera. This is going to be more of a 2024 story.
And that was one of the aspects we tied into the discussion on the on the comp ratio as well related to that.
Great. Thanks for that color I appreciate it.
For my second question.
The institutional revenue guide suggests some decent acceleration versus your first half pace, So and I also noticed that the advisory revenue.
I missed your your late June guide by a decent amount. So I'm guessing that's just timing so how much of I guess that would help your back half for sure with some of that advisory, but how much beyond just that which is a lot more tactical how much does your guide for the back half.
Assuming the current environment versus an improving environment. If you could just help us to still have that.
Yes, I think I think first of all to your last part yes.
We had four transactions, which which just slipped okay. We anticipated them closing, we anticipate them closing as late in the quarter as when we gave guidance as to banking revenue alright, and so the fact that they didn't.
It does sort of sort of timing you know what happens in our business.
So what wasn't in the second quarter will be in the third quarter.
So thats part of it the second part I'm not I don't.
I certainly have not factored in.
A significant improvement in the operating environment. We're looking at are visible pipe lines, and just extrapolating that out.
The second quarter was especially slow and the businesses, especially small for us and so are our back half what we're looking at.
We believe is in is in our pipelines and it's not factoring in.
A.
A market rebound.
When that happens and it will at some point.
That'll that'll be dramatic when it does.
But right now we're not.
Being optimistic that the market environment is changing in the second half of the year and as I commented on 2024.
We're not assuming that either okay. So we're taking a rather muted view.
At the economic activity as it relates to the equity business in particular.
Also highlight we're not anticipating the market to get worse from here, we're basically anticipating a stable market in the cement sentiment from our investment bankers today is much better than it was a quarter ago, and I'd say that and if you look at the total institutional results in that guide is implying somewhere between one three and $1. Four if you look back to 2022.
For 2020, that's below those levels of activity and we've added a lot of scale and resources. So we feel confident that we're able to reach those amounts.
Great. Thanks for taking my my questions I appreciate it.
Okay.
Our next question will come from Alex <unk> with Goldman Sachs.
Hey, guys. Good morning, Hey, Hey, Ron maybe a little bit of a higher level of profitability question for you guys. So 2023 updated guidance kind of points to a mid 20, low twenty's kind of 25%.
Pre tax margin.
Are you still getting pretty big tailwind from NII challenging capital markets backdrop. So as you look at the savings that youre likely to extrapolate from the business based on I guess some of the changes you announced today.
Scaling some of the initiatives what do you think the overall profitability of the business because look like overtime.
With what what kind of market <unk>.
Yes.
Obviously, you are saying that NII is likely to hold here, maybe it goes down a little bit but it sounds like you feel pretty comfortable with holding the line on this 1.2 ish billion dollar range in.
Again, assuming that the capital market activity starts to normalize.
It feels like Youre kind of approaching sort of peak ish pretax margin levels relative to what we've seen in the past and I wonder if it could get higher from here based on the sort of changing the business.
No I think I think.
Yeah.
We see the wealth management business continuing to grow.
On an operating revenue, we see strong recruiting driving.
That business.
And so that business.
How you can look at it we just had our.
Record quarter I believe is what we said and so on that side, we see that we see that now the real question is is in the institutional business. This is true of the street, we expect at least you know.
15% to 20% margins in our business that last quarter had zero harm.
And we are protecting the franchise in terms of doing some right sizing, but certainly not down to these levels and even to say that we would.
The business would rebound to 2020 levels would be us losing market share, which I don't think we're going to do because we've added a lot more capabilities a lot more mds a lot more businesses. So the way to think about it quickly is to put.
Put $1 five to $1 six which we do not think is a robust market is just not as limping along as it is today and you know and have margins go from zero to 15, mostly that'll be in the comp ratio.
Which was.
It's been 60% almost historic lane as low north of 70 today. So if you run that Youll see margins when you think about profitability being in.
Low to mid twenties.
Which as you know is what as we think about the profitability of that that's return on tangible of north of 20, and we think that you know.
At the top quartile of businesses like ours.
