PIPR - Piper Sandler: Strong Association With Depository Clients

2023-04-05 11:31:41 ET

Summary

• In Q4, we were reminded of Piper Sandler's position as a leader in serving depository clients.
• They were involved in the FDIC sorting out of SVB.
• Both their advisory and fixed-income trading business could benefit from regional banking looking to manage their portfolios and weather the flight risk of depositors.
• In every other respect, the business is pretty exposed to a downcycle and not worth the price.

Piper Sandler ( PIPR ), formerly Piper Jaffray, was not exactly the most respected shop. But they've been doing a lot to become more respected and their performance, thanks to very robust mid-market exposures, was relatively decent in 2022 where peers saw massive drop-offs from their exuberant 2021's. Moreover, PIPR was tapped to work on selling SVB Financial (SIVB) (SIVBQ) after it just went belly up at the start of this cycle's banking fears, and in their Q4 call, before any of this happened, we were reminded that PIPR was actually always a leader with depository institutions, to the point where they've been desperate to move away from those exposures. With difficulties in banking and a growing restructuring headcount, we see mandates on the horizon to mitigate industry pain. However, on balance, we see pressure on their businesses which cannot fully withstand a macro downturn and don't appreciate the 20x PE multiple at all.

Q4 Notes

PIPR has been very ensconced in the deposit banking sector for a long time.

When we combined with Sandler, one of our growth objectives was to expand our non-depository business, and we are experiencing strong momentum on that front. In 2022, non-depository revenues represented nearly 50% of our total financial services investment banking revenues, which compares to 32% for 2019 before the group joined our platform. Since the combination in early 2020, we have been adding headcount to expand our insurance, asset management, and real estate practices, and have nearly doubled our non-depository revenues during that time.

Chad Abraham , CEO of PIPR

The recent spate of banking blowups is a catalyst for more activity in their businesses. The above quote refers to their investment banking business, and specifically to their FIG business, but their fixed income business also has connections with the activity of depository institutions. With a focus on how to manage balance sheets right now in order to protect against depositor flight, there could be more activity and volatility in the PIPR fixed-income business, which ultimately accounts for a good deal of revenue ( more than 10% ).

With regional banking being quintessentially mid-market, and PIPR being pretty focused on the mid-market, evidenced by their relatively robust advisory revenue despite tough comps in 2021 and a drought of megadeals, we could see some idiosyncratic support to PIPR's results that peers won't share as macroeconomic conditions deteriorate and credit, in all likelihood, sees further tightening to finally put an end to inflation. Also, PIPR has been discussing their restructuring additions of MDs for a while now, making for a good combination. With advisory revenues growing sequentially (although Q4 is seasonally strong and has been a little deflated this year), strategic considerations could keep this segment more alive than peers come what may.

However, not everything is smooth sailing. The municipal financing business isn't doing well, because there's a skew to high-yield issuing which is a dead market, and has not shown any signs of recovering within the peer group whatsoever. It is almost 10% of revenue, so not insignificant. Moreover, further concerns around banking and the high likelihood that depressed credit spreads will start to widen also create concerns around how this high-yield skewed segment will fare.

Furthermore, other pockets in fixed income are not doing that well, again due to difficulties in forecasting and pegging rates. While there is some speculation lately that rates are going to peak, matters are complicated by banking worries, where credit quality could start mattering as well. The results are overstated in fixed income due to the consolidation of Cornerstone acquired last year .

Corporate financing depends on valuations and the equity markets, and factors point to a pretty bleak equity picture for the foreseeable future, even if we don't see further crashes. The main problem is a lack of certainty. While valuations are not likely to recover, and corporates can figure that out, it's the uncertainty that makes the timing of issuances more complicated and the decision gets deferred.

There's also the part that isn't FIG and strategically positioned within advisory that is likely to see incremental declines if the banking worries, specifically the regional banking worries which are very concrete, materialise into tighter capital.

Conclusions

PIPR has idiosyncratic exposures to depositors in several businesses that should create some resilience for them. Mid-market is also likely more durable, although it could see more incremental declines as macro deteriorates. In general, PIPR stands out among peers, with things like its equity brokerage business continuing to be a pillar for the company, beneficial in a countercyclical environment. But its PE is around 20x, which is just too high considering that they're still exposed on balance to macro pressures.

While there is some logic in staying level-headed and believing that inflation could come down quickly now with only slightly tightening credit standards after these bank fiascos, there are fault-lines and non-linearities in banking that could continue to create problems, like commercial real estate loan portfolios.

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