Stifel Financial Corp. (SF) Earnings Call Transcript & Summary

Good afternoon, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it's my pleasure to introduce Ron Kruszewski of Stifel. Ron is the firm's Chairman and CEO and he's held these positions since 1997. Prior to joining Stifel, Ron worked at Robert W. Baird. His career started accounting at KPMG. We also have CFO, Jim Marischen, joining us as well. Ron, Jim, thank you for joining us.

Sure. Thanks for having us.

Afternoon.

For those of you who don't know Stifel, it's a global wealth management and investment banking company that serves both consumers and institutions. The firm was founded 130 years ago in St. Louis, but through many mergers, its business has constantly evolved. Following these mergers, the firm has decided to keep some of the acquired firm names where it saw value in the brand. This includes KBW, Miller Buckfire and Eaton Partners. The firm is in a great position entering 2021 with both record recruiting and investment banking pipelines and more than $500 million in excess capital. All right, let's begin.

Ron, to start us off, I wanted to see if you could share your perspective on your institutional your business, which is coming off a very strong 2020 and seems to be consistently underappreciated by the Street.

Well, again, thanks for having us. We had a great year in 2020 in the institutional business and this year has started off very strong. I think that our business, as you look at it over the years, what you'll see is just an increased capability and increased relevance across the product sets, including some geographical diversity as well. We did acquisitions in Canada, expanded in the energy and mining business as well as blockchain. We're a leading underwriter on the AIM in London. We have businesses in Europe. But in the United States, our domestic business, as supplemented by KBW and Miller Buckfire and Thomas Weisel Partners back in the day, I think that the Street does not really totally appreciate the scope of our institutional capabilities. We recently did a deal where we've restructured our company to Miller Buckfire, helped them refinance, then get us back, then get pipe and enough [indiscernible], all of which maybe even 3 years ago, we have tried and unable to do. So as I look at it, I see a very strong business but a business that can gain a lot of market share. We're focused on the middle market and we see an ability to continue to gain market share.

Great. Ron, let's move on to wealth management. Can you update us on your wealth management recruiting and retention expectations for 2021 given your record pipelines?

Recruiting has been -- you have to go back 25 years and we had 200 advisers that it started, thus, we've been one of the fastest-growing firms in wealth management over the years. Our pipeline in recruiting is as strong as they've ever been. I'm gratified that, again, similar to our investment bank, a number of the people that we bring on today, 5, 6, 7 years ago probably would not have joined Stifel. We have added a lot of capabilities on the wealth management side as well. So we have very large teams dealing with very large clients that is really showing great momentum on the recruiting front.

So given the COVID pandemic last year, how has your recruiting practices evolved? And how successful has the firm been at pivoting to virtual recruiting?

I was worried about it when we first entered the pandemic. I thought that our strength was always are in-person meetings, was where we really could highlight the strengths of the firm. However, we've been very successful in a virtual environment. We also -- part of our success, I think, is also the fact that we were flexible in the way we dealt with COVID across the country. We have almost 400 locations. We didn't do just a massive shutdown of everything. We worked with local authorities and local guidelines. And so that flexibility certainly came through on our recruiting front as people saw that we were doing that. So I look forward to doing more in-person meetings but virtual's been just fine.

Yes. I think we all look forward to do more in-person meetings. But -- so sticking with recruiting for a minute, the breakaway broker trend has continued to supply financial adviser recruiting opportunities to the wealth managers that I cover. Can you remind us how Stifel is positioned for this trend? Can give us an update on the pace of activity from the big banks and warehouses?

Well, I think we've always -- I mean, we're well positioned in that we view ourselves as a firm that has a huge cultural advantage. We don't -- we, for 25 years, that -- have had a product at different compensation grid. We maintained one of the highest payouts on the street, yet, we're also very profitable. And I think that, that allows us to be in that sweet spot between employee and independent, even the RIAs. And so we have a lot of people that join us. So I will say, and I think I might be saying this the first time at your conference here right now, but we are -- we believe that we can also significantly compete in the independent space. That's a space that we have not focused on in the past. We have an independent broker dealer. We've had it for years. But as we've looked at it, as I look at some of the success and some of the trends around the Street, I'll tell you and also your audience here today that Stifel is not only going to be very successful in the employee channel but we're going to have some initiatives in the independent channel. We're not going to cede that space to some of the competitors because we actually think we have a great offering in that space as well.

