Q4 2023 Stifel Financial Corp Earnings Call
Participants
James M. Marischen; Senior VP & CFO; Stifel Financial Corp.
Joel Michael Jeffrey; SVP of IR; Stifel Financial Corp.
Ronald James Kruszewski; Chairman & CEO; Stifel Financial Corp.
Alexander Blostein; Lead Capital Markets Analyst; Goldman Sachs Group, Inc., Research Division
Brennan Hawken; Executive Director and Equity Research Analyst of Financials; UBS Investment Bank, Research Division
Christopher John Allen; MD; Citigroup Inc., Research Division
Devin Patrick Ryan; MD, Director of Financial Technology Research & Equity Research Analyst; JMP Securities LLC, Research Division
Steven Joseph Chubak; Director of Equity Research; Wolfe Research, LLC
William Raymond Katz; Senior Analyst; TD Cowen, Research Division
Presentation
Operator
Good day, and welcome to the Stifel Financial Fourth Quarter Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations at Stifel Financial. Please go ahead.
Joel Michael Jeffrey
Thank you, operator. I'd like to welcome everyone to Stifel Financial's Fourth Quarter and Full Year 2023 Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Kruszewski, our Co-Presidents, Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen. Earlier this morning, we issued an earnings release and posted a slide deck and financial supplement to our website, which can be found on the Investor Relations page at www.stifel.com.
I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis, and I would refer to our reconciliation of GAAP to non-GAAP as disclosures in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material by Stifel Financial and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financials. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.
Ronald James Kruszewski
Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our fourth quarter and full year 2023 conference call. Let's begin by discussing our year-end 2023, whereby Stifel generated strong results in an operating environment that was less than ideal. The benefits of our diversified business model enabled us to successfully navigate market conditions that included increased geopolitical risks, tightening of financial conditions primarily due to significant increases in short-term rates and quantitative tightening by the Federal Reserve, both implemented to (inaudible) inflation and the failure of 3 major banks in the United States.
Led by record results in Global Wealth Management, which produced its 21st consecutive year of record net revenue, driven by record asset management revenue and net interest income, Stifel overall generated net revenue of approximately $4.4 billion. This was essentially in line with 2022 despite a significant industry-wide slowdown in investment banking activity. As we'll discuss later, these results are directly correlated to our consistent reinvestment in our business, our focus on servicing our clients as well as our strategy of deploying our substantial excess capital in ways that generate strong risk-adjusted returns. Taken together, we generated operating pretax margins and returns on tangible common equity of approximately 19%. And excluding the impact of the nonrecurring legal charge in the third quarter.
With respect to capital deployment, we typically deploy the excess capital we generate each year and 2023 was no different. Last year, we generated $630 million of excess capital and deployed it as follows: the repurchase of 7.2 million shares totaling approximately $440 million, $211 million in common and preferred dividends and a modest amount of balance sheet and acquisition activity. Underscoring our confidence in improving market conditions, I'm happy to announce that our Board has authorized a 17% increase in our annual dividend on common shares from $1.44 to $1.68 per share.
On Slide 2, we look back at the growth of our business since 2015 and 2019. Despite constantly changing market conditions, the investments we've made in our business results in substantial growth. Net interest income was up more than 760% since 2015 as a strategy to grow our balance sheet enables Stifel to capitalize on the increase in short-term interest rates over the past 2 years. Importantly, we've achieved this growth without taking excessive interest or credit risk. Additionally, the investments we've made in recruiting on both the Wealth Management and Institutional segments have led both segments to more than double revenue over the past 8 years. The operating leverage from these investments resulted in earnings per share increasing 270% over this timeframe.
The comparison of 2023 to 2019 is also important as it illustrates the benefits we've seen from recent acquisitions, recruiting and balance sheet growth. Total revenue was up 30% in the past 4 years as Wealth Management growth of 40% more than offset relatively flat Institutional revenue, which should not be lost here as the potential upside we see in our Institutional business. Specifically, the average number of investment banking management directors has increased by 33% since 2019, but our Advisory revenue was relatively flat due to the market conditions. If our production per MD returns to historical levels, we would experience substantial growth for both our top and bottom lines.
