Stifel Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Stifel Financial 4th Quarter Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations at Stifel Financial. Please go ahead.

Speaker 1

Open. Thank you, operator.

Speaker 2

I'd like to welcome everyone to Stifel Financial's 4th quarter and full year 2023 conference call. Recorded. I'm joined on the call today by our Chairman and CEO, Ron Krzyzewski our Co Presidents, Victor Niesi and Jim Zemlyak and our CFO, Jim Marischen. Recorded. 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 www.stifel.com.

Speaker 2

I would note that some of the numbers that we state throughout our presentation are presented on a non GAAP basis, and I would refer to our reconciliation of GAAP to non GAAP as disclosures in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward looking statements and non GAAP measures. This audiocast is copyrighted material by Stifel Financial 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 Krzyzewski.

Speaker 1

Thanks, Joel. To our guests, good morning open. Thank you for taking the time to listen to our Q4 and full year 2023 conference call. Let's begin by discussing our year in 2020 free, whereby Stifel generated strong results in an operating environment that was less than ideal. The benefits of our diversified business model enabled us is successfully navigate market conditions that included increased geopolitical risks, tightening of financial is primarily due to significant increases in short term rates and quantitative tightening by the Federal Reserve, both implemented to corral inflation recorded and the failure of 3 major banks in the United States.

Speaker 1

Led by record results in Global Wealth Management, which produced its 21st consecutive year of record net revenue, driven by record asset management revenue and net interest income. Stifel overall generated net revenue of approximately $4,400,000,000 This was essentially in line with 2022 despite a significant industry wide slowdown in Investment Banking activity. As we'll discuss later, these results are directly correlated to our consistent reinvestment in our business, our focus on servicing our clients as well as our strategy of deploying our substantial excess capital in ways is generated strong risk adjusted returns. Taken together, we generated operating pre tax margins and returns on tangible common equity approximately 19%, excluding the impact of the non recurring legal charge in the Q3. With respect to capital deployment, We typically deploy the excess capital we generate each year and 2023 was no different.

Speaker 1

Last year, we generated $630,000,000 of excess capital recorded and deployed it as follows: the repurchase of 7,200,000 shares totaling approximately $651,000,000 in common and preferred dividends and a modest amount of balance sheet and acquisition activity. Underscoring our confidence and improving market conditions, I'm happy to announce that our Board has authorized a 17% increase in our annual dividend on common shares from $1.44 to $1.68 per share. On Slide 2, we look back at the growth of our business since 2015 2019. Despite constantly changing market conditions, the investments we've made in our business results in substantial growth. Net interest income was up more than 7 60% since 2015 is a strategy to grow our balance sheet enables Stifel to capitalize on the increase in short term interest rates over the past 2 years.

Speaker 1

And institutional segments have led both segments to more than double revenue over the past 8 years. The operating leverage from these investments resulted in earnings per share increasing 2 70 percent over this timeframe. The comparison of 2023 to 2019 is also important recorded as it illustrates the benefits we've seen from recent acquisitions, recruiting and balance sheet growth. Total revenue was up 30% in the past 4 years as Wealth Management growth of 40% more than offset relatively flat institutional revenue. What should not be lost here is the potential upside we see in our institutional business.

Speaker 1

Specifically, the average number of investment banking management due to the market conditions. If our production per MD returns to historical levels, we would experience substantial growth for both our top and bottom lines. Looking at our quarterly results, we had a strong rebound from the 3rd quarter. Net revenue of nearly $1,150,000,000 was our 3rd highest quarterly revenue is a combination of a pickup in institutional revenue and continued strong wealth management revenue drove this improvement. Given the flexibility of our operating model, we were able to maintain our compensation ratio at 58% and generate $1.50 of EPS, which was a 27% sequential quarterly increase in operating EPS, which excludes the significant one time legal reserve taken in the Q3.

Speaker 1

Moving on to Slide 4, we look at the variance table to consensus estimates. Total net revenue beat The Street by $60,000,000 as each of our primary revenue lines surpassed expectations. Transactional revenue came in $30,000,000 above is on stronger fixed income revenue as our rates business has begun to rebound from the weakness tied to bank failures, higher rates and an inverted yield curve. Investment Banking came in $21,000,000 above expectations, driven by higher advisory and fixed income Capital Markets, primarily public finance. Total expenses were higher than forecast, but much of that was reflected in compensation expense due to higher revenue in the quarter as the comp ratio remained consistent at 58% and was in line with Street consensus.

