OREANDA-NEWS. Fitch Ratings has affirmed Stifel Financial Corporation's (Stifel) Viability Rating (VR) of 'bbb', its Long - and Short-Term Issuer Default Ratings (IDRs) of 'BBB/F2' and its senior unsecured debt rating of 'BBB'. The Rating Outlook has been maintained at Stable. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS

VR and IDRS

The affirmation of Stifel's ratings reflects the firm's conservative business profile, well-established franchise with diverse revenue sources, significant deposit funding and solid capital levels. Rating constraints include the sensitivity of the business model to overall market conditions, potential integration issues given the firm's acquisitive growth strategy and a loan portfolio that has grown rapidly and has yet to fully season. Key man risk, particularly as it relates to strategic decisionmaking for the firm, and high compensation ratios are also rating constraints.

In Fitch's view, Stifel's wealth management business has demonstrated fairly stable revenues and margins, helping to offset potential earnings volatility in the company's institutional segment. Wealth management, which 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, including the firm's 2015 acquisition of Barclays' Wealth and Investment Management, Americas which added approximately $20 billion in client assets and $2 billion in assets to Stifel's balance sheet.

While the firm has continued its acquisitive growth strategy, it has a demonstrated track record of successfully integrating its acquisitions profitably without operational issues. The recent Barclays acquisition brought Stifel's total assets to greater than $10 billion, which is a threshold for increased regulatory requirements. That said, Fitch believes that Stifel has built a robust infrastructure along with enterprise risk management capabilities that should support these additional risk management and stress testing requirements.

Nevertheless, Fitch believes the firm remains potentially vulnerable to integration, retention and execution risks related to recent and future material acquisitions. Additionally, we also believe the firm's CEO presents key-man risk, though this is somewhat mitigated by the firm's ability to retain key management personnel from prior acquisitions.

Wealth management revenues could be negatively impacted by new Department of Labor rules which are expected to impose fiduciary standards on a host of wealth management products including brokerage IRAs. A shift in the compensation framework to a fee-based model (from commission-based) could cause wealth managers to lose certain smaller accounts under which the fee-based model is prohibitively expensive. However, in Stifel's case, the potential negative impact on the firm's overall performance is expected to be manageable, as brokerage IRA accounts represented only 15% of Stifel's client assets as of March 31, 2016, and higher fees on retained accounts could mitigate lost revenue from client asset outflows. Further clarity on the impact to the industry is expected over the coming months as market participants continue to evaluate to the rule and adjust their business practices accordingly.

Despite increased costs related to regulatory compliance and acquisitions, profitability remains good. Similar to peers, Stifel's earnings are 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. To the extent that the firm's acquisition activity slows, we expect that returns could improve as a result of lower costs and increased accretive benefits related to acquisitions.

Stifel Bank, which operates under the global wealth management segment, continued its rapid growth, with total assets increasing to $8.3 billion as of March 31, 2016, up 57% from $5.3 billion the year prior. Stifel Bank grew both its investment portfolio and loan portfolio, retaining an approximately 50/50 mix between loans and securities. This mix, as well as the large proportion of securities-based lending, at approximately one-third of loans, help to offset the bank's rapid loan growth.

The ratings also consider the firm's current and expected capitalization levels. 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 acquisition strategy. As of March 31, 2016, Stifel reported a tier one common capital ratio of 21.3%, down from 28.3% the year prior, but still higher than peers. 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.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Stifel's preferred stock issuance is expected to be rated five notches lower than Stifel's Viability Rating (VR) of 'bbb', in accordance with Fitch's 'Global Bank Rating Criteria' dated March 20, 2015. The preferred stock rating includes two notches for loss severity given these securities' deep subordination in the capital structure, and three notches for non-performance given that the coupon of the securities is non-cumulative and fully discretionary.

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.

RATING SENSITIVITIES

VR, IDR AND SENIOR UNSECURED DEBT

The Stable Outlook reflects Fitch's view of limited rating momentum over the Outlook horizon, particularly given an expectation for future declines in capitalization levels and the potential for some normalization in asset quality. These challenges are expected to be counterbalanced by Stifel's growing business and earnings diversity and Fitch's view of the company's moderate risk appetite.

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 integration of current and future acquisitions, and loan performance that is superior or at least consistent with peers through the cycle. Reduced key-man risk associated with Stifel's CEO would also be viewed positively. 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 risker acquisition targets or more aggressive funding (i. e. issuance of new debt). Additional ratings pressure could result from 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. Finally, to the extent that Stifel's acquisitions result in significant integration issues with any recent or future acquisitions, or result in any large-scale management departures, this could lead to a negative ratings action.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Stifel's preferred stock rating is sensitive to changes in Stifel's VR or change to Fitch's notching of preferred stock instruments.

SUPPORT RATING AND SUPPORT RATING FLOOR

The SR and SRF are sensitive to changes in Fitch's assumptions as to the propensity or ability of the U. S. government to extend extraordinary support in the case of need.

Fitch has affirmed the following ratings:

Stifel Financial Corporation

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Senior unsecured debt at 'BBB';

--Preferred stock at 'B+(EXP)';

--Viability Rating at 'bbb';

--Support at '5';

--Support Floor at 'NF'.

The Rating Outlook has been maintained at Stable.