Raymond James Financial, Inc. (NYSE:RJF) Q2 2024 Earnings Call Transcript

Raymond James Financial, Inc. (NYSE:RJF) Q2 2024 Earnings Call Transcript April 24, 2024

Raymond James Financial, Inc. misses on earnings expectations. Reported EPS is $2.31 EPS, expectations were $2.32. 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).

Kristie Waugh: Good evening. And welcome to Raymond James Financial Fiscal 2024 Second Quarter Earnings Call. This call is being recorded, and will be available for replay on the company’s Investor Relations website. 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 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, industry or 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 website. Now, I’m happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Paul Reilly: Thank you, Kristie. Good evening, everyone, and thank you for joining us today. Once again, we delivered strong results in the quarter. Highlighting our diversified platform, we generated record results for the fiscal second quarter and the first six months of the fiscal year. We continue to invest in our business, our people, and technology to help drive growth across all our businesses. Before discussing quarterly results, I want to highlight an important announcement made last month. Following a multi-year succession planning process, the board of directors appointed Paul Shoukry, our CFO, as President of Raymond James. And following a transition period, Paul is expected to become the firm’s CEO sometime during the fiscal year 2025, becoming only the fourth chief executive in the company’s 60-plus year history.

Paul has been an exceptional leader and a major contributor to Raymond James’ steady growth and financial stability. I am confident he will continue to guide the firm with the same conservative, long-term approach and laser focus on our advisors and client-first culture that has helped shape our success over the many years. In addition, we’re proud to announce that other key leadership appointments to take effect October 1, 2024. Private Client Group President, Scott Curtis, will become COO of Raymond James Financial, moving into the role following the retirement of Jeff Dowdle at the end of the fiscal year. Tash Elwyn, current Raymond James and Associate CEO, will become president of PCG. And Global Equities and Investment Banking President, Jim Bunn, will become President of the Capital Markets segment.

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Q&A Session

These expanded roles are a direct reflection of the significant leadership and contributions that Scott, Tash, and Jim have made over the years. I am confident, along with Paul, they will continue delivering on our mission to help clients achieve their financial objectives. Now, to review the second quarter results, starting on slide 5. The firm reported record quarterly net revenues of $3.12 billion, an increase of 9% over the preceding year quarter, primarily due to higher asset based revenues. Quarterly net income available to common shareholders was $474 million or $2.22 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $494 million or $2.31 per diluted share. The quarter included the favorable impact of a legal and regulatory net reserve release of $32 million, predominantly driven by a reduction in the reserve related to the SEC off-platform communications matter.

We generated strong returns for the quarter, with annualized return on common equity of 17.5% and annualized adjusted returns on tangible common equity of 21.8%, a great result, particularly given our strong capital base. Moving on to slide 5, client assets grew to record levels during the quarter, driven by rising equity markets and solid advisor retention and recruiting in the Private Client Group. Total client assets under administration increased 6% sequentially to $1.45 trillion. Private Client Group assets in fee-based accounts grew to $799 billion, and financial assets under management reached $227 billion. Domestic net new assets were $9.6 billion, representing a 3.2% annualized growth rate on the beginning of the period domestic Private Client Group assets.

This quarter does reflect some seasonality typical in the first calendar quarter. And as we’ve seen before, net new assets can be volatile quarter to quarter as we onboard newly recruited advisors and have advisors retire or leave the platform from time to time. With our robust technology capabilities, client-first values, and long-time multiple affiliated options, PCG continues to attract high-quality advisors to the platform. For example, during the quarter, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $80 million of trailing 12-month production and $12.8 billion of client assets at their previous firm. Fiscal year to date, trailing 12-month production of recruited advisors is up 45% and related assets up 77% over the prior six-month period.

There is a lag between recruiting results and net new assets as it takes some time for clients to transition to the Raymond James platform, but we are encouraged by the recruiting success so far this fiscal year. And these results do not include our RIA and custody services business, which also continues to have recruiting success and finished the quarter with $161 billion of client assets under administration. Looking to our fiscal year-to-date results, domestic net new assets worth $31.2 billion, representing a 5.7% annualized growth rate on the beginning-of-period domestic PCG assets, a strong result compared to our peers. Total clients domestic cash sweep and enhanced savings program balances ended the quarter at $58.2 billion, up slightly over December of 2023.

Bank loans were essentially flat from the preceding quarter at $44.1 billion as loan demand remains relatively muted given higher rates. Moving on to slide 6, Private Client Group generated record quarterly net revenues of $2.34 billion and pre-tax income of $444 million. Year-over-year, results were driven by higher asset management fees, reflecting the nearly 20% growth of assets in fee-based accounts at the beginning of the current quarter compared with the same prior year period. The Capital Markets segments generated quarterly net revenues of $321 million and a pre-tax loss of $17 million. Net revenues grew 6% compared to a year-ago quarter, primarily due to higher M&A and debt underwriting revenues. Sequentially, revenues declined 5% due to lower fixed income brokerage revenues and M&A and advisory revenues, partially offset by higher debt underwriting revenues.