Looking at our quarterly results, we had a strong rebound from the third quarter. Net revenue of nearly $1.15 billion was our third highest quarterly revenue as the combination of a pickup in Institutional revenue and continued strong Wealth Management revenue drove this improvement. Given the flexibility of our operating model, we were able to maintain our compensation ratio at 58% and generate $1.50 of EPS which was a 27% sequential quarterly increase in operating EPS, which excludes the significant onetime legal reserve taken in the third quarter.
Moving on to Slide 4. We look at the variance table to consensus estimates. Total net revenue beat The Street by $60 million as each of our primary revenue lines surpassed expectations. Transactional revenue came in $30 million above the street on stronger fixed income revenue as our Rates business has begun to rebound from the weakness tied to bank failures higher rates and an inverted yield curve. Investment banking came in $21 million above expectations, driven by higher advisory and fixed income capital markets, primarily public finance. Total expenses were higher than forecast, but much of that was reflected in compensation expense due to higher revenue in the quarter as the comp ratio remained consistent at 58% and was in line with Street consensus. Non-comp expenses were $10 million higher than expectations as a result of higher occupancy costs and higher legal expenses that was partially offset by a lower loan loss provision.
Before I turn the call over to Jim to go through our quarterly results, I wanted to talk about our Wealth Management business. While much of the discussion of our near-term upside is focused on our Institutional business, I want to emphasize that our Global Wealth segment has been the long-term growth engine of our firm and is a cornerstone of Stifel's success. As stated previously, our Wealth Management segment has posted 21 consecutive years of record revenue as our focus on recruiting, serving our clients, respecting the entrepreneurial spirit of our advisers and growing client assets has been fundamental to our success. Slide 8 illustrates these points.
Since 2014, Global Wealth Management revenue has increased 150% while the percentage of recurring revenue has increased from 44% to 78%. Again, this level of growth has been the result of our strategy to recruit high-quality advisers and provide them with extraordinary level of service. In this effort, we have continually invested in resources, support and technology to reduce bureaucracy and enable our advisers to thrive. Our recruiting efforts have been one of the key elements of our growth efforts. Since the end of 2018, we've added more than 700 financial advisers with cumulative trailing 12 production of approximately $435 million. We continue to see increased momentum in our recruiting efforts as the number of advisers we added to our platform increased by nearly 30% in '23 as compared to 2022.
So while we see significant upside in revenue and margins as our institutional segment gets back to historical norms, our long-term growth and success has been and continues to be driven by our Wealth Management franchise. And with that, let me turn the call over to Jim Marischen to discuss our most recent quarter results.
James M. Marischen
Thanks, Ron, and good morning, everyone. Looking at the details of our fourth quarter results on Slide 6. Our quarterly net revenue of $1.15 billion was up 2% year-on-year. The increase was driven by stronger client facilitation, trading and underwriting revenue that was partially offset by lower net interest income and advisory revenue. Our EPS was up 150% sequentially due to higher revenues as well as lower noncomp operating expenses, which Ron addressed earlier.
Moving on to our segment results. Global Wealth Management revenue was $766 million. Our pretax margins were 39%. For the full year, record net revenue of $3.05 billion was up 8% from 2022. This was driven by record asset management revenue and net interest income as well as strong transactional revenues. Primary driver of our growth has been our ability to recruit advisers and increase our client assets. During the quarter, we added a total of 40 advisers. This included 13 experienced advisers with trailing 12-month production of more than $8.1 million. We ended the quarter with fee-based assets of $165 billion, total client assets of $444 billion. The sequential increases were due to higher equity markets and organic growth as net new assets grew in the mid-single digits.
Moving on to Slide 8, where we highlight the solid trends at the bank. Net interest income of $273 million was in the lower half of our guidance as bank NIM was impacted by higher deposit costs, larger average cash balances and the movement of sweep deposits back into third-party banks. The movement of cash back into the Sweep Program, resulted in a few million dollars being recognized in asset management revenue rather than NII. This is simply changing the geography of where the revenue is recognized on the income statement. While we are not ready to say cash sorting is behind us, outflows from sweep accounts were essentially flat in the quarter as compared to outflows of more than $3.6 billion just 2 quarters earlier.