I'd also add to that if you go back about five years, we used to talk about pre tax margins in the 15% to 20% range. As you think about how we've scaled our balance sheet and how thats impacted our comp ratio and our margins that's driven a lot of the increase so you go to the last few years. So as Ron said, we've been between call. It 2020 four 'twenty, 5% so to get materially above that obviously you need a good environment.
And you need to continue to scale the balance sheet and the bank assets.
When you think about how the impact of the margins of our <unk>.
Good institutional Marc Maun.
Market, we had we had almost 24% margins in 2021, albeit that was a good market for institutional but 24% margins in a zero rate environment.
Okay and so.
We believe there certainly is margin expansion and profitability that will be driven primarily at this point not by expansion in NII, but improvement in the institutional overall.
Environment.
Got it yes, no that.
It all makes sense.
Quick follow up for you guys around just deposit cost as you look at the.
Sweep deposits from the broker so kind of the core deposit base.
What do you expect in terms of the ultimate cost of these deposits through sort of the rest of the cycle as the fed is likely to sort of pause here and it looks like you guys were holding the line kind of into this 20% to 30% deposit beta again outside of the smart mini program.
On the way down do you anticipate sort of like a similar pace of deposit beta as rates start to come down there or the core deposit sweep program could have a higher deposit beta on the way down.
So I would I would start that we're saying if we do see a rate hike here I think there's a good chance you could see us paying a higher rate on our smart rate program, probably won't have as much of an impact on our sweep deposit program, but all of that's baked into our guidance already and kind of what we've incorporated in the second half guide as we look forward.
Beyond this next rate hike, if we were to see rates decline I would say generally speaking historically <unk> seen a higher beta on the rate cuts on the way down.
I don't see anything in the current environment that would guide us to think differently about that today than what we've seen historically and we would expect higher beta on the way down.
Yeah.
Our largest tempur Jim's remarks by saying that while I agree with that I think if it does different environment with.
With the competition for deposits and Qt and just the amount of liquidity that is less.
The system, so like everything.
History tends to repeat itself, but not perfectly and in this case I think there is a risk that the competition for deposits will somewhat mute the deposit betas on the way down so that we're also thinking about that as well so.
Yes, I just want to temper that because I hear a lot about.
100% deposit betas on the way down.
Not sure I'm, all complete proponent of that.
Or do you believe in that.
Including some of the high yield saving program, so like the smart grid.
Payload risk program.
The high yield savings program when we when we net all this out and hit it.
Ending up being very competitive with money market.
With where we're going and is the high yield savings program would be.
More.
The deposit beta that should move with fed funds moves because that's kind of where we pegged and so I would say that I'm talking about on these on the transactional cash that those deposit betas have been much lower and I think well be much lower.
That's all it roughly 50 basis points.
How much of the deposit maybe you don't have so yes, exactly okay alright, thanks for clarifying appreciate it guys.
And our next question will come from Chris Allen with Citi.
Good morning, everyone.
They do not.
Most of my questions have been answered I guess, just maybe following up on the recruiting environment gave some good color on the independent channel.
What's the competitive environment like on the employee channel. These days some of the pressures exerted by some of the companies that have undergone some of the issues back in March.
Did and any anyone stepping up or is it just a bit more moderate competitive environment the moment.
I think the competitive environment really hasn't changed I think that what has changed for US is our profile within that it would I would often be frustrated that that Oh Wow I always felt recruiting was good, especially when we when we got people to look.
At our platform, we have a very high.
Conversion rate.
Yet I also felt that we would call teams that will go somewhere else. So why didn't we talk to you and they say well wait I didn't even really.
Think of it or know about you and that is that has changed quite a bit and so we see our ability or the number of people that we're talking to the population.
<unk>.
Significantly and if we have or not.
Oral batting average, which I think is going to be higher anyway that our recruiting is going up in that.
Almost.
Not.
Unless the competitive market really changes in terms of being something thats not economical we believe we're in a better relative to possess.
Position than we've ever been at.
Great. Thanks, a lot guys.
And we have a question from Stephen <unk> with Wolfe Research.
