Raymond James Financial, Inc. (NYSE:RJF) Q1 2024 Earnings Call Transcript

Raymond James Financial, Inc. (NYSE:RJF) Q1 2024 Earnings Call Transcript January 24, 2024

Raymond James Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Kristina Waugh: … First Quarter Earnings Call. This call is being recorded, and will be available for replay on the company’s Investor Relations Web site. I am Kristie Waugh, Senior Vice President of Investor Relations, thank you for joining us today. With me on the call today are Paul Reilly, Chair and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation being reviewed today is available on Raymond James Investor Relations Web site. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industrial market conditions, anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses, anticipated results of litigation and regulatory developments and general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as may, will, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our Web site. Now, I’m happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Paul Reilly: Thank you, Kristie. Good evening. Thank you for joining us today. Who would have thought given all the uncertainty over the past year, we would have ended the last fiscal year with record results, and generated record earnings per share and record client assets this quarter. This is a testament to our focus on executing on our strategic priorities, which are rooted in our advisor and client-focused cultures. These priorities have remained consistent over many years. They are to drive organic growth throughout our businesses, invest in technology and service capabilities, and to maintain focus on strategic M&A and effective integrations. Through our relentless focus on these priorities, we have maintained long-term success across changing market environments.

Now to review the first quarter results starting on Slide 4. The firm reported quarterly net revenues of $3.01 billion, an increase of 8% over the prior year quarter, primarily due to higher asset based revenues. Quarterly net income available to common shareholders was 497 million, or a record $2.32 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $514 million, or $2.40 per diluted share both records. We generated strong returns for the quarter with annualized return on common equity of 19.1% and annualized adjusted return on tangible common equity of 23.8%, a great result particularly given our strong capital base. Moving to Slide 5. Client assets grew to record levels this quarter, driven by strong advisor retention and recruiting results along with the strong market.

Total client assets under administration increased 9% sequentially to $1.37 trillion. Private Client Group assets and fee-based accounts grew to $747 billion and financial assets under management reach $215 billion. PCG continues to generate strong organic growth evidence this quarter with domestic net new assets of $21.6 billion, representing a 7.8% annualized growth rate on beginning of period domestic PCG assets. Advisors are attracted to our robust technology capabilities, and client first values. And through our long established multiple affiliation options, they can find the right set for their business. During the quarter, we recruited to our domestic independent contractor and employee channels, financial advisors with approximately 16 million of trailing 12 production and $13 billion of client assets at their previous firms.

These results do not include our RIA and custody services businesses, which also continued to have recruiting success and finished the quarter with $147 billion of assets. Despite strong recruiting activity, the financial advisor count was sequentially flat, mostly due to an elevated number of retirements, which are seasonally higher in the first quarter, but where the firm typically retains the vast majority of assets through previously established succession plans. In addition, advisors moving to our RIA channel are excluded from the advisor count since they no longer carry a FINRA license with us. We announced that the President of our PCG Independent Contractor Division, Jodi Perry, transitioned to a newly created role of National Head of Advisor Recruiting.

Jodi has generated outstanding results in every role she has held in her nearly 30 year career with Raymond James, and I am confident she will continue to strengthen this key growth engine for the firm. This key leadership appointment continues to highlight the importance and focus on advisor recruiting. With this transition, we are excited about Shannon Reid becoming the PCG Independent Contractor Division President and joining the firm’s Executive Committee. Shannon’s most recently served as Senior Vice President of our Northeast division. She has an impressive background and has been a stellar leader in an important market. Total client’s Domestic Sweep and Enhanced Savings Program balances ended the quarter at $58 billion, up 3% over September 2023.

Balances were boosted by growth in both the Enhanced Savings Program as well as the client’s sweep balances. Bank loans increased 1% from the preceding quarter to a record $44.2 billion, although loan demand remains relatively muted, given higher rates. Moving to Slide 6, Private Client Group generated quarterly net revenues of $2.23 billion and pre-tax income of $439 million. Year-over-year, results were driven by higher asset management fees, reflecting 18% growth of assets in fee-based accounts. The capital market segment generated quarterly net revenues of $338 million and a pre-tax income of $3 million. Investment banking revenues grew 15% compared to a year ago quarter due to higher M&A and underwriting revenues. Sequentially, robust fixed income brokerage revenue growth, largely offset weaker M&A and affordable housing investment results.

While fixed income results were stronger during the quarter, investment banking activities industry wide appear to be on a gradual recovery. The uncertain market environment, along with the impact of the amortization of share-based compensation granted in the preceding periods, has strained the near-term profitability of segment results. We remain focused on managing controllable expenses. The Asset Management segment generated pre-tax income of $93 million, a net revenues of $235 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation, net inflows into PCG fee-based accounts. The Bank segment generated net revenues of $441 million and pre-tax income of $92 million.