I'd also note that the Sweep Program now has $2.1 billion in balances with third-party banks. That said, we typically see some cash outflows early in the year given the timing of tax payments. In terms of our expectations for the first quarter, we project net interest income to be in a range of $250 million to $260 million. Our credit metrics and reserve profile remains strong. Nonperforming asset ratio stands at only 15 basis points. Our credit loss provision totaled $2.3 million for the quarter, and our consolidated allowance to total loans ratio was 86 basis points.
During the quarter, charge-offs were primarily tied to an individual C&I credit, it was fully reserved for previously. I would also note that we saw an approximate $800 million reduction in C&I balances during the quarter, as we opportunistically sold certain broadly syndicated loan exposure, as we continue to focus balance sheet allocations to portfolios that also provide other deposit or fee income opportunities.
Lastly, our balance sheet continues to be well capitalized. Tier 1 leverage capital decreased 30 basis points sequentially to 10.5%. I'd also like to highlight the improvement in unrealized losses in the bond portfolio. To put numbers to this and reflecting on the rally in the 10-year treasury bond, and tightening of credit spreads, our unrealized losses declined by $127 million or nearly 40% during the quarter.
On the next slide, I'll discuss our Institutional Group, which had its strongest quarter in 1.5 years. Total revenue from the segment was $359 million in the fourth quarter, which represented a 40% sequential increase as both Investment Banking and our Transactional Business had strong quarters. Firm-wide Investment banking revenue totaled $206 million as both capital raising and advisory revenue experienced significant increases from the third quarter. Advisory revenue was $129 million, which was up 33% sequentially as we had solid results in our industrial, health care and technology verticals.
I highlight that although we benefited from year-end seasonality, the quarter was again negatively impacted by continued delays in closings. We continue to expect these deals to close, the timing remains uncertain. However, our pipelines remain strong, and we are seeing momentum begin to build in our activity levels, but the timing of the sustained rebound in the business remains very much market dependent. Equity revenues totaled $89 million in the quarter, which was our strongest quarter since the fourth quarter of 2021. Equity transactional revenue totaled $57 million up 20% from the prior quarter, represented our highest quarterly revenue in 2 years.
We continue to gain transaction -- I'm sorry, we continue to gain traction in our electronic offerings and see strong engagement with our high-touch trading and best-in-class research. Fixed Income generated net revenue of $142 million, an increase of $50 million from the third quarter. Much of the increase was driven by the $35 million increase in Transactional revenue. We are starting to see the rates market open up as banks are beginning to trade their investment portfolios, given the more dovish Fed outlook and more stable deposits.
Underwriting revenues increased 60% sequentially as we continue to be a leader in the municipal underwriting business as activity increased and we continue to be ranked #1 in the number of negotiated transactions as our market share was nearly 15% in 2023.
On the next slide, we go through expenses. Our comp-to-revenue ratio in the fourth quarter was 58%, which was in line with our forecast.
Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $249 million. Our noncomp OpEx as a percentage of revenue was 21.8%. The effective tax rate during the quarter came in at 21.6%. The lower tax rate was primarily due to the impact of the increase in our share price and related excess tax benefit on stock-based compensation. Before I turn the call back over to Ron, let me discuss our capital position.
In the third quarter, we repurchased more than 2.3 million shares. We have nearly 12 million remaining on our authorization. We have approximately $170 million of excess capital based on a 10% Tier 1 leverage target. Additionally, we continued to generate substantial amounts of excess cash as illustrated by our 2023 net income of $530 million. We remain focused, generating strong risk-adjusted returns when deploying capital, and we've done this through reinvesting in the business, making acquisitions as well as through share repurchases and our recently increased dividend. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the first quarter fully diluted share count to be 110 million shares. And with that, let me turn the call back over to Ron.
