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Morningstar | Stifel Had Strong NIM Expansion In 1Q; Shares Fairly Valued

Given the choppy equity markets and bearish macro sentiment since the back half of 2018, Stifel Financial had fair results. The company reported net income to common shareholders of $97 million, or $1.22 per diluted share, on $770 million of net revenue for the first quarter of 2019. Net revenue increased 3% from the previous year, with the main driver being net interest income that increased 27% to $142 million. Net revenue decreased 3% sequentially, as client assets were relatively low at the end of the fourth quarter for determining asset-management revenue, equity market volatility subsided that reduced commissions, and the U.S. government shutdown dampened capital-raising activity. There was nothing concerning in Stifel’s results, and we don't anticipate making a material change to our $65 fair value estimate for the no-moat company.

The most interesting aspect of the quarter was the sequential $15 million, or 12%, increase in the company’s net interest income. This was almost all driven by net interest margin expansion of 28 basis points instead of balance sheet growth. The improvement was split about in half between a higher yield on interest-earning assets and a decrease in the cost of interest-bearing liabilities. With the addition of another bank charter, the company looks like it was able to use more client cash swept into bank deposits to replace higher-yielding certificates of deposit and Federal Home Loan Bank borrowings. Management said it may have another $500 million it can probably move into its bank from third-party banks, which could add upwards of $0.05 to earnings per diluted share annually. After this additional movement of client cash, we expect NIMs to be fairly stable, barring a change in the federal-funds rate.

On the capital front, Stifel recently increased its quarterly dividend 25% to $0.15 from $0.12 per share and issued $150 million on noncumulative perpetual preferred stock that should help the bank's capital ratios.

For our recent analysis of deposit costs and net interest margins, please see our December 2018 Financial Services Observer "The Return of the Bank: Net Interest Margins Reach a Turning Point."