Speaker 1

Non comp expenses were $10,000,000 higher than expectations as a result of higher occupancy costs and higher legal expenses that was partially offset recorded by a lower loan loss provision. Before I turn the call over to Jim to go through our quarterly results, I wanted to talk about our Wealth Management business. While much of the discussion of our near term upside is focused on our institutional business, I want to emphasize that our Global Wealth segment has been the long term growth engine of our firm and is a cornerstone of Stifel's success. As stated previously, our Wealth Management segment has posted 21 consecutive years of record revenue as our focus on recruiting, serving our clients, respecting the entrepreneurial spirit of our advisors and growing client assets has been fundamental to our success. Slide 8 illustrates these points.

Speaker 1

Since 2014, Global Wealth Management revenue has increased 150 8%, while the percentage of recurring revenue has increased from 44% to 78%. Again, this level of growth has been the result of our strategy to to recruit high quality advisors and provide them with extraordinary level of service. In this effort, we have continually invested in resources, support and technology to reduce bureaucracy and enable our advisors to thrive. Our recruiting efforts have been one of the key elements of our growth efforts. Since the end of 2018, we've added more than 700 financial advisers with cumulative trailing 12 production of approximately 435,000,000 We continue to see increased momentum in our recruiting efforts as the number of advisors we added to our platform increased by nearly 30% in 2023 as compared to 2022.

Speaker 1

So while we see significant upside in revenue and margins recorded. As our institutional segment gets back to historical norms, our long term growth and success has been and continues to be driven by our Wealth Management franchise. And with that, let me turn the call over to Jim Marish to discuss our most recent quarter results.

Speaker 3

Thanks, Ron, and good morning, everyone. Looking at the details of our 4th quarter results on Slide 6, our quarterly net revenue of $1,150,000,000 was up 2% year on year. The increase was driven by stronger client facilitation, trading and underwriting revenue is partially offset by lower net interest income and advisory revenue. Our EPS was up 150% sequentially due to higher revenues as well as lower non comp operating expenses, which Ron addressed earlier. Moving on to our segment results.

Speaker 3

Global Wealth Management revenue was $766,000,000 and our pretax margins were 39%. Recorded. For the full year, record net revenue of $3,050,000,000 was up 8% from 2022. Driven by record asset management revenue and net interest income as well as strong transactional revenues. Primary driver of our growth has been our ability to recruit advisors and increase our client assets.

Speaker 3

Recorded. During the quarter, we added a total of 40 advisors. This included 13 experienced advisors with trailing 12 month production recorded for more than $8,100,000 We ended the quarter with fee based assets of $165,000,000,000 total client assets of $444,000,000,000 The sequential increases were due to higher equity markets and organic growth Net interest income of $273,000,000 was in the lower half of our guidance as bank NIM was impacted by higher deposit costs, Larger average cash balances and the movement of sweep deposits back into 3rd party banks. The movement of cash back into the sweep program resulted in a few $1,000,000 being recognized in asset management revenue rather than NII. This is simply changing the geography Outflows from sweep accounts were essentially flat in the quarter as compared to outflows of more than $3,600,000,000 just 2 quarters earlier.

Speaker 3

I'd also note that the Suite program now has $2,100,000,000 in balances with 3rd party banks. That said, we typically see some cash outflows early in the year given the timing of tax payments. In terms of our expectations for the Q1, we project net interest income to be in a range of $250,000,000 to $260,000,000 Our credit metrics and reserve profile remain strong. Non performing asset ratio stands at only 15 basis points. Our credit loss provision totaled $2,300,000 for the quarter and our consolidated allowance to total loans ratio was 86 basis points.

Speaker 3

Recorded. During the quarter, charge offs were primarily tied to an individual C and I credit that was fully reserved for previously. I would also note that we saw an approximate $800,000,000 reduction in C and I balances during the quarter recorded as we opportunistically sold certain broadly syndicated loan exposure as we continue to focus balance sheet allocations to portfolios is also provide other deposit or fee income opportunities. Lastly, our balance sheet continues to be well capitalized. Tier 1 leverage capital decreased 30 basis points sequentially to 10.5%.