Ronald James Kruszewski
Thanks, Jim. Let me conclude by discussing our outlook for 2024 in terms of the current Street estimate. The current consensus estimates for net revenue for 2024 is $4.7 billion, which is up about $320 million from 2023. The primary driver of the increase is the expectation that our Wealth Management and Institutional revenue will increase by a combined $400 million, which will be -- which will more than offset the roughly $80 million expected decline in net interest income. As you can see from the table, we are guiding to total net revenue of $4.55 billion to $4.9 billion in 2024. This includes our expectation that net interest income will be in the range of $1 billion to $1.1 billion. Overall, we believe that the pressure on net interest margin can be offset by an increase in interest-bearing assets.
Simply considering the multiple factors impacting the banking industry, we see the current period as an opportunity to make great loans. While we anticipate an improvement in our operating revenue, particularly in institutional, we remain conservative given the recent industry-wide weakness in investment banking. Considering this, we expect our compensation ratio will be in the range of 56% to 58%, and that nonoperating noncomp and net operating noncomp will be 19% to 21%. I've heard the term transition year apply to 2024, and I believe that's a relatively accurate description of the environment. We don't believe that 2024 will be a "normalized operating environment" as there remains uncertainty regarding the number of rate cuts that the Federal Reserve will make, the timing of the pickup in investment banking revenue, the presidential elections and how the equity markets will react to these changes.
Personally, I believe that, The Street estimate of 11% EPS growth for the S&P 500 in 5 to 6 rate cuts is optimistic. We believe that earnings will grow for the S&P of 6% and approximately 2 to 3 rate cuts is more realistic. But I wouldn't be upset with the consensus that would likely have a meaningful positive effect on our operating results. Lastly, while not giving guidance beyond 2024, I did want to touch on how we are looking at the next few years. I must say that while we are cautiously optimistic for 2024, we see the potential for significant exit velocity into 2025.
Last quarter, we discussed the potential results of $5 billion in revenue and $8 in earnings per share in a more normalized market environment. For 2025 be such a year, it's certainly possible if the markets cooperate as we don't believe that reaching these numbers would require significant outperformance in any of our businesses. What we need is to return to historical productivity levels in banking, continued growth in wealth management and some future balance sheet growth.
The bottom line is that as the operating environment improves, Stifel is well positioned to continue our legacy of profitable growth which we believe will continue to drive shareholder value. This is consistent with our strategy of continuing to build our market-leading wealth management franchise with an achievable goal of $1 trillion of client assets, while also being a premier middle market investment bank. And with that, operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Devin Ryan with JMP Securities.
Devin Patrick Ryan
Great. Good morning, Ron and Jim, how are you? First question, just want to, want to start just on deposit betas. And assuming interest rates do move on, at least with the current forward curve, how you guys are thinking about kind of the movement over the first and second 100 basis points? And I guess, the question is, obviously, we know smart rate is over half of the cash x money markets, and so that should be 1 for 1. And so really kind of what are you expecting just for the sweep deposit piece of the equation?
Ronald James Kruszewski
Well, I think half of our, approximately are in smart rate, and that is highly correlated to effective Fed funds. I think the question on deposit betas on the way down are going to be driven by competitive factors, just as they were sort of on the way up. Jim, I don't know if you want to...
James M. Marischen
No. I mean the correlation effect of Fed Funds is essentially because of the competition. The competitions are money market, mutual funds and treasury bonds. And those that, by its nature, is tied to the short end of the curve. And so you'll see near 100% beta on the way down on the first couple of cuts and probably beyond that.
Ronald James Kruszewski
Yes, for smart rate. I think, Devin, I think you're trying to get to what will happen with sweep balances, which is more transactional balances versus savings balances. And we expect them to decline. I'm not sure that I would be comfortable giving you a deposit beta on those balances.
Devin Patrick Ryan
But it would be modest like it was modest on the way out?
Ronald James Kruszewski
It was modest, both ways actually.
Devin Patrick Ryan
Yes. Okay. That's fair. You figured it. I see what you guys would say there. And then I guess on the financial advisor evolution of the firm, I get this question a fair amount. Your Independent contractors is still very small, less than 5% of overall financial advisor headcount. And I'd just love to get your thoughts, Ron, around what do you think that looks like maybe 5 years from now? How much of an objective of the firm; is it to grow independent relative to employee if it is at all? And if it is, kind of some of the steps you're taking to either drive that growth, whether it's organic or inorganic or just make the platform more compelling for independents as well as employees?
