Low leverage and an excellent balance sheet translates into financial strength during crises
Low leverage for a financial institution does not necessarily translate into unprofitability relative to its competitors. As long as excellent employees and managers are acquired and retained, business can expand at reasonable rates while strong capital positions will be beneficial in the inevitable periods of financial turmoil.
Take for example Stifel Fianancial (SF), a full-service regional brokerage and investment banking firm that is up about 27% YTD. Looking at their financial ratios, its not hard to imagine why they are doing so well in this environment.
- Stifel Financial, the holding company, has a Tier-one capital ratio of 49%, which is 12 times the required level; For comparison, Citigroup’s Tier-one capital ratio is approximately 9%
- Stifel Nicolaus, the broker-dealer, has a net capital ratio of 37%, 17 times the required level
- Stifel Financial’s total capital ratio is 3 to 1…. The major New York investment banks’ capital ratio, on average, has been 30 to 1…. In other words, the large firms are ten times more leveraged than Stifel
In the 2007 shareholder’s letter, Chairman, President, and CEO, Ron Kruszewski begins with a quote from Warrent Buffett: “It’s easy to put on leverage but not as easy to take it off.” It seems to me that Stifel has done quite well simply by not employing the insane amounts of leverage like other investment banks. I’m willing to bet that Stifel will continue to do quite well as a result of their seemingly prudent nature. I look forward to reading the 2008 shareholder letter.
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