Fitch Publishes ‘BBB-/F3’ Ratings for Stifel Financial; Outlook Stable
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The following is from Fitch Ratings on
Fitch Ratings has published long- and short-term IDRs of 'BBB-' and 'F3' for
The Rating Outlook on the long-term IDR is Stable. Fitch has also assigned a 'BBB-' rating to Stifel's existing senior unsecured debt and an expected 'BBB-' rating to Stifel's proposed senior unsecured note issuance. A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS
Stifel's ratings and Stable Outlook are supported by the company's conservative business profile, well-established wealth management platform, increased deposit funding and solid capital levels. Stifel's revenues have become more diverse as a result of recent acquisitions as well as some organic growth, though they remain sensitive to overall market conditions. Key rating constraints include the firm's acquisitive growth strategy, a nascent lending platform, key man risk and high compensation ratios.
Stifel has completed numerous successful acquisitions. However, Fitch believes the firm remains vulnerable to potential integration, retention and execution risk related to future material acquisitions. Key man risk with the firm's CEO and the potential for lack of Board independence given the large number of insider Directors are also rating constraints.
Similar to peers, Stifel's profitability is subject to some variability given its sensitivity to market conditions, particularly domestic equity and fixed income markets. Despite this sensitivity, the business has been consistently profitable over several cycles while many larger peers experienced significant losses in the aftermath of the credit crisis. Stifel's compensation ratio tends to average in the mid-60 percent range, which is higher than most peers. There have been frequent one-time non-GAAP expenses in Stifel's reported earnings due to significant acquisition-related expenses. Fitch views some of these 'non-recurring' charges as more ongoing in nature given the acquisitive strategy.
The institutional business provides securities brokerage, trading, research, underwriting and corporate advisory services. Some of these businesses (fixed income in particular) utilize Stifel's balance sheet, though Fitch views the risks as relatively modest. There is virtually no proprietary trading or prime brokerage activity in the broker-dealers. Additionally, position taking is primarily limited to residual exposures from investment banking underwriting and market-making activities. Market risk appears manageable, as inventory is limited in size, comprised of highly liquid securities with relatively high turnover rates.
The acquisition of KBW has increased the net revenue contribution from the institutional segment, which represented just under half of the firm's revenues at year-end 2013. Fitch recognizes that there is some benefit to having a more diversified earnings stream. However, the institutional business introduces additional risk and earnings volatility.
In Fitch's view, Stifel's wealth management business has demonstrated more stable revenues and margins, which offsets the more volatile institutional segment to some extent. Wealth management, which currently represents over half of the firm's net revenues, has exhibited steady growth over several cycles. The business has grown both organically and through numerous acquisitions.
Acquisitions have been a significant component of Stifel's growth strategy over many years. Stifel has demonstrated the ability to successfully identify and integrate these acquisitions, which Fitch considers this one of its core competencies. However, an acquisitive strategy generally creates more operational risks than organic growth. Stifel has acquired entire companies (such as
In
Fitch views Stifel's current capitalization as robust and believes there is some room for modestly higher leverage at the current rating level. However, Fitch would expect Stifel's long- term capitalization to remain more conservative than peers because of its growth-oriented and acquisitive strategy. As of
The majority of Stifel's balance sheet is funded with cash, deposits and secured funding sources. Excess liquidity is generally maintained at the main operating subsidiaries. Deposits at
While Fitch believes the firm is well managed, there are some concerns regarding key man risk with the firm's CEO. Stifel's Board has a large number of insider Directors, which creates the potential for a lack of Board independence. The number of Directors is also unusually large at 18, which is mainly the result of acquisitions Stifel has completed over the years.
RATING SENSITIVITIES
Upward rating momentum is limited in the near- to intermediate- term given Stifel's growth profile, competitive position and key man risk. However, longer-term upward momentum could potentially be achieved through:
--More measured growth;
--Demonstrated seasoning of the expanded lending platform; and
--More robust succession planning and Board profile.
The rating could be negatively impacted by any of the following factors:
-- An increased appetite for acquisitions, either in terms of riskier acquisition targets or more aggressive funding (i.e. issuance of new debt);
-- Material deterioration in capitalization, either for the overall firm or at the subsidiary level, particularly if such reduction is not accompanied by a commensurate reduction in Stifel's growth profile;
-- Significant integration issues with any recent or future acquisitions;
-- Large-scale management departures and/or lack of long-term succession planning to address key man risk.
Stifel is a full-service middle market regional brokerage and investment bank based in
Fitch has published the following ratings:
-- Long-term IDR 'BBB-', Rating Outlook Stable;
-- Short-term IDR 'F3';
-- Viability Rating 'bbb-';
-- Support '5';
-- Support Floor 'NF';
Fitch has also assigned the following ratings:
-- Senior unsecured debt at 'BBB-';
-- Proposed senior unsecured debt issuance at 'BBB-(EXP)'.
Additional information is available on fitchratings.com.
--'Global Financial Institutions Rating Criteria' (Jan. 31,);
--'Securities Firms Criteria' (Jan. 31,).
Global Financial Institutions Rating Criteria
http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=732397
Securities Firms Criteria
http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=732556
Additional Disclosure
Solicitation Status
http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=839663
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