Raymond James Financial, Inc. (NYSE:RJF) Q3 2023 Earnings Call Transcript
Raymond James Financial, Inc. (NYSE:RJF) Q3 2023 Earnings Call Transcript July 26, 2023
Raymond James Financial, Inc. misses on earnings expectations. Reported EPS is $1.61 EPS, expectations were $2.14.
Kristina Waugh: Good evening everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us 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 website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. Please note 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, anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments or general economic conditions.
In addition, words such as may, will, could, anticipates, expects, believes or continue or negative of such terms or other comparable terminology, 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 the forward-looking 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 Investor Relations website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance.
A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. Now I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?
Paul Reilly: Good evening. Thank you for joining us today. Since our last earnings call, we hosted our two major advisor conferences for both the independent and employee affiliation channels and also had our Chairman's Council Recognition Trip for our top employee advisors. I'm so proud of our advisors' unwavering dedication to serving their clients and helping them to navigate these volatile and uncertain times. Our advisors have also expressed their appreciation of our commitment to managing the firm for the long-term and always striving to be a source of strength and stability for them and their clients. It's these shared values that have resulted in our success through multiple cycles since our founding and what makes me confident about our continued success in the future.
Now turning to our results. Despite the challenging environment and elevated market volatility since the Federal Reserve started raising interest rates, we generated record net revenues and earnings for the first nine months of the fiscal year. Reviewing third quarter results, starting on Slide 4, the firm reported record quarterly net revenues of $2.9 billion and net income available to common shareholders of $369 million or $1.71 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $399 million or $1.85 per diluted share. The increase in interest-related revenues driven by higher short-term interest rates drove significant earnings growth over the prior year. Net revenues increased 7%, and net income available to common shareholders grew 23%.
Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters of approximately $65 million, and bank loan provision for credit losses of $54 million, which was predominantly driven by significantly weakened macroeconomic assumptions for the Moody's CRE price index utilized in our CECL models. Notwithstanding these items, we had a solid quarter in a tough market environment. We generated strong returns with annualized returns on common equity of 14.9% and annualized adjusted returns on tangible common equity of 19.7%. We believe this is a leading result, especially considering our strong capital base. Moving to Slide 5, the strength of our PCG business really shine driving record assets this quarter. We ended the quarter with record total client assets under administration of $1.28 trillion, record PCG assets and fee-based accounts of $697 billion and financial assets under management of $201 billion.
With our continued focus on retaining, supporting and attracting high-quality financial advisers, PCG consistently generates strong organic growth, which was evident again this quarter with domestic net new assets of $14.4 billion, representing a 5.4% annualized growth rate on the beginning of the period domestic PCG assets. However, I'll note net new assets in our adviser count were negatively impacted by an independent contractor relationship whose affiliation with the firm ended in the fiscal third quarter. This was a planned in mutual separation and more than 60% of the assets and advisors stayed with Raymond James. The impact of the portion that moved off the platform this quarter was $4.6 billion in assets and 60 financial advisors through our net new asset metric would have been even stronger after adjusting for this separation, which we do not believe will negatively impact our profitability.
During the prior 12 months we recruited to our domestic independent contractor and employee channels financial advisors with approximately $282 million dollars of trailing 12-month production and nearly $38 million dollars of client assets at their previous firms. Total clients domestic sweep and enhanced savings program balances into the quarter at $58 billion dollars up 11% from March of 2023. The enhanced savings program with its competitive rate and robust FDIC insurance continued to attract significant cash this quarter offsetting a decline in client sweep balances largely due to quarterly fee billings and tax payments in April. Total bank loans decreased 1% from the preceding quarter to $43 billion dollars primarily reflecting a modest decline in corporate loans as new origination demand continues to be tepid in the market.