So Ron, turning the subject over to NIMs. 2020 was a tough year for bank NIMs due to the lower interest rate backdrop, but we have launched the 10-year go vertical in 2021. How has the year-to-date increase in the long and the yield curve impacted Stifel's NIM? And I'm also trying to gauge any sensitivity to your $450 million to $500 million net interest income guidance.

I'll let Jim give those details. I'll just say that we have said that we found the way we were positioned in our -- on our balance sheet and our asset mix between investments and loans and the fact that we don't have a lot of repayments. We felt, and we've said that we felt that we were near the low end of where our NIM could go. And yet we felt that actually that would -- could increase NIM them even with our balance sheet -- our net interest income for sure, but also we'd be able to increase our NIM as we [indiscernible] investments into loans. So that's the high level. I don't know, Jim, if you want to jump in a little bit on this.

Yes. I'd say we're less tied to kind of the long end of the curve. All of our assets really going to reprice really on the short end. And I think that's a lot where more our exposure is. But to maybe expand a little bit on what Ron said, as we look at it today, we have the opportunity to grow NIM and NII. I think when you look at some of the things we've talked about in our last call, the yields on our loan portfolio were about 100 basis points higher than what we're seeing on the bond portfolio. I think there's opportunity for growth there. And I think when you combine the excess capital position that we're in with the liquidity that we have, we have an opportunity here to really drive additional NIM, additional NII and additional margin. And I would say, when we put our forward guidance together, we essentially assumed no change in the yield curve or interest rates in general. So if we see anything there, that's just a pickup on top of what we already have in our base case.

Great. Thank you, Jim. Maybe another question for Jim. We'll say, how do you expect the asset mix of the balance sheet to trend over the next year? And what impact does this have on the firms now?

Yes. I would say you're going to continue to see loans grow a little bit faster pace than the investment portfolio. I think given where rates are today, there's less attractive opportunities there. We're not in a position where we're just trying to grow NII without considering NIM. And I think we have a lot of opportunities there. And so I think if you look back over the last few quarters, we've been growing residential mortgages as well as securities-based loans $200-plus million a quarter. Given where the interest rate environment is today, along with the strength that we're seeing in recruiting, we're seeing strong pipelines in both those asset classes. And I think those are going to be 2 that drive a lot of our growth here.

Great. So soft net interest income revenues but really strong investment banking and wealth manager revenues may not be a great thing for margins given the comp allocation. Can you articulate this dynamic and also talk about your current comp ratio guidance of 58-point -- I mean, 58.6% to 60.5%?

There's a couple of things. I mean first of all, yes, if you look at historically, if you look at our net interest income as it's grown, and it's still only maybe 15% of our revenue, but as it's grown, that's driven our comp ratio down. It's just simply because net interest income is not a compensable item. And so last year, with a 0 rate environment, it was and certainly fully expected by us for our comp ratio as a percentage of revenues to increase. And as we look forward, that drives our guidance close out the 58.5%, I think to 60.5%. What I want to say, though, is that one of the things that I want to focus on less about the comp ratio is the fact that last year, we drove so many operating revenues that, that's a good thing. I mean as comp ratio going up, it's because we drove a lot of investment banking revenues and our franchise value is and has been increasing significantly. So I don't want to overly focus. I would encourage investors not to overly focus on the comp ratio as much as our returns on capital and our growth in revenue.

Great. Let's change subject to capital management. So what are your capital management priorities today? And I'm especially thinking about both buybacks and M&A.

We -- there's -- our capital management practices are basically unchanged as they have been over the last several years, even decades. And that is that we will do what we think is in the best interest of our shareholders and provides the highest gross adjusted returns on capital. That can -- sometimes, you need patience before you just are doing anything. We've raised our dividend last year for the fourth consecutive year but it's still basically a 1% yield so that's not a lot. We will obviously look at buybacks, especially as it relates to stock-based dilution and comp. Balance sheet growth, we talked about $2 billion of balance sheet growth, so that's the use of capital, and obviously, acquisitions. I think that when we talk about this, I sort of like to just slip backwards and say throughout all of the things that we've done and using all 4 of those levers, we -- our return on tangible equity is 25%. So I think we've been good stewards of that. Is there any one lever that we're going to pull to put in the models for capital management? The answer is no. It's going to be based upon opportunities. And we recognize the importance of capital management to drive shareholder value.