Ronald James Kruszewski
Yes. I think the answer to your question would be what you finished that with, which is, we would like to provide an opportunity and a compelling platform for independents to utilize simply our platform, our technology and our capabilities. There is no particular focus on growing the independent channel relative to the employee channel. There just hasn't been. We will deal with that as supply and demand sort of dictates. We have the platform, and it's a good alternative.
What you'll see, though, is our focus has been historically, and this is nothing against the independent channel. I just want to say our focus over the years has been on the employee channel. And that's simply because we are a diversified firm with a lot of capabilities that the employee model it's more, it's been tailored over the last 25 years to the employee model. So I can see both growing. I'm frankly indifferent the way we look at the business.
Operator
We'll take our next question from Alex Blostein with Goldman Sachs.
Alexander Blostein
First question around NNA. I heard you talk about a mid-single-digit NNA rate for the quarter. Can you talk a little bit broader kind of what it's been for the year and what's been the contribution from same-store sales, new FA recruiting and maybe your outlook for organic growth in that business for '24?
James M. Marischen
I would say the results we saw in the fourth quarter were consistent with what we saw over the full year. The net new asset number was relatively consistent in the mid-single digits, across each of the quarters in 2023. I think it's a fairly even mix between existing advisers and recruiting. I wouldn't say either side is particularly driving the addition of net new assets there. And I think it's fairly balanced.
Ronald James Kruszewski
Yes. And look, I think I don't have in front of me, Alex, the same-store sales. Certainly, the last half of the year helped the overall slow business in the Wealth Management sector. If you ask me just to look forward though, I would say, generally speaking, that I would expect the increase in same-store sales to be higher in 2024 than it was in 2023. We got off to a rocky start in 2023. And with the equity markets where they are today and our outlook, I see some relatively good performance over '23 for '24 versus '23 versus '22.
Alexander Blostein
I got you. That's helpful. My second question, just wanted to dig into the interplay on capital management as well as you look out into next year. So, it sounded like your appetite for loan growth perhaps was a little bit better as you look out versus maybe what we've seen over the course of 2023. So maybe just expand on that a little bit and just tease out what that means for share repurchases for 2024 as well?
Ronald James Kruszewski
Well, we have, first of all, we've been repositioning the balance sheet. All right, as we have adapted to a new environment where deposits aren't just free flowing all over the place and trying to keep an eye on various sectors and credit considerations of loans, you'll see, as Jim mentioned, we sold nearly $0.75 billion in, syndicated, broadly syndicated loans, which were really put on almost just a spread lending type strategy, and where we intend to deploy that much more focus to more of a relationship type relationship, deposits, other opportunities that we can provide for the firm.
And with all that said, we really haven't had a diminishing loan demand. We've just muted it. So I see today, this is a good time to be in the lending business. And that is what -- that's just I would say relative to before, and we see now and as it relates to stock repurchases and the interplay on that, we'll grow from relatively flat to $2 billion. If we're up $2 billion, that's, call it, $200 million of capital plus our dividend, leaves ample room for additional share repurchases, ample.
James M. Marischen
The other thing I'd add to that is the additional liquidity we have available today to fund some of that loan growth. You'll see we have over $2 billion in third-party sweep banks. And on top of that, we added another $336 million in venture deposits. And so Ron made the comment the capacity and our ability to generate loans and the investments we've made across Fund and Venture and our continued ability to service our clients with securities-based lending and mortgage is fairly significant. And now there's a little bit more liquidity supporting that growth as we look forward.
Operator
We will take our next question from Bill Katz with TD Cowen.
William Raymond Katz
Okay. So appreciate the financial guidance, and it looks like there's a margin opportunity as we look ahead into '24 and probably getting into '25. Just looking through some of the supplement disclosure you have, which is terrific. So thank you for that. And looking at the incremental margin in the Institutional Group, if I did the math correctly, it looks like it was about a 55% incremental margin in the fourth quarter. And just as you look out into '24 and again into '25 into the sort of aspirational sort of normalization of $8, how should we be thinking about the incremental margin maybe for Stifel overall and then specifically to the institutional group along that path?