Moving to Slide 6, Private Client Group generated record results with quarterly net revenues of $2.18 billion and pre-tax income of $411 million dollars. Year-over-year asset based revenues declined due to market decline. However PCT results were lifted by the benefit of higher interest rates and interest-related revenues and fees. The Capital Markets segment generated quarterly net revenues of $276 million dollars and a pre-tax loss of $34 million dollars. Revenues declined 28% compared to the prior year quarter mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues. The extremely challenging market environment particularly for investment banking has strained the near-term profitability of the segment's results.
As we explained at Analysts and Investor Day, the segment's results were negatively impacted by amortization, share based compensation for prior years, as well as growth investments. However we are focused on managing controllable expenses as near-term revenues are depressed. The Asset Management segment generated pre-tax income of $89 million dollars on net revenues of $226 million dollars. The increase in net revenues and pre-tax income over the preceding quarter were largely a result of higher assets and fee-based accounts. The Bank segment generated net revenues of $514 million dollars and pre-tax income of $66 million dollars. Third quarter NIM for the Bank segment of 3.26% rose 85 basis points over the year-ago quarter but as expected decreased 37 basis points from the preceding quarter primarily due to higher funding costs.
We continue to add diverse higher cost funding sources and shifted more of the lower cost suite funding to third-party banks. While this negatively impacted the Bank segment's NIM, Paul Shoukry will walk us through how this benefits both clients and the firm overall. Looking at the fiscal year-to-date results on Slide 7, we generated record net revenues of $8.6 billion dollars and record net income available to common shareholders of $1.3 billion dollars, up 5% and 22% respectively over the prior year's records. We aren't seeing many other firms in our industry generate records so far this year. Additionally we generated strong annualized return on common equity of 17.9% and annualized adjusted return on tangible common equity of 22.7% for the nine-month period.
Photo by Georgi Dyulgerov on Unsplash
On Slide 8 the strength of the PCG and Bank segments for the first nine months of the year primarily reflects the benefit of strong organic growth in the Private Client Group, the successful integration of TriState Capital, and higher interest-related revenues. When compared to the record activity levels in the year-ago period weaker capital markets results reflect the challenging environment for investment banking and fixed income brokerage revenue despite incremental revenues from the SumRidge acquisition. And now I'll turn it over to Paul Shoukry for a more detailed review of our third quarter financial results. Paul?
Paul Shoukry: Thank you, Paul. Starting on Slide 10, consolidated net revenues were a record $2.91 billion dollars in the third quarter up 7% over the prior year and 1% sequentially. Being able to generate record quarterly revenues during a period when capital market revenues were so challenged across the industry reinforces the value of having diverse and complementary businesses anchored by the Private Client Group business which reached record client assets this quarter. Asset management and related administrative fees declined 4% compared to the prior year quarter and increased 5% sequentially due to the higher assets and fee-based accounts at the end of the preceding quarter along with one additional billable day in the fiscal third quarter.
This quarter fee-based assets grew 5% to a new record providing a tailwind for asset management and related administrative fees in the fiscal fourth quarter. Brokerage revenues of $461 million dollars declined 10% year-over-year and 7% sequentially. This year-over-year decline was largely due to lower fixed income brokerage revenues in the Capital Markets segment as well as lower asset-based trail revenues in PCG. I'll discuss accountant service fees and net interest income shortly. Investment banking revenues of $151 million dollars declined 32% year-over-year and 2% sequentially. As experienced across the industry both underwriting and M&A revenues continue to be challenged this quarter. We are optimistic that the environment is improving and we continue to see a healthy investment banking pipeline and solid new business activity.
However there remains a lot of uncertainty in the pace and timings of deals launching and closing given the heightened market volatility. So while we may not see significant improvement in the fiscal fourth quarter, we expect better results over the next six to 12 months. Moving to Slide 11, clients domestic cash sweep and enhanced saving program balances ended the quarter at $58 billion dollars up 11% over the preceding quarter and representing 5.2% of domestic PCG client assets. Advisors continue to serve their clients effectively leveraging our competitive cash offerings. The enhanced savings program attracted approximately $8.5 billion dollars in new deposits this quarter. A large portion of the total cash coming in to ESP has been new cash brought to the firm by advisors highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.