Bank segment net interest margin a 2.74%, declined 13 basis points compared to the preceding quarter, primarily due to a higher cost mix of deposits as Enhanced Savings Program balances that replaced a portion of lower RJBDP cash sweep balances. Now, I’ll turn it over to Paul Shoukry for a more detailed review of the first quarter results. Paul?

Paul Shoukry: Thank you, Paul. Starting on Slide 8, consolidated net revenues were $3.01 billion in the first quarter, up 8% over the prior year and down 1% sequentially compared to the record set in the preceding quarter. Asset management and related administrative fees grew 13% over the prior year and declined 3% compared to the preceding quarter. The sequential decline was largely the result of lower fee-based assets at the beginning of the quarter compared to the beginning of the preceding quarter. This quarter, fee-based assets increased 9%, which will be a strong tailwind for asset management and related administrative fees in the fiscal second quarter. Brokerage revenues of $522 million grew 8% year-over-year, mostly due to higher transactional activity in PCG.

Sequentially, brokerage revenues increased 9%, the result of higher institutional fixed income brokerage revenues, as client activities increased in the trading environment was more favorable. I’ll discuss account and service fees and net interest income shortly. Investment Banking revenues of $181 million increased 28% year-over-year. Sequentially, the 10% decline was driven predominantly by lower M&A revenues. We are cautiously optimistic that the environment for M&A is improving, and we continue to see a healthy investment banking pipeline and solid new business activity. However, there remains a lot of uncertainty and we are hopeful a gradual recovery will lead to better results over the next 6 to 9 months. Other revenues of $38 million were down 30% compared to the preceding quarter, primarily due to lower affordable housing investment revenues compared to the seasonally high fiscal fourth quarter.

Moving to Slide 9. Clients’ domestic cash sweep and enhanced saving program balances ended the quarter at $58 billion, up 3% compared to the preceding quarter, and representing 4.8% of domestic PCG client assets. Advisors continue to serve their clients effectively, leveraging our competitive cash offerings. Many clients have now taken advantage of the attractive enhanced saving program and other high yielding products. Thus, the pace of flows into this program has decelerated as we expected, growing approximately $900 million or 7% this quarter. A large portion of the total cash coming into ESP has been new cash brought into the firm by advisors, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.

While we are encouraged by the modest sequential growth of client cash balances during the quarter, which was helped by seasonal tailwinds in the fourth calendar quarter, we continue to expect some further yield seeking activity by clients. Through Monday of this week, sweep and ESP balances are down approximately $1.5 billion for the month of January, primarily due to quarterly fee billings of $1.35 billion. RJBDP sweep balances with third-party banks were $17.8 billion at quarter end, up 12% from September 2023. The strong growth of enhanced savings program balances at Raymond James Bank has allowed for more balances to be deployed off balance sheet with third-party banks. While this dynamic has negatively impacted the bank segments NIM because of the lower cost sweep balances being swept off balance sheet, it ultimately provides clients win an attractive deposit solution while also optimizing the firm’s funding flexibility by providing a large funding cushion for when attractive growth opportunities emerge.

Looking forward, we have ample funding and capital to support attractive loan growth. Turning to Slide 10, combined net interest income and RJBDP fees from third-party banks was $698 million, down 2% from the preceding quarter due to lower firm wide net interest income resulting from NIM compression, but outperforming our expectations on the last earnings call as client cash balance were more stable than we expected at that time. The Bank segment’s net interest margin decreased 13 basis points sequentially to 2.74% for the quarter, and the average yield on RJBDP balances with third-party banks increased 6 basis points to 3.66%. While there are many variables that will impact actual results, absent any changes to short-term interest rates, we currently expect combined net interest income and RJBDP fees from third-party banks to be about 5% lower in the fiscal second quarter compared to the fiscal first quarter, just based on spot balances after the fee billings this quarter, and our expectation of some continued client cash sorting activity.

Hopefully we can outperform this expectation again this quarter, but we believe it’s prudent to err on the side of conservatism given the continued uncertainty around client cash balance trends. We remain focused on preserving flexibility and growing net interest income in RJBDP fees over the long-term, which we believe we are well-positioned to do. Moving to consolidated expenses on Slide 11. Compensation expense was $1.92 billion and the total compensation ratio for the quarter was 63.8%. Excluding acquisition related compensation expenses, the adjusted compensation ratio was 63.4%. Looking ahead, the impact of salary increases effective on January 1, and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal second quarter.