Ronald James Kruszewski
Yes. I think that our margins will improve obviously, as -- you almost start with the Institutional side of the business, we, as you can see, we essentially broke even on revenues of about $1.3 billion. And contrast that with 2021, which we may always look back at saying that was a really phenomenal year. But that said, it was a $2.2 billion and profitability of $400 million plus. So with, you can almost draw a line between the $1.3 billion and $2.2 billion and see the leverage in earnings that we would expect. And that will drive our margins best laid plans of mice and men.
But if we, but if the markets cooperate, we'll see margins that can get back into the mid-20%s as we see our growth in wealth management continuing. The offset being that we offset a lot of the weakness in the Institutional business by growing NII to up to almost $1.2 billion. As you can see in our guidance, we would expect some modest declines in net interest income being more than offset by the potential that you're referring to in our Institutional business.
James M. Marischen
And maybe more, a little bit more color on the consolidated level. If you back off the legal accruals from the third quarter, year-to-date, we're a little over 19% pretax margins today. And that's including the fact that we were essentially breakeven on the institutional side in 2023. So you think about back to previous side, Ron talked about 2021, kind of the mid-20% range. We have a higher starting point today, given some of the base, the NII that Ron had talked about. So you have the potential for incremental margin as the market recovers and normalizes and if you already catch kind of a good market, if you will, it could go higher from what we saw in the previous cycle.
William Raymond Katz
Okay. That's helpful. And just as a follow-up, not to get too far in the weeds, but I was wondering if you could expand a little bit on the legal charge in the quarter? And maybe, Ron, to zoom out, you have a pretty good view of this, how you sort of see the regulatory landscape in '24 obviously, a lot of moving parts, including election year, but anything to be mindful of in terms of the outlook here?
Ronald James Kruszewski
Yes. I'll let Jim talk about legal and then I'll answer your question.
James M. Marischen
Yes. The legal charges we were talking about, the accrual was in the third quarter. There was a $67 million accrual that was booked last quarter. It was not something that occurred in the fourth quarter.
Ronald James Kruszewski
Yes. What I said in my prepared remarks was we, the fourth quarter had, I think, a 27% increase if we sort of excluded that legal charge. I was just trying to point we had a pretty good quarter, and we're seeing that now, or just that was to illustrate that. The regulatory environment, I'm not sure that really is changing. I feel that as a, maybe as a headwind for the industry, the level of regulatory resolutions seems to be markedly higher than what it's been in the past. But we'll see as this plays out, hard to predict that. But certainly, the off-channel communications was a significant factor for not only Stifel, but frankly, everyone that's been dealing with that.
Operator
We'll take our next question from Steven Chubak with Wolfe Research.
Steven Joseph Chubak
So I wanted to start off just unpacking some of the assumptions underpinning the '24 fee guidance. Didn't catch if you guys, and so I'm sorry if I missed this, if you alluded to the equity market appreciation that you're assuming in the coming year? And specifically for FICC brokerage, is this $100 million, Jim, a reasonable jumping off point, given the tailwinds from both steeping that you cited in the prepared remarks?
James M. Marischen
So specific to fixed income, I think the conversations we're having with the people that run that business as they continue to see increased levels of activities. Obviously, with the Fed's change in stance, the unwinding of some of the unrealized losses on bank balance sheets. Going forward, you'll probably see banks use and rely on each TM on a lesser basis. You're starting to see that, and so you're starting to see more activity, and we do anticipate that to continue. We do feel like, at this point, we're being a little bit conservative, but it's a reasonable jumping off point to look at what happened in the fourth quarter and maybe discount off that a little bit. But we are seeing some very positive trends across the fixed income area.
Ronald James Kruszewski
And I would add that as I think we talked about in previous calls, and we've made some meaningful hires in that space, both in the SBA and in the [Jenny] space, which deals with origination and provides product to many of our end buyers. And so that wasn't, that's just getting ramped up, and that's a not less than material opportunity for us with the hires we've made there. So I think that just underscores that I think it is a reasonable jumping off place.