The enhanced savings program balances exceeded $11.9 billion dollars this week continuing to grow modestly in partially offsetting the decline in sweep balances largely due to the approximately 1.3 billion dollars of quarterly fee billings in July. As I said on last quarter's call, it feels like we are closer to the end of the cash sorting dynamic than we are to the beginning and we have certainly seen a deceleration of the activity over the past several months. However, we are not ready to declare the end of that dynamic. We will need more time with stable balances and interest rates. This quarter sweep balances with third-party banks increased $7.5 billion to $16.9 billion, giving us a large funding cushion when attractive growth opportunities surface.
These third-party balances grew faster than we expected last quarter as a strong growth of enhanced saving program balances at Raymond James Bank allowed for more balances to be deployed off balance sheet. While this dynamic has negatively impacted the Bank segment's NIM because of the geography of the lower cost sweep balances being swept off balance sheet, it ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility. Looking forward, we have ample funding and capital to support attractive loan growth. Turning to Slide 12, combined net interest income and RJBDP fees from third-party banks was $708 million, up 91% over the prior year quarter and down 3% compared to the preceding quarter.
The sequential decrease in firm-wide net interest income was partially offset by higher RJBDP fees from third-party banks. If you recall, on our last earnings call, we anticipated a 10% decline in these interest-related revenues, so we are pleased with a better-than-expected decline of just 3%, which was partly a function of higher-than-anticipated growth of enhanced saving program balances. The Bank segment's net interest margin decreased 37 basis points sequentially to 3.26% for the quarter, and the average yield of RJBDP balances with third-party banks increased 12 basis points to 3.37%. While there are many variables that will impact the actual results, we currently expect combined net interest income and RJBDP fees from third-party banks to be around 5% lower in the fiscal fourth quarter compared to the fiscal third quarter, as we expect some further contraction of the Bank segment's net interest income to be partially offset by an increase in RJBDP fees from third-party banks.
As we have always said, instead of concentrating on maximizing NIM over the near-term, we are more focused on preserving flexibility and growing net interest income and RJBDP fees over the long-term, which we believe we are well-positioned to do. Moving to consolidated expenses on Slide 13, compensation expense was $1.85 billion, and the total compensation ratio for the quarter was 63.7%. The adjusted compensation ratio was 62.7% during the quarter, which we are very pleased with, especially given the challenging environment for capital markets. Non-compensation expenses of $570 million increased 15% sequentially. As Paul mentioned earlier, the quarter included elevated provisions for legal and regulatory matters of approximately $65 million and a bank loan provision for credit losses of $54 million.
The $65 million of provisions for legal and regulatory matters was made up of several items that all hit this quarter. Some of those items were closed out and publicly disclosed, and some of the other items are still in process, and we, therefore, will not be able to provide much more detail on those in this call. Additionally, this quarter included seasonally higher conference and event-related expenses. The bank loan provision for credit losses for the quarter of $54 million increased 26 million over the preceding quarter, largely reflecting weaker assumptions for commercial real estate valuations in the Moody CRE price index, and in particular, the office price index, which resulted in higher allowances. I'll discuss more related to the credit quality in the Bank segment shortly.
In summary, while there has been some noise with elevated legal and regulatory matters over the past two quarters, none of the other non-compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year. But as you all know, legal and regulatory expenses and provisions for loan losses using the CECL methodology are inherently difficult to predict. Importantly, we remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. Slide 14 shows a pre-tax margin trend over the past five quarters. In the current quarter, we generated a pre-tax margin of 16.7% and an adjusted pre-tax margin of 18.1%, a strong result given the industry-wide challenges impacting capital markets and the aforementioned provisions.
