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Morningstar | Stifel's Management Is a Little More Optimistic Than Its Capital Market Firm Peers

While encountering many of the same trends as other capital market firms, Stifel Financial's management is a little more optimistic than peers. Similar to other financial firms with significant wealth management operations, Stifel had decent results compared with the previous year, but underwhelming results compared with the previous quarter. The company reported a 2.4% increase in net revenue from the previous year to $743 million, and non-GAAP diluted earnings per share increased to $1.22 from $0.90. All of the revenue growth from the previous year came from the wealth management segment, which grew $45 million, while the institutional securities business decreased about $20 million. Asset prices and interest rates are higher than a year ago, which has helped wealth management businesses. However, institutional securities businesses have had more mixed results in 2018, primarily in trading. We don't anticipate making a material change to our $58 fair value estimate for no-moat Stifel Financial, and we assess that shares are fairly valued to slightly undervalued.

Stifel's management struck a more optimistic note than other management teams. Other investment banking management teams have generally said that the capital markets environment is currently strong, but that there are many global uncertainties, such as trade disputes, that could hurt corporate sentiment. On the other hand, Stifel's management felt that its second-half investment banking performance could be better, partially due to some underwriting transactions that were pulled forward from the first half of 2018 to the back half of 2017. The management team also signaled that it believes its shares are trading at a relatively attractive valuation and that it would consider using more of its repurchase authorization if shares remain at current levels. In the second quarter, the company bought back about 800,000 shares for $56.28 apiece.

Management confirmed what we have been saying would be one of the largest trends in financial services in 2018: rising deposit betas. Average funding costs increased to 0.87% in the second quarter from 0.64% in the first quarter and 0.45% in the second quarter of 2017. Not only have banks and other financial institutions been increasing what they're paying on deposits, clients are moving more of their cash balances into certificates of deposits and money market funds. This is occurring across the financial services landscape and will slow net interest income growth and ROE expansion.