Fitch Affirms Stifel at 'BBB+'/'F2'; Outlook Stable

Published: 2025-04-16 05:19:23 ET SF

Fitch Ratings has affirmed Stifel Financial Corp.'s (Stifel) Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'BBB+' and 'F2', respectively.

Fitch has also affirmed Stifel's Viability Rating (VR) at 'bbb+', senior unsecured debt rating at 'BBB+', and preferred stock rating at 'BB'. The Rating Outlook is Stable.

Key Rating Drivers

Diversified Business Model: Stifel's ratings reflect its growing scale and diverse business profile, encompassing wealth management and institutional services, which should continue to support earnings resilience over time. Stifel's ratings also reflect its experienced management, solid asset quality, adequate capitalization, and sound liquidity position.

Ratings Constraints: The ratings are constrained by the business model's sensitivity to advisory and brokerage transactional revenue, which is cyclical in nature, as well as elevated compliance and conduct risks inherent in its wealth management business. In addition, recent loan growth at the bank segment has heightened Stifel's exposure to loan losses, which increases business model risk in an economic downturn.

Established Franchise; Complementary Businesses: Stifel has a well-established middle-market franchise in institutional securities brokerage, M&A advisory, and wealth management. The franchise strength is demonstrated through long-term revenue growth and consistent growth in client assets, despite the highly fragmented and competitive U.S. wealth management sector. Stifel also provides investment banking and brokerage services and has a growing banking business. Fitch views these businesses as complementary to its wealth business, contributing to overall revenue diversification.

Solid Credit Quality: Stifel has maintained strong asset-quality metrics due to its conservative underwriting standards. However, recent credit normalization is partly due to exposure to more vulnerable sectors such as commercial real estate and construction. Nonperforming loans amounted to 0.77% of total loans at YE 2024, up from an average of 0.29% in 2021-2024. Net charge-offs remained low at 0.08%, and loan allowances were stable at 0.81% of the loan portfolio at YE 2024.

Despite a weakening economic outlook, Fitch believes Stifel's asset quality will remain manageable due to its sound risk management practices and adequate capital levels. Consumer loans (which make up approximately 53% of the loan portfolio) comprise high-quality residential mortgages and well-collateralized securities-based loans. These are expected to remain resilient and mitigate potential higher losses in the firm's commercial loan portfolio.

Strong Profitability: Stifel's profitability remains supported by strong results in the global wealth management segment and improved performance in the brokerage and investment banking businesses. Pre-tax operating income to average equity was 16.9% in 2024, up from 13.3% a year ago and in line with the four-year average of 17.6%. Fitch expects Stifel's wealth business to maintain strong revenue generation and a solid operating margin, benefitting from continued recruitment of highly productive financial advisors. Fitch would view an increase of fee-based accounts favorably, as this would support greater earnings stability over time.

Near-term operating performance may be impacted by a slowdown in dealmaking and bank lending due to U.S. trade policy uncertainties and potential legal accruals for pending litigations. However, over the long term, a sustained recovery in capital markets and disciplined loan growth along with net interest income growth, could enhance Stifel's performance.

Adequate Capitalization: Stifel's net adjusted leverage (tangible assets less reverse repos and securities borrowed over tangible equity) was 11.1x as of Dec. 31, 2024, which is within the 'bbb' category benchmark range of 10x-15x for securities firms with high balance sheet usage. Over the same period, Stifel's consolidated Common Equity Tier 1 (CET1) ratio and Tier 1 leverage ratio improved modestly yoy to 15.4% and 11.4%, respectively. The Tier 1 leverage ratio remains comfortably above the regulatory minimum of 5% and management's target of above 10%. The CET1 ratio at Stifel's bank operation also remains well in excess of the regulatory minimum and is within Fitch's 'bbb' category benchmark range of 9%-14%. Cash flow leverage (gross debt/adjusted EBITDA) was low, at 0.6x, at YE 2024.