Speaker 3

I'd also like to highlight the improvement in unrealized losses in the bond portfolio. To put numbers to this and reflecting the rally in the 10 year treasury bond and tightening of credit spreads, our unrealized losses is now open. Our next slide, I'll discuss our institutional group, which had its strongest quarter in a year and a half. Total revenue from the segment was $359,000,000 in the 4th quarter, recorded, which represented a 40% sequential increase as both Investment Banking and our transactional business had strong quarters. Firmwide Investment Banking revenue totaled $206,000,000 as both capital raising and advisory revenue experienced significant increases from the 3rd quarter.

Speaker 3

Advisory revenue was $129,000,000 which was up 33% sequentially as we had solid results in our industrial, Healthcare and Technology Verticals. I highlight that although we benefited from year end seasonality, the quarter was again negatively impacted recorded by continued delays in closings. We continue to expect these deals to close, but timing remains uncertain. However, our pipeline has remained strong Equity revenues totaled $89,000,000 in the quarter, which was our strongest quarter since the Q4 of 2021. Equity transactional revenue totaled $57,000,000 up 20% from the prior quarter and represented our highest quarterly revenue in 2 years.

Speaker 3

We continue to gain traction in our electronic offerings and see strong engagement with our high touch trading and best in class research. Fixed income generated net revenue of $142,000,000 an increase of $50,000,000 from the 3rd quarter. Much of the increase was driven by the $35,000,000 increase in transactional revenue. We are starting to see the rates market open up Underwriting revenues increased 60% sequentially as we continue to be a leader in the municipal underwriting business as activity increased On the next slide, we go through expenses. Our comp to revenue ratio in the 4th quarter was 58%, which was in line with our forecast.

Speaker 3

Non compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, is recorded. Our non comp OpEx as a percentage of revenue was 21.8%. Effective tax rate during the quarter came in at 21.6%. The lower tax rate was primarily due to the impact of the increase in our share price related to excess tax benefit on stock based compensation. Before I turn the call back over to Ron, let me discuss our capital position.

Speaker 3

Recorded. In the Q3, we repurchased more than 2,300,000 shares. We have nearly $12,000,000 remaining on our authorization. We have approximately $170,000,000 of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate substantial amounts of excess cash is illustrated by our 2023 net income of $530,000,000 We remain focused generating strong risk adjusted returns and deploying capital recorded and we've done this through reinvesting in the business, making acquisitions as well as through share repurchases and our recently increased dividend.

Speaker 3

Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the Q1 fully diluted share count to be 110,000,000 shares. Complete. And with that, let me turn the call back over to Ron.

Speaker 1

Thanks, Jim. Let me conclude by discussing our outlook for 2024 in terms of the current Street estimate. The current consensus estimates for net revenue for 2024 is $4,700,000,000 which is up about $320,000,000 from 2023. The primary driver of the increase is the expectation that our Wealth Management and Institutional revenue will increase by a combined $400,000,000 which will be is more which will more than offset the roughly $80,000,000 expected decline in net interest income. As you can see from the table, we are guiding to total net revenue recorded for the full year of $4,550,000,000 to $4,900,000,000 in 2024.

Speaker 1

This includes our expectation that net interest income will be in the range of $1,000,000,000 to 1 $100,000,000 Overall, we believe that the pressure on net interest margin can be offset by an increase in interest bearing assets. Simply considering the multiple factors impacting the banking industry, we see the current period as an opportunity to make great loans. While we anticipate an improvement in our operating revenue, particularly in institutional, we remain conservative given the recent industry wide weakness in Investment Banking. Considering this, we expect our compensation ratio will be in the range of 56% to 58% I've heard the term transition year applied to 2024, and I believe that's a relatively accurate description of the environment. We don't believe that 2024 will be a normalized operating environment as there remains uncertainty regarding the number of rate the best that the Federal Reserve will make, the timing of the pickup in Investment Banking revenue, the presidential elections and how the equity markets will react to these changes.