On slide 15, at quarter end, total assets were $78 billion, a 2% sequential decrease, largely reflecting lower client cash balances and CIP during the quarter. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $1.7 billion, well above our $1.2 billion target. The Tier 1 leverage ratio of 11.4% and total capital ratio of 22% are both more than double the regulatory requirements to be well-capitalized. The 11.4% Tier 1 leverage ratio reflects over $1 billion of excess capital above our conservative 10% target, which would still be two times the regulatory requirement to be well-capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
We also have significant sources of contingent funding. We have a $750 million revolving credit facility, which was recently renewed and upsized in April, and nearly $10 billion of FHLB capacity in the Bank segment. Slide 16 provides a summary of our capital actions over the past five quarters. During the fiscal third quarter, the firm repurchased 3.31 million shares of common stock for $300 million at an average price of nearly $91 per share. As of July 26, 2023, approximately $750 million remained available under the Board's approved common stock repurchase authorization, and we currently intend on continuing our planned repurchases, as we have discussed previously. Lastly, on Slide 17, 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 just 0.94%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at just 1.04%. The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 1.9% at the quarter end. We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints, higher interest rates, and the potential recession on the corporate loan portfolio. As we have done from time to time when we believe there's an attractive risk reward, during the quarter, we proactively sold approximately $450 million of corporate loans at an average price of around 98% of par value.
There continues to be a lot of attention on the commercial real estate across the industry given the challenge with property values and interest rates. So let me briefly cover our portfolio. Across the Bank segment, we have CRE and REIT loans of approximately $8.8 billion, which represents 20% of total loans. Our office portfolio is $1.4 billion, only representing approximately 3% of the Bank segment's total loans. Overall, we have deliberately limited the exposure to office real estate, and we underwrote office loans with what we believed were conservative criteria. But we will continue to monitor each loan closely given the industry-wide challenges. Now, I will 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'm pleased with our results for the first nine months of fiscal 2023 and our ability to generate record earnings during what continues to be a challenging environment. And while there is still near-term 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. And the Private Client Group next quarter results will be favourably impacted by the 5% sequential increase of assets in fee-based accounts. And I'm optimistic over the long-term, we will continue delivering industry-leading growth as current and prospective advisors are attracted to our client-focused values and leading technology and product solutions.
In the Capital Markets segment, there are some signs of improvement in investment banking, and we continue to have a healthy M&A pipeline and good engagement levels. But while there is reason for optimism, we expect the pace and timing of transactions to be heavily influenced by market conditions and would more likely pick up over the next six to 12 months. In the fixed income space, depository clients are experiencing 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 could start to see an improvement. So while there are some near-term challenges over the long-term, we believe the capital markets business is well positioned for growth given the investments we've made over the last five years and have significantly increased our productive capacity and market share.
We will continue to prudently manage expenses in these businesses as near-term revenues continue to come under pressure. Obviously, we'll have to take more significant action if the industry had once proved to be more long-term. In the Asset Management segment, financial assets under management are starting the fiscal fourth quarter up 3% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the quarter. We remain confident that strong growth of assets and fee-based accounts and 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 through increased scale, distribution, and operational and marketing synergies.
In the bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate and expect demand for those loans to eventually recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been tepid. However, we believe the yield environment has improved with ample cash sitting with third-party banks and lots of capital. We are well positioned to lend once activity picks up. In closing, we have strong prospects for future growth given our strong competitive positioning in all of our businesses and our ample capital and liquidity.
I want to take this time to thank our advisors and associates for their continued perseverance and dedication to providing excellent service to their clients each and every day, especially in these uncertain times when clients need trusted advice the most. Thank you all for what you do. And with that, Operator, will you please open the line for questions?
See also Top 50 Countries with the Most Beautiful Women in the World and 30 Best Excuses to Get Out of Work Provided By AI Chatbots.
To continue reading the Q&A session, please click here.