Non-compensation expenses of $462 million decreased 20% sequentially, largely due to elevated provisions for legal and regulatory matters in the preceding quarter, whereas this quarter was a relatively quiet quarter for legal and regulatory reserves. The bank loan provision for credit losses for the quarter declined to $12 million. I’ll discuss more related to the credit quality in the Bank segment shortly. We remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. For the fiscal year, we expect non-compensation expenses, excluding provision for credit losses, unexpected legal and regulatory items, or non-GAAP adjustments to be around $1.9 billion. This implies incremental non-compensation growth throughout the year, as we continue to invest in growth and ensure high service levels for advisors and their clients throughout our businesses.

And remember, many of the non-compensation expenses, such as investment sub advisory fees represent healthy growth that follows the corresponding revenue growth. Slide 12 shows the pre-tax margin trend over the past five quarters. This quarter, we generated a pre-tax margin of 20.9% and an adjusted pre-tax margin of 21.7%, a strong result given the industry wide challenges impacting capital markets. As a reminder, our current targets provided at our Analyst and Investor Day last May are for pre-tax margin of 20% plus, and a compensation ratio of less than 65%. We still think these targets are appropriate, and we will provide an update as needed at the next Analyst and Investor Day scheduled for May 22. On slide 13, at quarter end, total balance sheet assets were $80.1 billion, a 2%.

sequential increase. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target. And we remain well capitalized with a Tier 1 leverage ratio of 12.1% and a total capital ratio of 23%. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter was 21%, reflecting a tax benefit recognized for share-based compensation that vested during the period. Going forward, we still believe that 24% to 25% is an appropriate estimate to use in your models. Slide 14 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 1.4 million shares of common stock for $150 million at an average price of $107 per share.

As of January 24, 2024, approximately $1.39 billion remained available under the Board’s approved common stock repurchase authorization. Our current plan, which is subject to change is to repurchase at least $200 million of shares in the fiscal second quarter to complete the remaining repurchases associated with the dilution from the TriState Capital acquisition. Following the second quarter, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. Lastly, on Slide 15, we provide key credit metrics for our Bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.09%.

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.08%. The bank loan loss allowance for credit losses on corporate loans, as a percentage of corporate loans held for investment was 2.06% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact a corporate loan portfolio, including the commercial real estate portfolio. Within the CRE portfolio, we have prudently limited the exposure to office loans, which represent just 3% of the Bank segment’s total loans. Now, I’ll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Paul Reilly: Thank you, Paul. As I said at the start of the call, I am pleased with our results for the first fiscal quarter, generating record earnings per share, and ending the quarter with record client assets. And while there is still economic uncertainty, I believe we are in a position of strength and are well-positioned to drive growth over the long-term across all of our businesses. In the Private Client Group, next quarter results will be positively impacted by the 9% sequential increase of assets and fee-based accounts. Near-term, we expect some headwinds to the interest sensitive earnings at both PCG and the Bank segment given ongoing cash sorting activity, and uncertain rate environment. However, we are already seeing some of the higher yield competitor rates coming in.

Despite this, I believe our effort and focus on being a destination of choice for our current and prospective advisors will continue to drive industry leading growth. Our advisor recruiting activity remains robust, including a record number of large teams in the pipeline. In the Capital Market segment, we continue to have a healthy M&A pipeline and good engagement levels. But our expectations for a gradual recovery are heavily influenced by market conditions. And we would expect activity to likely pick up over the next 6 to 9 months. In the fixed income business, we saw improvements in this quarter with higher activity, but the dynamics of the past year persist. Depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity.

We hope that once rates and cash balances stabilize, we will start to see an improvement. Despite some of the near-term challenges, we believe capital markets business is well-positioned for growth once the market and rate environment become conducive. In the Asset Management segment, financial assets under management are starting the fiscal second quarter up 9% over the preceding quarter, which should provide a tailwind to revenues. We remain confident that strong growth of assets and fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James investment management to help drive further growth over time. In the Bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand.

We have seen security based loans pay off, decelerate and are starting to experience growth. We expect demand for these loans to recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been muted. However, spreads have improved and with ample client cash balances and capital, we are well-positioned to lend once activity increases in our conservative risk parameters. In addition to our focus on organic growth across our businesses, we have also ramped up corporate development efforts. In closing, we are well-positioned entering the second fiscal quarter with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth.

As always, I would be remiss if I did not thank our advisors and associates for their continued dedication to providing excellent service to their clients. Thank you for all you do. That concludes our prepared remarks. Operator, will you please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Michael Cho from J.P. Morgan. Your line is open.

Michael Cho: Hi, good evening. Thanks for taking my question. My first question I just wanted to touch on net new assets. Clearly they seems to be a pickup in M&A [ph] and you continue to call out a robust recruiting backdrop. The question is, what do you think is driving that M&A acceleration now? And how much do you think a more stable macro outlook could contribute toward an M&A acceleration from here?