Speaker 1

Personally, I believe that The Street estimate of 11% EPS growth for the S and P 500 and 5% to 6% rate cuts is optimistic. We believe that earnings will grow for the S and P of 6%, approximately 2 to 3 rate cuts is more realistic. I wouldn't be upset with the consensus that would likely have a meaningful positive effect on our operating results. Lastly, while I'm not giving guidance beyond 2024, I did want to touch on how we are looking at the next few years. I must say that while we are cautiously optimistic for 2024, we see the potential for significant exit velocity into 2025.

Speaker 1

Last quarter, we discussed the potential results of $5,000,000,000 in revenue and $8 in earnings per share in a more normalized market environment. Could 2025 be such a year? It's certainly possible if the markets cooperate as we don't believe that reaching these numbers would require significant outperformance in any of our businesses. What we need is the return to historical productivity levels in banking, continued growth in Wealth Management is due to the strong financial results and some future balance sheet growth. The bottom line is that the operating environment improves, Stifel is well positioned to continue our legacy of profitable growth, which we believe will continue to drive shareholder value.

Speaker 1

This is consistent with our strategy of continuing to build our market leading wealth management franchise with an achievable goal of $1,000,000,000,000 of client assets,

Operator

is open. We'll take our first question from Devin Ryan with JMP Securities.

Speaker 4

Great. Good morning, Rod and Jim. How are you?

Speaker 1

Good morning, Kevin. Great, by the way.

Speaker 4

First question, just want to go. Good. We want to start just on deposit betas. And assuming Interest rates do move on at least with the current forward curve. How you guys are thinking about kind of the movement over the first and second 100 basis points?

Speaker 4

And I guess The question is, obviously, we know Smart Rate is over half of the cash ex money market, so that should be one for 1. And so really kind of what are you expecting just for the sweep deposit piece of the equation. Thanks.

Speaker 1

Well, I think half of our approximately are in smart rate and that is highly correlated to effective Fed funds. I think the question on deposit betas on the way down are going to be driven by competitive factors, just as they were sort of on the way up. Jim, I don't know if you want to

Speaker 5

No, I

Speaker 3

mean, the correlation effect of Fed funds is essentially because of in addition to the competitions are money market mutual funds and treasury bonds and those that's by its nature is tied to the short end of the curve. And so you'll see near 100% beta on the way down on the first couple of cuts and probably beyond that.

Speaker 1

Yes, for smart rate. I think Devin, I think you're trying to get to What will happen with sweep balances, which is more transactional balances versus savings balances. And we expect them to decline. I'm not sure that I would be comfortable giving you a deposit beta on those balances. Is But it would be modest like

Speaker 3

it was modest on the way up.

Speaker 1

It was modest both ways actually.

Speaker 4

Yes. Okay. That's fair. I figured I'd see what you guys would say there. And then, I guess, on the financial advisor Evolution of the firm.

Speaker 4

I get this question a fair amount. Independent contractors is still very small, less than 5% of overall financial advisor headcount. And I just love to get your thoughts, Ron, around what you think that looks like maybe 5 years from now. How much of a objective of the firm is to grow independent relative to employee, if it is at all. And if it is, kind of some of the steps you're taking to either drive that growth, whether it's organic or inorganic, or just, make the platform more compelling for independents as well as employees.

Speaker 4

Thanks.

Speaker 1

Yes. I think to answer your question, it would be, what you finished that with, which is, we would like to provide an opportunity and a compelling platform for independence to utilize simply our platform, our technology and our capabilities. There is no particular focus on growing the independent channel relative to the employee channel. There just hasn't been. We will deal with that is as supply and demand sort of dictates, we have the platform and it's a good alternative.

Speaker 1

What you'll see though is our focus has been historically and this is nothing against the independent channel. I just want to say our focus over the years has been on the employee channel and that's simply because we are a diversified firm with a lot of capabilities is that the employee model, it's more it's been tailored over the last 25 years to the employee model. So, I can see both growing. I'm frankly indifferent the way we look at the business.

Speaker 4

Yes. Okay. Appreciate it.

Speaker 3

I'll leave it there. Thanks, guys.

Operator

We'll take our next question from Alex Blostein with Goldman Sachs.

Speaker 6

Open. Hi, thanks guys. Good morning. First question around NNA. I heard you talk about a mid single digit NNA rate for the quarter.

