Fitch Ratings has upgraded
Fitch has also affirmed Stifel's Short-term IDR at 'F2'. The Rating Outlook is Stable.
Fitch has withdrawn Stifel's Support Rating (SR) and SR Floors as they are no longer relevant to the agency's coverage following the publication of Fitch's updated 'Bank Rating Criteria' on
Key Rating Drivers
The ratings upgrade reflects growth and diversification of Stifel's businesses, which Fitch expects to yield improved earnings resilience and profitability levels, as well as a strong performance track record during a period of extreme market volatility in 1Q20, which underscores the benefits of its diversified business model. 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 GAAP earnings. 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 loan and securities portfolios.
The ratings are constrained by the sensitivity of the business model to advisory and brokerage transactional revenue, which is cyclical in nature; increased sensitivity to interest rate movements; and potential credit risk associated with the rapid loan growth within the bank in recent years.
Fitch believes, the scale and diversity of Stifel's businesses should yield improved earnings stability and profitability levels over time. While rising inflation, slower economic growth and geopolitical uncertainty resulting from
With the improved scale of 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 transactions, thus reducing the magnitude of operational and integration risks.
Stifel's profitability was strong in 2021, despite the lower interest rate environment. Pre-tax operating income to average equity declined to 16.2% in 1Q22, from 23% in 2021, due to headwinds in capital raising, 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 loan growth at the bank.
Fitch expects asset growth at the bank to continue at a strong pace, although slower than 2014-2018, when the loan portfolio quadrupled in size. The loan portfolio was
Although credit losses could pick up in the event of an economic slowdown, Fitch believes Stifel's credit losses will remain manageable due to relatively conservative underwriting standards with respect to borrower leverage and loan-to-values. Loan growth has been funded primarily by sweep deposits from Stifel's private client brokerage accounts. The company indicated that it has about
Fitch views Stifel's capitalization as adequate for the ratings. As of
Stifel reported a consolidated common equity Tier 1 ratio (CET1) of 15.2% at
Stifel's funding profile is well-diversified, with deposits representing the vast majority of total funding. As 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 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 trading or operational losses;
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;
Regulatory, litigation, or reputational damage that impairs the franchise and/or weakens its funding and liquidity profile;
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:
Positive ratings potential is viewed as limited in the near term, given the current ratings upgrade, but could over time be driven by:
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;
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.
OTHER DEBT AND ISSUER 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 is rated 'BB', which is four notches lower than Stifel's 'bbb+' Viability Rating (VR), in accordance with Fitch's 'Global Bank Rating Criteria' dated
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SHORT-TERM IDR
Stifel's Short-Term IDR is primarily sensitive to changes in the long-term IDR and would move in tandem in accordance with the linkages outlined in Fitch's 'Non-Bank Financial Institutions Rating Criteria.'
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 with any changes to the IDR.
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.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
SHORT-TERM IDR
Stifel's Short-Term IDR is primarily sensitive to changes in the long-term IDR and would move in tandem in accordance with the linkages outlined in Fitch's 'Non-Bank Financial Institutions Rating Criteria.' In addition to changes in Stifel's Long-Term IDR, if Stifel's FLC score were to be 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 with any changes to the IDR.
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 being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.
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