Management has set a long-term target of doubling both revenue and client assets from the current levels. Fitch expects Stifel to maintain its conservative capital policy and focus on driving growth organically, in the areas of advisor recruitment and loan book expansion, supplemented by selective tuck-in acquisitions or team lift-outs.

Diverse Funding Profile: Stifel's funding profile is well-diversified, with deposits representing most of the total funding. As of Dec. 31, 2024, Stifel's loan-to-deposit ratio remained conservative at 72%. Stifel's liquid assets to short-term funding ratio was also a solid 10.3x at YE 2024, compared with an average of 11x in 2021-2024.

With no unsecured debt maturity coming due until 2030, Fitch believes liquidity held at the holding company is sufficient to meet near-term liquidity needs including interest, dividends, and operating expenses. Fitch does not expect a restriction in dividends from the bank subsidiaries given Stifel's strong capitalization levels.

Stable Outlook: The Stable Outlook reflects Fitch's expectation that Stifel will continue to demonstrate strong operating performance, as reflected in operating income to average equity near 15%, while maintaining conservative capital ratios, including Tier 1 leverage above 10%, and a sound liquidity position. The Outlook also reflects Fitch's expectations that Stifel will maintain a conservative risk appetite pertaining to its loan and securities portfolios, and credit losses will remain manageable despite the recent loan growth.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A significant shift of the firm's underwriting standards or risk appetite in the bank loan and securities portfolios, resulting in a sustained increase in credit losses or impairments;

Regulatory, litigation, or reputational damage that impairs its franchise and/or weakens its funding and liquidity profile;

An increased appetite for balance sheet-intensive acquisitions, resulting in a material deterioration in capitalization, either for the overall firm or at the subsidiary level, and leading to reduced cushion above the regulatory minimums;

Sustained increase in cash flow leverage, as reflected in debt/EBITDA of above 2.0x;

Material trading or operational losses.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Sustained enhancement of franchise scale, as evidenced by continued growth of recurring wealth management revenue and diversification of investment banking revenue streams;

Sustained improvement in operating profit as a percentage of average equity toward 20%;

Consistent strong CET1 capital and Tier 1 leverage levels of above 12%;

Maintenance of a strong funding and liquidity profile;

Continued strong asset quality performance, such that non-accrual loans remain at or below 0.10% of total loans, absent a material increase in impairment charges and/or write-offs.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

Stifel's Long-Term IDR is equalized with its VR, reflecting its Standalone Credit Profile (SCP). Fitch does not view Stifel as a systemically important institution; therefore, Stifel has a Government Support Rating (GSR) of 'ns' (No Support), reflecting no expectation of extraordinary financial support from the U.S. government.

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'. Stifel's FLC score is currently 'bbb+'; as such, the lower Short-Term IDR of 'F2' is maintained.

The senior unsecured debt rating is equalized with Stifel's Long-Term IDR, reflecting average recovery prospects under a stressed scenario.

The rating on the preferred stock reflects standard notching based on Fitch's 'Bank Rating Criteria'. Stifel's non-cumulative, perpetual preferred stock is four notches below the VR, reflecting two notches for nonperformance and two notches for loss severity.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

Stifel's Short-Term IDR is primarily sensitive to changes in the Long-Term IDR and would be expected to move in tandem. In addition to changes in Stifel's Long-Term IDR, if Stifel's FLC score were upgraded to 'a' from 'bbb+', the Short-Term IDR would be upgraded to 'F1'.

The unsecured debt rating is sensitive to changes in the Long-Term IDR and would be expected to move in tandem.

The preferred stock rating is sensitive to any changes to the VR and would be expected to move in tandem.

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.

ADJUSTMENTS

The SCP has been assigned in line with the implied SCP.

The Business Profile score has been assigned below the implied score due to the following adjustment reason(s): Business model (negative).

The Earnings & Profitability score has been assigned below the implied score due to the following adjustment reason(s): Revenue diversification (negative), Earnings stability (negative).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Fungibility (negative).

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.