Speaker 6

Can you talk a little bit of broader kind of what it's been for the year and what's been the contribution from same store sales, Neil Fey recruiting and maybe your outlook for organic growth in that business for 2024?

Speaker 3

I would say the results we saw in the 4th quarter were consistent with what we saw over the full year. The net new asset number was relatively consistent in the mid single digits across each of the quarters in 2023. I think it's a fairly even mix between existing advisors and recruiting. I wouldn't say either side is particularly driving The addition of net new assets there, and I think it's fairly balanced.

Speaker 1

Yes. And look, I think I don't have in front of me, Alex, The same store sales. Certainly, the last half of the year helped the overall well business in the Wealth Management Sector. If you ask me just to look forward, though, I would generally speaking that I would expect the increase in same store sales to be higher in 2024 than it was in 2023. We got off to a rocky start in 2023.

Speaker 1

And with the equity markets where they are today and our outlook. I see, some relatively good performance over 2023 for 2024 versus 2023 versus 2022.

Speaker 6

I got you. That's helpful. My second question, just wanted to dig into the interplay on capital management as well as you look out into next year. So It sounded like your appetite for loan growth perhaps was a little bit better as you look out versus maybe what we've seen over the course of 2023. So maybe just expand on that a little bit and just tease out what that means for share repurchases for 2024 as well?

Speaker 1

Well, we have first of all, we've been repositioning the balance sheet, all right, as we have is adapted to a new environment where deposits aren't just free flowing all over the place. And trying to keep an eye on various sectors and credit considerations of loans, You'll see, as Jim mentioned, we sold nearly $0.75 In syndicated broadly syndicated loans, which we're really put on almost as just a spread lending type strategy. And we intend to deploy that much more focused to more of a relationship type relationship, deposits, other opportunities that we can provide for the firm. And with all that said, we really haven't had a diminish in loan demand. We've just muted it.

Speaker 1

So I see today, this is a good time to be in the lending business. And is That's just what I would say relative to before. And we see now, and as it relates to stock repurchases and the interplay on that, we'll grow from relatively flat to $2,000,000,000 If we're up $2,000,000,000 that's call it $200,000,000 of capital, plus our dividend leaves ample room for additional share repurchases, ample.

Speaker 3

The other thing I'd add to that is the additional liquidity we have available today to fund some of that loan growth. You'll see we have over $2,000,000,000 in 3rd party sweep banks. And on top of that, we added another $336,000,000 in venture deposits. And Ron made the comment, the capacity and our ability to generate loans and the investments we've made across fund and venture And our continued ability to service our clients with securities based lending and mortgage is fairly significant. And now there's a little bit more liquidity supporting that growth as we look forward.

Speaker 6

Got it. Very helpful. Thank you, guys.

Speaker 1

Thanks, Alex.

Operator

We will take our next question from Bill Katz with TD

Speaker 1

is Appreciate the

Speaker 7

financial guidance and looks like there's some margin opportunity as we look ahead into 'twenty four and probably again into 'twenty five. Just looking through some of the supplement disclosure you have, which is terrific. So thank you for that. And looking at the incremental margin in the institutional group, If I did the math correct, it looks like it was about a 55% incremental margin in the 4th quarter. And just as you look out into 'twenty four and again into 'twenty 5% into that sort of aspirational sort of normalization of $8 How should we be thinking about the incremental margin maybe for Stifel overall and is specifically to the institutional group along that path.

Speaker 1

Yes, I think that Our margins will improve, obviously, as the you can almost start with the institutional side of the business. We as you can see, We essentially broke even on revenues of about 1,000,000,000 $1,300,000,000 and contrast that with 2021, which we may always look back and say that was a really phenomenal year. But that said, it was a $2,200,000,000 and profitability of $400,000,000 plus. So, with you can almost draw a line between the $1,300,000,000 $2,200,000,000 and see the leverage in earnings that we would expect. And that will drive our margins is best laid plans of mice and men, but if we but if the markets cooperate, we'll see Margins that can get back into the mid-20s as we see our Growth in Wealth Management continuing.

Speaker 1

The offset being that we offset a lot of the Weakness in the institutional business by growing NII, to up to almost 1,200,000,000 As you can see in our guidance, we would expect some modest declines in net interest income being more than offset by the potential that you're referring to in our institutional business.