Paul Shoukry: Well historically like this quarter, it’s a pretty good M&A number. So the — what’s really driving it is still great retention, recruiting and most of our recruiting, the advisor count number is a little misleading now, because we’re recruiting more and more larger, very large teams, fewer number, but larger teams. This quarter, we had a lot of retirements, but the retirement, seasonally we do at the end of the year. But in retirements, almost all of them have transition plans, so we keep the assets with tribes, the advisor count number down. And when people transfer to the RIA division, which happens every quarter, we take them out because they don’t have a FINRA license. So if you look at the net assets, net new assets, you can go over the last few years, and then we continued to be near the top of the market or at the top of the market and it’s really just a great retention and robust recruiting.

And as we recruit larger and larger teams, a lot of those teams or their businesses are still growing significantly, and it’s really generating net new assets. And of course, there’s market health, right, as the market goes up, you bring people over the assets are higher, so that we feel pretty comfortable. And as we announced, we brought over Jodi Perry, to really even add more robustness to our recruiting efforts, which are diversified or spread out between the channels that really bring them together to a more unified effort, we think we can do better than we have been doing.

Michael Cho: Okay, great. Now, thanks for all that color. I want to switch gears on the capital market side of industry, specifically investment bank. I mean you continued to invest in talent there, despite the choppy backdrop over the last 18 months, and I think you’ve called out a higher quality bank or higher producing bank or Raymond James now — versus previous periods. I mean, how should we think about something like revenue per MD going forward in a more normalized environment if the backlog starts to flow through at some point.

Paul Reilly: Well, back in the last, the peak of the last market, we exceeded 10 million per MD. So I mean, we generate a very, very high productive number. And if you go back a few years, or a couple of million dollars per MD, and that really is the difference or part of that’s the market. But certainly part of that was the high quality MDs recruited and the teams that joined us. So I don’t know what that number is in a good market. I think we could still produce that number or better. We continue to recruit people and some of the businesses that we felt were subscale or didn’t have the senior people that we wanted. And I think the productivity is still there. So if we had a market as robust as we did a couple of years ago, we could top that $10 million, but certainly we’d be much higher, and the high single digits, I think, in a reasonable market.

Again, the market as we said, is we see slow improvement, but nothing that’s really moving quickly up but moving up steadily.

Operator: Your next question comes from the line of Devin Ryan from JMP Securities. Your line is open.

Devin Ryan: Thanks so much. Good evening, Paul and Paul.

Paul Shoukry: Hey, Devin.

Paul Reilly: Hey, Devin.

Devin Ryan: So, first question, if we go back to your early calendar 2023, you guys had built a fair amount of liquidity, and maybe gave up some interest income short-term. And I think the view was that lending spreads could widen out and so you wanted to have some capacity and obviously, there’s also a reason to be conservative at that time. But it did seem like some of the — maybe the headwinds to spread revenues was more of a timing dynamic and intentional. So looking at today, you still have a lot of excess liquidity to grow loans if you see attractive risk adjusted return. So I’m just curious if kind of that view still holds that you had kind of through most of calendar 2023. And then are those better spreads materializing as maybe you thought they would? Are you still waiting for that? And you’re trying to think about the interplay with that and then accelerating lending activity into that as well. Thank you.

Paul Reilly: I think there’s two pieces to that Devin is that we have seen spreads widen. The problem is the market hasn’t been really robust in the area that we liked the lender, and we have a target both in industries, borrowers that are fairly conservative. And that pipeline of new loans, as you can see from other banks to is just slowed down. So we’re still waiting for that kind of resurgence and activity, which we think will happen at some point. But that’s really been the — we’re ready to lend. We’re also seeing SBL loans and things which was deteriorating. We’ve seen that, the payoffs really decreasing, we’re seeing some growth there now, too. So we’re starting to see the beginning of growth in those portfolios, but certainly the market isn’t giving us that opportunity to put on loans at the same rate. We did that in late — early 2023, or certainly ’22.

Devin Ryan: Okay. Thanks, Paul. And then just a follow-up on the institutional fixed income brokerage. Obviously, really material improvement in the quarter and you kind of run rating over $400 million last year, you did mid 300s and just looking at like 2023, relative to 2021, you’re down over 30% even though you have some rich today, and arguably, a bigger, better business. So love to just think about kind of the — some of the momentum that you saw in the quarter in the depositories, or maybe becoming more active again? And just how to think about kind of what a normalization in that business looks like? Is it the, call it, a little bit over $400 million run rate that we saw in this quarter? Or is it something better? And is this quarter kind of a good jumping off point because it is such a start [ph] came from the prior quarter? Thanks.