Steven Joseph Chubak
That's great. And the equity market appreciation that you guys are assuming?
Ronald James Kruszewski
For asset management fees?
James M. Marischen
Yes. I mean I think we just took some of our internal expectations, some of our internal account. I forget what the exact percentage increase in market appreciation is, but I can follow up on that.
Steven Joseph Chubak
Okay. Great. And just on the non-comp implied guidance. I know that you had the legal charge, there was a fair amount of noise this past year. But just looking at the core non-comp trends, ex legal, those have been growing roughly at about a high single-digit CAGR since '19. The '24 non-comp guide actually implies a bit of contraction from what we can tell. So I just want to understand what's driving the better expense control in the coming year, at least relative to recent history?
Ronald James Kruszewski
Well, we're talking about percentage of net revenue, okay? And so first of all, there's always some noise in our fourth quarter. As always, if you look, you'll always see that is historically higher. I mean we just, we have really pushed a cutoff on all of our expenses to make sure that they're in. And if you go back over years, you'll see that the fourth quarter tends to be above trend for the year. And there's leverage in the model. So while I expect noncomp expense to increase, as we raise revenues, that's where the leverage in the model. That's why we see our margins getting into the mid-20s because of that percentage will come down as revenues rebound.
Steven Joseph Chubak
Okay. So the expectation, though, is that the dollars will at least increase in noncomps but the ratio will improve with some of the operating leverage?
James M. Marischen
Yes. And if you look specifically at the fourth quarter, there's some seasonality in there. When you think about the fourth quarter, you typically see elevated levels of travel entertainment as well as some statement-related expenses. We also had some third-party legal expenses that were somewhat elevated in the fourth quarter. Those are lumpy. Those are hard to predict. And you think about those in a normalized run rate when you're comparing kind of the results in the fourth quarter, normalizing some of those things on an annual basis. In addition to the revenue increases that Ron talked about is really what's getting you to the levels in our guidance range.
Operator
We'll take our next question from Chris Allen with Citi.
Christopher John Allen
Maybe you can just dig in a little bit on the investment banking pipeline. Just wondering if you're seeing the improvement across all verticals or specific verticals? Maybe give us some color just whether you're starting to see any signals that bank activity specifically is picking up? I mean, obviously, you start to see some activity on the fixed income trading side. I wonder if that's filtering through at all on the banking side?
Ronald James Kruszewski
Well, for sure. I mean, the engagement in the tone and frankly, some deals getting done is definitely improving. I'm cautious, Chris, just because we've been talking about improvements in green shoots and all of that for quite a while here. So the -- I just see the tone being much better. We asked about where is certainly health care, industrials, FIG and Tech. So it's kind of broad-based when we look at our pipeline. I just want to make a more generalized comment here, which is we've been through pretty much a recession in this business with equity capital raising down like 70% over almost whatever time frame you want to compare it to as it relates to 2021 and M&A down 50%.
And that environment is not going to continue. So we, I definitely see improved business. I don't want to try to comment as to how steep the curve of the improvement will be. But certainly, as we start the year, we're seeing improved engagement and our pipelines and our engagements are improving. And simply, there's a lot to do. There's been a lot of strategic and financial considerations and decisions that have been delayed in the face of inflation at 8% and the Fed rising 500 basis points very quickly. That certainly puts a damper on the timing of activity. And now as we see that stabilizing and in fact, the consensus is that, that's going to go down, you're going to see improved activity. I think that's pretty clear.
Operator
We will take our next question from Brennan Hawken with UBS.
Brennan Hawken
Curious, it was a pretty nice growth in the third-party bank balances. So curious whether or not that was driven by client action, such as seeking out of excess FDIC? Or was this more like an asset decision where you guys sold your loan and didn't see loan growth, so allocated to capture the yield?