Speaker 3

And maybe more a little bit more color on the consolidated level. If you back off the legal accruals from the Q3, year to date we're a little over 19% pre tax margins today And that's including the fact that we were essentially breakeven on the institutional side in 2023. So you think about back to previous slides, Ron talked about 2021, kind of the mid-twenty percent range. We have a higher starting point today given some of the base, the NII that Ron had talked about. So you have some potential for incremental margin as the market recovers and normalizes.

Speaker 3

And if you were to catch kind a good market, if you will. It could go higher from what we saw in the previous cycle.

Speaker 7

Okay. That's helpful. And just as a follow-up, not to get too far in the weeds, but I was wondering if you could expand a little bit on the legal charge in the quarter And maybe, Ron, to zoom out, you have a pretty good view of this. How you sort of see the regulatory landscape in 2024? Obviously, a lot of moving parts, including election year.

Speaker 7

But anything to be mindful on in terms of the outlook here?

Speaker 1

Yes. I'll let Jim talk about legal and then I'll answer

Speaker 3

The legal charges we were talking about, the accrual was in the Q3. There was a $67,000,000 accrual That was booked last quarter. It was not something that occurred in the Q4. Yes.

Speaker 1

And what I said in my prepared remarks was We the Q4 had, I think, a 27% increase if we sort of excluded that legal charge. I was just trying to point we had a pretty good quarter and we're seeing that now, just that was to illustrate that. The regulatory environment, Not sure that really is changing. I feel that as a maybe as a headwind for the industry, is The level of regulatory resolutions is seems to be markedly higher than what it's been in the past. But we'll see as this plays out hard to predict that, but certainly the off channel communications was a significant factor for not only Stifel, but frankly everyone that's been dealing with that.

Speaker 1

All right. Thanks for the clarification. Thank you.

Operator

We'll take our next question from Steven Chubak with Wolfe Research.

Speaker 8

Hi. Good morning, Ron. Good morning, Jim.

Speaker 1

Good morning, Steven.

Speaker 8

So I wanted to start off just unpacking some of the assumptions underpinning the underpinning the 24 fee guidance. Didn't catch if you had and so I'm sorry if I missed this. If you alluded to the equity market appreciation that you're assuming in the coming year and specifically for FICC Brokerage, Is this $100,000,000 Jim a reasonable jumping off point given the tailwinds from both steepening that you cited in the prepared remarks?

Speaker 3

So specific to fixed income, I think the conversations we're having with the people that run that business is they continue to see increased levels of activities. Obviously, with the Fed's change in stance, the unwinding of some of the unrealized losses on bank balance sheets, is going forward, you'll probably see banks use and rely on HTM on a lesser basis. You're starting to see that on thaw. You're starting to see more activity and we do to pay that to continue. We do feel like at this point, we're being a little bit conservative, but it's a reasonable jumping off point to look at what happened in the 4th quarter is And maybe discounted that a little bit, but we are seeing some very positive trends across the fixed income area.

Speaker 1

And I would add that as we as I is We've made some meaningful hires in that space, both in the SBA and in the Ginnie space which deals with origination and provides product to many of our end buyers. And so That wasn't that's just getting ramped up and that's a not less than material opportunity for us with the hires we've made there. So I think that just underscores that I think it is a reasonable jumping off place.

Speaker 8

That's right. And the equity market appreciation that you guys are assuming?

Speaker 1

For asset management fees?

Speaker 5

Yes. I mean, I think we just took some

Speaker 3

of our internal expectations, some of our internal I forget what the exact Percentage increase in market appreciation is, but I can follow-up on that.

Speaker 8

Okay, great. And just on the non comp implied guidance. I know that you had the legal charge, so there was a fair amount of noise this past year. But just looking at the core non comp trends, Ex legal, those have been growing roughly at about a high single digit CAGR since 2019. The 24 non comp guide actually implies a bit of contraction from what we can tell.

Speaker 8

So just want to understand what's driving the better expense control in the coming year at least relative to recent history.

Speaker 1

We're talking about percentage of net revenue, okay? And so first of all, There's always some noise in our Q4. As always, if you look, you'll always see that is historically higher. I mean, we just we really push a cut off on all of our expenses to make sure No, that they're in. And if you go back over years, you'll see that the Q4 tends to be above trend for the year.

