Stifel CEO: 'Economy needs to be cooled a little bit' so supply catches up with demand

Stifel CEO & ChairmanRon Kruszewski joins Yahoo Finance Live to discuss Q4 earnings, inflation, supply chains, and the U.S. economic recovery.

Video transcript

[MUSIC PLAYING]

JULIE HYMAN: Well, Stifel Financial earlier this week revealed its 26th straight year of record net revenue, fifth consecutive year of record earnings as well. Let's bring in Stifel chairman and CEO Ron Kruszewski.

Ron, good to see you. Thanks for being here. It's always a pleasure to talk to you.

I want to start actually, not on the earnings, but perhaps future earnings implications from what were you seeing with interest rates. That's because both Brian and I were kind of surprised today. Bank of America coming out and saying we could see as many as seven rate increases from the Fed this year.

You guys saw an increase in net interest income last quarter. But you've got other stuff that might offset that from rising rates. So talk me through the effect on your business if there were, say, seven rate increases.

RON KRUSZEWSKI: Well, we did say that with four increased rate increases, basically 100 basis point shock today to interest rates. If it happened today, our earnings would be up almost a quarter of a billion dollars. And so we are, as an organization, we're very, as they say in our business, asset sensitive.

So rising rates would be very good for Stifel. Very good. On the other hand, rates, seven rate increases may also shock the economy. And that could possibly even cause a recession.

So that could have some other impacts on our investment banking and on capital raising. But overall, rising rates, as long as they occur in a measured and maybe communicated manner, would be very good, very good for Stifel.

BRIAN SOZZI: And Ron, Stifel works very closely with a lot of middle-- just companies in the middle, middle area of banking or however you want to look at it. What are they telling you right now? Is the economy so strong that it could handle seven rate hikes, or even five or six?

RON KRUSZEWSKI: Well, I think first of all, today, while demand is huge, and that's what we're understanding is that there was been so much money put into this economy both fiscal and monetary through QE and low interest rates that demand is great. And businesses are struggling with meeting demand and keeping people at work.

And the whole combination of the pandemic and everything has made it hard on business to keep up with demand. And of course, what they're doing is raising prices. I mean, this is economics 101.

So I believe that the economy needs to be cooled a little bit so that supply can catch up with demand. We all learned that. I did 40 years ago. I don't think it's changed.

BRIAN SOZZI: No, it has not changed. I can confirm that. I remember learning that myself way back when.

But let's focus on the business for a second because it was another quarter of strength for Stifel investment banking. Why do you continue to see the strength?

RON KRUSZEWSKI: We actually, Brian, and I think you might have talked about this. We set out really right after the financial crisis in 2010. We felt that with what happened in the market with Merrill being acquired by B of A, with the unfortunate circumstance with Lehman with Bear Stearns going into JPMorgan, we believe that there was a tremendous opportunity for a firm like Stifel, that was a bank and an investment bank and a wealth manager, to grow into the void that was left for middle market companies.

And we went from being back then a very focused middle market firm to a global firm that can handle all kinds of business, but again for companies that are in the middle market. And that's why we've grown as fast as we have is that the market opportunity for us is so great. And we've simply taken advantage of that.

JULIE HYMAN: And speaking of which, I was taken on your call. You mentioned several times that you are a growth company, that Stifel is a growth company, which is reflected in that advance that we've seen in the shares not just over the past year but over the past several years. That was your third consecutive year of double digit growth in the stock. But should you be careful what you wish for?

In other words, growth stocks are getting smacked right now. You guys are off about 7% from your highs. So definitely not as acute as we've seen in software names for example. But are you worried at all about slowing momentum because of how the market is viewing those kinds of companies right now?

RON KRUSZEWSKI: Well, I mean, look, I say we're a growth stock. We're also a very consistent company. I would challenge you to find another investment bank that's had 26 consecutive years of record revenue.

So I think we're consistent in growth. But specifically to your question, I mean, I would worry about it if my PE ratio was sky high. And that's what happens to big growth companies that have huge PEs.

As rates go up, they get you-- their stock prices come down. I mean, our PE ratios basically under 10. So even though I like to say I'm a growth company, the market has not given us the multiple that certainly I believe we deserve for the kind of growth that we've displayed.

So yeah, I hear you. Be careful what you wish for. But we've been a growth company. And I think the market will recognize that at some point.

BRIAN SOZZI: How hard is it, Ron, to keep the talent when you have first or second year associates pulling in $150,000 base and being promised all sorts of bonuses and perks?

RON KRUSZEWSKI: We're a competitive firm. We're going to pay people competitively. I think that the difference is it's an overused word, Brian. But it's our culture.

Our people want to work in an organization that's growth oriented. We're a very performance based shop. And if you do well and you perform well, you're going to get recognized.

And so of course, we feel the competitive pressures. But I believe that people want to work at a successful growing organization. And that helps.

It's not all just about what you take home in your paycheck. Although, that is a big part of it. I don't mean to suggest that it's not. But if you work here, people work here like it. And that matters.

BRIAN SOZZI: Does it matter, Ron, too just staying on the worker aspect that workers and investment bank are back in the office, that that trading desk is full? As the CEO, do you want to see them back in their full time given that we are still in the pandemic?

RON KRUSZEWSKI: Yeah, Brian, it makes me feel like I'm some guy that maybe doesn't get it in terms of the new work environment I certainly, and we as a company, will embrace and understand remote work when necessary and when we can accommodate certain circumstances.

But I have to tell you. I've been in this business a long time. And we are an on-the-job learning company. And our people, our young people learn by being together with other people. And the amount-- and I've seen it.

The amount of collaboration, the amount of creativity, the productivity that comes together from being together is unmatched. And so while I I'll protect our employees and be very mindful of the whole health situation, at the end of the day, I know that we will be a better firm if our people are together and collaborating together.

And again, I think people miss being at work. And so it's not that controversial in our shop. People want to get back together.

JULIE HYMAN: Amen, Ron. If the camera could pan around this room, you will see that despite the background, I'm not in the studio. I am rather in the third floor of my house. Ron, good to see you. And I--

RON KRUSZEWSKI: If you pan around here, you would see that I am in my office. And there are people here. So good to see you too, OK.

JULIE HYMAN: Yes, but it is-- you are luckier than I today. Ron Kruszewski, Stifel CEO and Chairman. Great to catch up with you. Thanks for your time today.