Steven you are back.
Okay lifestyle. So thank you for accommodating the follow up.
Wanted to ask on the non comps that it.
It's been a.
Source of Delta versus consensus over the last couple of quarters has been running a bit higher.
An updated full year guidance on the non comp ratio if I did the math correctly implies about $40 million increase versus the prior guide.
You cited a couple of items like FDIC assessment costs being higher but just wanted to better understand the primary driver of that higher non comps. The FDIC piece certainly doesn't explain the bulk of it.
Actually the only explains a small proportion of it and just how sticky are those expenses is there any room to bend the cost curve.
Well you know.
The FDIC Youre right I mean that is that's been part of it doesn't explain all of that we've been investing in the brand and that is that's been helping our profile has been helping recruiting and and that has been something we havent done over the past. So we will use <unk> seen increase.
Sponsorship by Stifel.
And a lot of the sporting venues.
U S ski team sponsor, we you know in baseball with the Cardinals et cetera, and that that has really helped our visibility and a lot of things. We're doing we needed to do that but there's also a significant portion.
That is variable in nature and that is our conferences and travel and entertainment, which we have taken the position.
Like that old United commercial with the Guy who puts his tickets in his pocket, we got to see our clients and even though the environment is not conducive to.
Spending what those variable expenses versus the short term revenue we believe that.
This is money well spent.
There is variability if we wanted to have a more of a governor on the travel entertainment conferences and those things and at this point.
We are playing the long game.
The only thing I'd add there as well as additional technology expense, we continue to invest in the business. We're always doing that that's always going to have an impact on the bottom line and then obviously our guide is ex provision in our investment banking gross up but those obviously were up a little bit in the quarter as well, obviously I think provision expense across the market today is going to be a little bit elevated.
Given the economic environment and really the IV gross up increasing in the current quarter was a function of the step up in the capital raising activity as well.
Look Steve and I think I think that every year.
Non comp Opex goes up okay.
Yes.
Because of the investments what normally people aren't talking about it as much because margins are going up as well.
And in this particular instance, our margins have been declining since you're getting a little bit more focused but these investments are investments. We believe we need to make to continue to be competitive so.
As the business rebounds, and our margins expand I think the wisdom of these expenses.
<unk>.
No that's really helpful color, although Ron it might be nice if you decided to invest there or market to franchises that are outside of the St. Louis area, but I won't hold that against you.
Uh huh.
The other piece I wanted to just.
As dawn is cash sorting and you the trend is clearly improving.
Wait wait a minute why youre not getting by with that I'll get to the cash.
Oh, St. Louis franchises travel to 40 cities outside of the United States and I will tell you that's been the big difference. So you know if we had a named stadium in Saint Louis I'd take that but these these franchises travel and we get a lot of exposure.
Can't help but youre not a cardinal fan obviously, so go ahead with their cash sorting.
Yeah.
No I am only supporting superior sports franchises on cash sorry, David.
Each month through June of operator.
[laughter] gas.
Cash starting.
I agree.
In comparison.
Yeah.
But how have the trends fared through July just wanted to get a sense as to whether you are expecting continued improvement, especially in light of what you expect it to be another rate hike coming in very short order.
Yeah, I'll give you an update so if you look back to June we had about a $300 million outflow from the sweep program.
Through July that number is about right around $100 million and so youll continue to see those trends progressed into July . This was probably as of the end of last week are beginning of this week roughly speaking and so we continue to see the trends produce.
Fewer and fewer outflows as we go forward.
Great color. Thanks, so much for taking the follow up Hey, Stephen C&I last point, Okay. As it relates to our sports marketing I would note there are no ski mountains in St. Louis Missouri.
Okay.
[laughter].
All right any more questions.
There are no further questions at this time.
And everyone. We appreciate it.
The overall message is that we had a strong quarter.
The expected profitability and our growth we continue we expect to continue.
A challenging environment, but one that we believe we're well positioned in the future I look forward to talking to everyone in the coming quarters and appreciate your time today. So thank you.
Well. Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Okay.
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Okay.
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