Speaker 1

And there's leverage in the model. So while I expect non comp expense to increase as we raise revenues, that's where the leverage in the model. That's why we see our margins getting into the mid-20s because of that percentage will come down as revenues rebound.

Speaker 8

Okay. So the expectation though is that the dollars will at least increase in non comps, but the ratio will improved with some of the operating leverage.

Speaker 3

Yes. And if you look specifically at the Q4, there's some seasonality in there. When you think about the Q4, you typically see elevated levels of travel entertainment as well as some statement related expenses. We also had some third party legal expenses that were somewhat elevated in the 4th quarter. Those are lumpy, those are hard to predict.

Speaker 3

And you think about those in a normalized run rate when you're comparing kind of the results in the Q4, normalizing some of those things on an annual basis, In addition to the revenue increases that Ron talked about is really what's getting you to the levels in our guidance range.

Speaker 8

Really helpful color. Thanks so much for taking my questions.

Operator

We'll take our next question from Chris Allen with Citi.

Speaker 3

Yes, good morning guys. Maybe you can just dig in a little bit on the Investment Banking pipeline. Just wondering if you're seeing The improvement across all verticals or specific verticals. Maybe give us some color just whether you're starting to see Any signals that bank activity specifically is picking up? I mean, obviously, you're starting to see some activity on the fixed income trading side.

Speaker 3

I wonder if that's filtering through at all on the banking side?

Speaker 1

Well, for sure. I mean, the engagement and the tone and practically some deals getting done is definitely improving. I'm cautious, Chris, just because we've been talking is I just see the tone being much better. You asked about where is certainly healthcare, industrials, FIG and tax. So it's kind of broad based when we look at our pipelines.

Speaker 1

And I just want to make a more generalized comment here, which is we've been through pretty much a recession in this business with equity capital raising down like 70 percent over almost whatever time frame you want to compare it to as it relates to 2021 and M and A down 50%. And that environment is not going to continue. So we I definitely see improved business. I don't want to try to comment as to how steep the curve of improvement will be. But certainly, as we start the year, we're seeing improved engagement.

Speaker 1

Our pipelines and our engagements are improving. And simply, there's a lot to do. There's been a lot of strategic is and financial considerations and decisions that have been delayed in the face of inflation at 8% and the Fed rising 500 basis points very quickly. That certainly puts a damper on the timing of activity. And now as we see that stabilizing and in fact, the consensus is that that's going to go down, You're going to see improved activity.

Speaker 1

Just I think that's pretty clear.

Speaker 3

Thanks, guys. That was it for me.

Operator

We will take our next question from Brennan Hawken with UPS.

Speaker 5

Good morning. Thanks for taking my questions. Curious, it was a pretty nice growth in the 3rd party bank balances. So curious whether or not that was driven by client action such as seeking out of excess FDIC Or was this more like an asset decision where you guys sold your loan and didn't see loan growth so allocated to capture the yield?

Speaker 1

I think there's as I read and listened looking at some of the Street's comments on this, I'd love to take a moment just to clarify how we look at that, all right? I view 3rd party bank sweep balances to be part and parcel part of our sweep program, All right. We control, the if you will, the valve on what we want to do. So if we It's just where we're allocating our deposits. So that is just deposits that we're choosing now not to have on the balance sheet of Stifel.

Speaker 1

They're, if you will, diverted to 3rd party banks. No one's making that decision other than us, is the best way to say that and we could turn around and bring those back on balance sheet as needed or increase it. So you need to look at, in my opinion, you have to look at sweep deposits and 3rd party combined.

Speaker 3

Yes. And the decision to push some of that sweep some of those sweep dollars back was based upon some of the loan sales we talked about on the prepared remarks as well as just general elevated cash balances at the bank. So Again, the revenue associated with that just moves in the income statement. It's showing up in asset management revenues rather than NII, But you're getting a similar return in either location.

Speaker 5

Yes. Thanks for clarifying that. Appreciate it. And then, Ron, you made reference to some of the hires that you all have made in the bond trading business. And I know you guys have referenced recruiting through much of the past year, but we noticed that the institutional MDs were actually down a bit, not by much, just by 1, But would have thought that that would have been growing just given the focus, right?

