Stifel Earnings: Wealth Management Steady; Capital Markets Struggling but Will Eventually Recover

Stifel’s SF wealth management segment reported record revenue, but the capital markets business isn’t experiencing a recovery yet. The company reported net income to common shareholders of $59 million, or $0.52 per diluted share, on $1.05 billion of net revenues. Similar to other investment banks, Stifel had elevated legal and regulatory charges in the quarter that included provisions for the SEC regarding record-keeping. Excluding the $67 million of charges would add about $0.58 to EPS. We don’t anticipate making a material change to our $72 fair value estimate for no-moat-rated Stifel Financial and assess shares are modestly undervalued.

The wealth management segment had record net revenue of $769 million, but operating income of $298 million was 6% lower than its fourth quarter of 2022 peak. The decline in operating income can be attributable to expense inflation and lower net interest income. Despite higher interest rates, net interest income is $16 million, or 5% lower than the fourth quarter of 2022 in the wealth management segment. Funding costs have increased to about 3% from 1.5% since the fourth quarter and the net interest margin contracted to 3.43% from 3.64%.

Given the challenging capital markets environment, the institutional group segment reported a loss of $28 million compared with quarterly operating income of over $100 million in each quarter of 2021. Neither trading nor investment banking revenue has been spared, being down about 25% and 60%, respectively, from their 2021 averages. While we don’t believe it will be easy to reach the 25%-plus operating margins booked in 2021, a mid-to-upper-teens operating margin is reasonable in a more normalized environment. Stable to lower U.S. interest rates in 2024 along with avoiding a recession should bring the segment back to profitability.

While Stifel has historically been acquisitive, management is emphasizing share repurchases with its capital given the interest-rate environment and share price.