Ronald James Kruszewski
I think there's, as AI read and listened, looking at some of the, The Street's comments on this. I'd love to take a moment just to clarify how we look at that, all right? I view third-party bank sweep balances to be part-and-parcel part of our sweep program, all right? We control the, if you will, the valve on what we want to do. So if we, it's just where we're allocating our deposits. So that is just deposits that we're choosing now not to have on the balance sheet of Stifel. There, if you will, diverted to third-party banks. No one is making that decision other than us is the best way to say that. And we could turn around and bring those back on balance sheet as needed or increase it. So you need to look at, in my opinion, you have to look at sweep deposits and third-party combined.
James M. Marischen
Yes. And the decision to push some of that sweep, some of the sweep dollars back was based upon some of the loan sales we talked about in the prepared remarks, as well as just general elevated cash balances of the bank. So again, the revenue associated with that just moves in the income statement, it's showing up in asset management revenues rather than NII, but you're getting a similar return in either location.
Brennan Hawken
Appreciate it. And then Ron, you made reference to some of the hires that you all have made in the bond trading business. And I know you guys have referenced recruiting through much of the past year. But we noticed that the Institutional MDs were actually down a bit, not by large just but one, but I would have thought that, that would have been growing just given the focus, right? So what drove that to be sort of flattish? And was there some movement under the surface that maybe like we can appreciate just by looking at the number in and of itself?
Ronald James Kruszewski
Yes. I mean look, it could have been up one, okay? And then I would, you've had the same question. It's down one. I think that we see, since 2019, we see our MDs are up some, what do we say, 33%, okay? And, most of those MDs that there's been is in banking in terms of leveling it out. And look, we have a lot of capability here. I think that our viewpoint is that we're not quickly going back to 2021 levels. And we not only want market share, we want to make money. And so we're balancing those. You can, it becomes, it's a big strategic decision to really hire into what you think is going to be a very robust market. And if that doesn't happen, that causes other problems.
So we're being balanced as we always are, but we have very capable bankers, very capable services, and we are well positioned as we sit here today for rather significant improvement in the market everyone will do well, including our shareholders, we need to drop this activity down in EPS.
Brennan Hawken
Got it. And for the record, the symbol wasn't what matters, plus or minus. It was the flattish.
Ronald James Kruszewski
I know. I know. Look, one of the things that just, when we go back to the other question also, remember, and we see this on the Wealth Management side, and I think this drives activity. And a lot of our clients that have invested in alternatives in the private equity, our private equity needs to return money to limited partners, okay? They want to raise new funds but you also need to have realizations and return capital. And that's been on pause a little bit.
So as I can see a lot of things that are requiring some transactions to get done so that private equity can sort of recycle the capital back. You can't sit there on these investments for 15 years. And so we definitely have to see a lot of discussions around the broad topic of returning capital to limiteds.
Brennan Hawken
On that, Ron, since you've mentioned that, I'd love to throw in another question here. Like have you, we have seen the volumes pick up on the announcements but it has mostly been on the strategic side. When you look at your backlog, are you starting to see financial sponsors getting more active and preparing to monetizing as well? Or was that more a prospective expectation, you know just based upon some of the dynamics that you laid out. Or like are you seeing early signs or leading indicators of the activity pickup?
Ronald James Kruszewski
Definitely. I can expand that if you want me to.
Brennan Hawken
I'd love to if you don't mind.
Ronald James Kruszewski
No, no. no. Again, you're -- as markets, as the interest rates go up and the spread widens between bid offer expectations in M&A, not just strategic but the ability to have realizations in private equity, one of the drivers is returning capital. It's hard to raise a new fund when you haven't consummated your last one. And so that is driving bid offer expectations tighter, and there's a lot of discussions going on, on this. And that's, again, just speaking to the overall tone in that market, which is an improved market environment in that and frankly, across the markets. So, absent any external shock to the system, that's why we see improvement here.
Operator
We do not have any further questions in the queue.
Ronald James Kruszewski
Well, very good. I want to thank everyone for taking the time to listen to our results. Look forward to talking to you about what I believe will be an improving environment in 2024 as we go through the year and into 2025. So thank you, everyone, for your time. and we look forward to communicating again next quarter. Have a good day.
Operator
This concludes today's call. Thank you for your participation. You may now disconnect.