Speaker 5

So what drove that to be sort of flattish? And was there some movement under the surface that maybe like we can't appreciate just by looking at the number in and of itself?

Speaker 1

Yes, I mean, look, it could have been up 1, okay, and then I would you've had the same question. It's down 1. I think that we see, since 2019, we see, our MDs are up Some, what did we say, 33%, okay? And is Most of those MDs that there's been is in banking in terms of leveling it out. And look, we have a lot of capability here.

Speaker 1

I think that our I think that our viewpoint is that we're not quickly going back to 2021 levels. And we not only want market share, we want to make money. And so we're balancing those. You can it becomes it's a big strategic decision to really hire into what you think is going to be a very robust market. And if that doesn't happen, that causes other problems.

Speaker 1

So we're being balanced as we always are, But we have very capable bankers, very capable services and we are well positioned as we sit here today For rather significant improvement in the market, everyone will do well, including our shareholders. We need to drop This activity down in EPS.

Speaker 5

Got it. Thanks, Ron. And for the record, The symbol wasn't what matters, plus or minus. It was the flattish.

Speaker 1

I know, I know. But Yes. Look, one of the things that just yes, but to go back to the other question also, remember, and we see this on the wealth management side, and I think This drives activity in a lot of our clients that have invested in alternatives in the private equity. Is Private Equity needs to return money to limited partners, okay? They want to raise new funds, but you'd also need to have realizations is in return capital, and that's been on pause a little bit.

Speaker 1

So as I can see a lot of things that are requiring some transactions to get done so that private equity can sort of recycle the capital back. You can't sit there on these investments for 15 years. And so we definitely have to see a lot of discussions around the broad topic Of returning capital to limited.

Speaker 5

On that, Ron, since you mentioned that, I'd love to throw in another question here. Have you we've seen the volumes pick up on the announcements, but it's mostly been on the strategic side. When you look at your backlog, are you starting to see financial sponsors getting more active and preparing to monetize pick

Speaker 1

up. Definitely. Great.

Speaker 8

Thanks for taking the call.

Speaker 1

I can expand that if you want me to.

Speaker 5

Yes, please. I'd love to, if

Speaker 1

No, no, no, again, as markets as interest rates go up and The spread widens between bid offer expectations in M and A, not just strategic, But the ability to have realizations in private equity, one of the drivers is Turning capital. It's hard to raise a new fund when you haven't consummated your last one. And so that is driving bid offer expectations tighter and there's a lot of discussions going on, on this. And that's again just speaking to the overall tone in that market, which is an improved market environment in that and frankly across The markets. So absent any external shock to the system, That's why we see improvement here.

Speaker 5

Great. Thanks for that color.

Speaker 1

Well, very good. I want to thank everyone for taking the time to listen to our results, look forward to talking to you about what I believe will be an improving environment in 2024

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Key Takeaways

  • Even in a challenging 2023 marked by geopolitical risks, rising rates, and bank failures, Stifel generated roughly $4.4 billion in net revenue—flat versus 2022—anchored by a record 21st consecutive year of Global Wealth Management net revenue and robust net interest income.
  • The firm produced $630 million of excess capital in 2023, deploying it into the repurchase of 7.2 million shares (≈$651 million), paying common and preferred dividends, and making targeted balance-sheet investments, while boosting its common share dividend by 17% to $1.68 per share.
  • Global Wealth Management remains the long-term growth engine, with revenue up 158% since 2014 and recurring revenue rising from 44% to 78%; momentum continued in Q4 as the firm added 40 advisors and saw recruiting increase nearly 30% in 2023 versus 2022.
  • In Q4 2023, Stifel posted its third-highest quarterly revenue of $1.15 billion, delivering $1.50 EPS—a 27% sequential increase excluding prior legal charges—and beat consensus revenue estimates by $60 million across all major lines.
  • For 2024, Stifel guides total net revenue of $4.55 billion–$4.90 billion (including net interest income of $1.0 billion–$1.1 billion), targets a 56%–58% compensation ratio, and sees the potential to achieve $5 billion in revenue and $8 EPS in a normalized market by 2025.
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Earnings Conference Call
Stifel Financial Q4 2023
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