NEW YORK--(BUSINESS WIRE)--Fitch Ratings has today upgraded the following ratings for Stifel Financial Corporation (Stifel):
--Viability Rating (VR) to 'bbb' from 'bbb-';
--Long- and short-term Issuer Default Ratings (IDR) to 'BBB/F2' from 'BBB-/F3';
--Senior unsecured debt rating to 'BBB' from 'BBB-'.
The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
VR and IDRS
The upgrades to Stifel's IDRs, Viability Rating and senior unsecured debt rating reflect the firm's demonstrated track record of successfully integrating acquisitions profitably without operational issues and significant improvement to Stifel's enterprise risk management framework. The firm has added significant resources to its risk management function to ensure the infrastructure is commensurate with growth and has formalized policies and procedures, with central monitoring and management similar to larger banks.
The upgrades also consider Stifel's strong capitalization, even when taking into account expected declines from current elevated levels, though still expected to be above peer, less balance sheet intensive acquisitions, and a more diversified business model relative to peers. Fitch also expects that returns should improve as a result of a managed decline in capital. The short-term IDR upgrade reflects the company's strong liquidity profile, with about 40% of its balance sheet in cash and liquid securities. The Stable Outlook reflects Fitch's view of limited additional upside to the rating over the Outlook horizon as the firm maintains its acquisitive strategy and it loan portfolio will season after recent rapid growth.
Rating strengths include the company's conservative business profile, well-established wealth management platform, improved risk controls and increased deposit funding and solid capital levels. Stifel has been diversifying its revenues and expanding its investment banking, brokerage, wealth management and lending activities through recent acquisitions as well as some organic growth. Rating constraints include the sensitivity of the business model to overall market conditions, the firm's acquisitive growth strategy, rapid growth in lending, and key man risk limit. The firm's acquisition appetite is also likely to bring the firm over the $10 billion asset threshold in the near future, which will garner greater regulatory scrutiny and may spur larger acquisitions. Stifel's IDR of 'BBB' is equalized with its VR of 'bbb', reflecting Fitch's view that external support cannot be relied upon.
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. Fitch believes the firm's CEO presents key man risk and the large board gives rise to a potential lack of independence, though this is somewhat mitigated by the firm's ability to retain key management personnel from prior acquisitions.
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% range, which is consistent with mid-tier securities firms, though higher than bulge bracket firms. Stifel continues to incur frequent one-time non-GAAP expenses in reported earnings due to its acquisitions. As a result, Fitch views some of these 'non-recurring' charges as more ongoing in nature given the firm's acquisitive strategy.
In Fitch's view, Stifel's wealth management business has demonstrated more stable revenues and margins, which helps offset the more volatile institutional segment. 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.
Stifel Bank, which operates under the global wealth management segment, has experienced considerable growth, with total assets increasing to $5.3 billion as of March 31, 2015 from just $1.8 billion at year-end 2010, though slowing its pace year-over-year. Stifel is near its target of a 50/50 mix between loans and securities achieved through loan growth and from shrinking the investment portfolio. The rapid loan growth in a very competitive environment could lead to credit quality deterioration as the book seasons, though asset quality remains very strong.
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 March 31, 2015, Stifel reported CET1 ratio of 28.3% is significantly higher than peers, and reflects an increase from year-end. Leverage at the broker-dealer subsidiaries is also conservative.
SENIOR UNSECURED DEBT
The senior unsecured debt rating is equalized with Stifel's Long-term IDR reflecting that existing notes are senior unsecured obligations of the company that rank equally in payment priority with all existing and future unsubordinated unsecured indebtedness of Stifel.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor (SRF) of 'No Floor' reflects Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to Stifel.
VR, IDR AND SENIOR UNSECURED DEBT
The Stable Rating Outlook reflects Fitch's view of limited rating momentum over the Outlook horizon, particularly given an expectation for future declines in capitalization levels and some deterioration in asset quality, consistent with the banking sector more broadly. These challenges are expected to be counterbalanced by Stifel's growing business and earnings diversity and moderate risk appetite.
Stifel's VR, IDRs and senior unsecured debt ratings are sensitive to future acquisitions in terms of the associated size, pace, financing, balance sheet risk and integration risk associated.
Rating upside is viewed as limited in the near-term, although longer-term, upward rating momentum could be influenced by moderated growth and/or acquisitions, acquisitions that are limited in their balance sheet intensity, continued profitability with successful acquisition integration, and loan performance that is superior or at least consistent with peers through the cycle. Per Fitch's Global Non-Bank Financial Institution Rating Criteria dated April 28, 2015, securities firms are typically not rated higher than 'BBB+' absent globally dominant franchises with significant business diversity.
Stifel's ratings could be downgraded if the firm shows an increased appetite for more balance sheet intensive acquisitions, either in terms of riskier acquisition targets or more aggressive funding (i.e. issuance of new debt).
Material, rapid 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, and large-scale management departures, could also lead to a downgrade. Failure to successfully navigate the increased regulatory requirements associated with assets exceeding $10 billion would also be viewed negatively.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are sensitive to changes in Fitch's assumptions around the propensity or ability of the U.S. government to extend extraordinary in the case of need.
Fitch takes the following rating actions:
Stifel Financial Corporation
--Long-term IDR upgraded to 'BBB' from 'BBB-';
--Short-term IDR upgraded to 'F2' from 'F3';
--Senior unsecured debt upgraded to 'BBB' from 'BBB-';
--Viability Rating upgraded to 'bbb' from 'bbb-';
--Support affirmed at '5';
--Support Floor affirmed at 'NF'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 20 Mar 2015)
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
Dodd-Frank Rating Information Disclosure Form