STIFEL FINANCIAL CORP.
Fitch Ratings has affirmed
Fitch has also affirmed Stifel's Short-Term IDR at 'F2'. The Rating Outlook is Stable.
Key Rating Drivers
The ratings affirmation reflects the diversification of Stifel's businesses, which has yielded earnings resilience and a strong performance track record even during periods of market volatility. While management continues to make opportunistic acquisitions, Fitch believes Stifel is less reliant on acquisitions for growth, and future acquisitions should be less impactful to its earnings and capitalization. Stifel's ratings also reflect its well-established middle market-focused franchise, significant deposit funding, and solid capital levels, as well as strong historical credit performance of its loan and securities portfolios.
The business model's sensitivity to advisory and brokerage transactional revenue, which is cyclical in nature, constrains the ratings. In addition, increased sensitivity to interest rate movements and potential credit risk associated with rapid loan growth in the bank in recent years also constrain Stifel's ratings.
Fitch believes the scale and diversity of Stifel's businesses should yield earnings stability and solid profitability levels over time. While the challenging macroeconomic environment has pressured capital raising and advisory revenues since mid-2022, Stifel's global wealth management business has benefitted from the rising interest rate environment in the
Fitch expects an increase in net interest income will continue to help mitigate revenue pressures in the institutional group. Management expects Stifel's net interest income to improve by approximately
With the improved scale of its institutional and wealth management businesses, Fitch expects Stifel to focus on organic expansion, selective tuck-in acquisitions and team lift-outs, as opposed to larger-scale transformational transactions, thus reducing the magnitude of operational and integration risks.
Fitch expects asset growth at the bank to continue, although slower than 2019-2022 when the loan portfolio doubled in size. The loan portfolio was
Stifel's profitability has remained strong, with record results in the global wealth management business offset by declines in the institutional segment. Pre-tax operating income to average equity declined to 16.7% in the trailing 12 months (TTM) ended 1Q23 from 17.1% in fiscal 2022 and 23.0% in 2021, but remained substantially above Fitch's 'bbb' category benchmark range for securities firms with high balance sheet usage of 5% to 10%. Fitch expects Stifel's profitability to remain solid, supported by strong performance of the wealth management segment and continued loan growth at the banks.
Fitch views Stifel's capitalization as adequate for the ratings. As of YE 2022, Stifel's tangible assets (net of securities borrowed and reverse repo) to tangible equity was 11.4x, and within Fitch's 'bbb' category quantitative benchmark range for securities firms of 10x-15x. Leverage ratios remained stable despite growth in the bank loan book, as strong earnings generation supported balance sheet growth.
Stifel reported a consolidated common equity Tier 1 ratio (CET1) of 13.9% at 1Q23. The bank's regulatory capital ratios remain well in excess of regulatory minimums and above Fitch's 'bbb' category quantitative benchmark range of 8% to 10%. The tier 1 leverage ratio was 10.9% at 1Q23, above the well-capitalized regulatory minimum of 5%. Cash flow leverage, as reflected in corporate long-term debt to EBITDA was 1.0x for fiscal 2022, which Fitch views favorably.
Stifel's funding profile is well-diversified, with deposits representing the vast majority of total funding. As of 1Q23, Stifel's loan-to-deposit ratio remained conservative at 74%. Stifel's liquid assets to short-term funding ratio was also a solid 14.1x at YE 2022. The next unsecured debt maturity of
The Stable Outlook reflects Fitch's expectation that Stifel will continue to demonstrate strong operating performance, as reflected in operating income to average equity at-or-above 15%, while maintaining conservative capital ratios, including Tier 1 leverage above 10% and a sound liquidity position. Fitch also expects Stifel's credit losses to remain modest despite the recent loan growth.
Stifel's Long-Term IDR is equalized with its VR, reflecting its standalone credit profile. Fitch does not view Stifel as a systemically-important institution; therefore, it has a Government Support Rating (GSR) of 'No Support', reflecting no expectation to receive extraordinary financial support from the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Material deterioration in capitalization, either for the overall firm or at the subsidiary level, leading to reduced cushion over regulatory minimums;
Sustained increase in cash flow leverage, as reflected in Debt/EBITDA of above 2.0x;
Outsized credit losses or impairments in the loan and securities portfolios held at the bank;
Material trading or operational losses;
Regulatory, litigation, or reputational damage that impairs the franchise and/or weakens its funding and liquidity profile; and/or
An increased appetite for balance sheet-intensive acquisitions, which result in a change to the firm's risk or leverage profile.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Continued growth of recurring revenue streams in wealth management;
Continued diversification of the investment banking platform that reduces the cyclicality of earnings;
Sustained improvement in operating profit as a percentage of average equity towards 20%;
Maintenance of strong CET1 capital and Tier 1 leverage levels of above 12%;
Maintenance of a strong funding and liquidity profile; and/or
Continuation of strong asset quality performance, such that non-accrual loans remain at-or-below 0.10% of total loans, absent material increase in impairment charges and/or write-offs.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SHORT-TERM IDR
According to Fitch's 'Non-Bank Financial Institutions Rating Criteria,' a Long-Term IDR of 'BBB+' maps to a Short-Term IDR of 'F1' or 'F2'. To achieve the higher rating, Stifel would need to have a minimum Funding, Liquidity and Coverage (FLC) score of 'a'. At this time, Stifel's FLC score is 'bbb+', and Fitch has maintained the lower Short-Term IDR option.
SENIOR UNSECURED DEBT
The senior unsecured debt rating is equalized with Stifel's Long-Term IDR, reflecting average recovery prospects under a stressed scenario.
PREFERRED STOCK
Stifel's non-cumulative, perpetual preferred stock has a 'BB' rating, which is four notches lower than Stifel's 'bbb+' Viability Rating (VR), in accordance with Fitch's 'Global Bank Rating Criteria' dated
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SHORT-TERM IDR
Stifel's Short-Term IDR is primarily sensitive to changes in the Long-Term IDR, which Fitch expects would move in tandem in accordance with the linkages outlined in its 'Non-Bank Financial Institutions Rating Criteria.' In addition to changes in Stifel's Long-Term IDR, if Stifel's FLC score were upgraded to 'a' from 'bbb+', the Short-Term IDR would be upgraded to 'F1'.
SENIOR UNSECURED DEBT
Stifel's unsecured debt rating is sensitive to changes in Stifel's Long-Term IDR and would be expected to move in tandem.
PREFERRED STOCK
Stifel's preferred stock rating is sensitive to changes in Stifel's VR and would be expected to move in tandem with any changes to the VR.
SUPPORT RATING AND SUPPORT RATING FLOOR
Should Fitch's views on the perceived likelihood of extraordinary support extended to Stifel change, a change in the GSR could occur. Presently, Fitch does not anticipate this scenario.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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