The pre-tax loss in Capital Markets of $17 million reflects the impact of amortization of deferred compensation granted in preceding periods, which totaled $20 million this quarter. While the timing of closings remains difficult to predict, we are encouraged by the healthy pipelines and new business activity in M&A. We continue to expect investment banking revenues to improve along with the industry-wide gradual recovery. The Asset Management segment generated pre-tax income of $100 million on record net revenues of $252 million. Results were largely attributable to higher financial assets under management compared to the prior-year quarter due to market appreciation and net inflows into PCG fee-based accounts. The Bank segment generated net revenues of $424 million and pre-tax income of $75 million.

Bank segment net interest margin of 2.66% declined 8 basis points compared to the preceding quarter, primarily due to the higher cost mix of deposits as the enhanced savings program balances replaced a portion of the lower cost RJBDP cash sweep balances. Looking to the fiscal year-end date, results on slide 7, we generated record net revenues of $6.13 billion and record net income available to common shareholders of $971 million, up 8% and 4% respectively, over the prior year’s record. Additionally, we generated strong annualized return on common equity of 18.3% and an annualized adjusted return on tangible common equity of 22.8% for the six month period. On slide 8, the strength of the PCG and Asset Management segment for the first half of the year primarily reflects the strong organic growth in PCG with robust equity markets.

And now, I’ll turn over to Paul Shoukry, our CFO and soon to be CEO, for the second quarter results. Paul?

Paul Shoukry : Thank you, Paul. Starting on slide 10, consolidated net revenues were $3.12 billion in the second quarter, up 9% over the prior year and up 3% sequentially. Asset management and related administrative fees grew to $1.52 billion, representing 16% growth over the prior year and 8% over the preceding quarter. This quarter, PCG fee-based assets increased 7%, which will be a strong tailwind for asset management and related administrative fees in the fiscal third quarter. Brokerage revenues of $528 million grew 6% year-over-year, mostly due to higher brokerage revenues in PCG, which were partially offset by lower fixed income brokerage revenues as depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities.

Remember, in our fixed income business, we do not have the same exposure to the higher volatility currency and credit products that have benefited many of the larger players in our industry during the quarter. I’ll discuss account and service fees and net interest income shortly. Investment Banking revenues of $179 million increased 16% year-over-year and declined 1% sequentially. Compared to the prior-year quarter, second quarter results benefited from stronger debt underwriting revenues in both fixed income and public finance, as well as improvement in M&A and advisory revenues, which continue to be subdued. Moving to slide 11, clients domestic cash sweep and enhanced savings program balances ended the quarter at $58.2 billion, up slightly over the preceding quarter and representing 4.6% of domestic PCG client assets.

Sweep balances were essentially flat and ESP balances increased 3% sequentially, both outperforming our expectations on the last call. Since the beginning of this quarter, domestic cash sweep balances have declined about $1.7 billion, mostly due to quarterly fee billings along with income tax payments. Turning to slide 12, combined net interest income and RJBDP fees from third-party banks was $689 million, down 1% from the preceding quarter, largely reflecting one fewer billable day. Again, this result outperformed our guidance on last quarter’s call, given the more stable client cash balances. Going forward, net interest income and RJBDP third-party fees will largely be dependent on the level of short-term interest rates, the stability of client cash balances, and the trajectory of loan growth, which has been subdued in this rate environment.

Fortunately, we are well positioned for the eventual recovery in loan growth with ample capital and funding flexibility. Moving to consolidated expenses on slide 13, compensation expense was $2.04 billion and the total compensation ratio for the quarter was 65.5%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 65.2%. As is typical in the first calendar quarter, compensation expenses were impacted by annual salary increases and the reset of payroll taxes. All in, an adjusted compensation ratio close to 65% is in line with our current target and is a satisfactory result given the challenging environment for the capital market segment. Non-compensation expenses of $466 million increased 1% sequentially, largely due to higher communications and information processing expenses and a higher bank loan loss provision, which were partially offset by a favorable legal and regulatory net reserve release of $32 million in the quarter, which Paul mentioned earlier.

For the fiscal year, we still 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. Keep in mind, many of our non-compensation expenses, such as investment subadvisory fees, represent healthy growth that follows the corresponding revenue growth. Slide 14 shows the pre-tax margin trend over the past five quarters. This quarter, we generated a pre-tax margin of 19.5% and adjusted pre-tax margin of 20.4%, a strong result, especially given the challenging market conditions impacting capital markets.

As a reminder, our current targets provided at our Analyst and Investor Day last May are for a 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 our upcoming Analyst and Investor Day scheduled for May 23rd. On slide 15, at quarter end, total balance sheet assets were $81.2 billion, a 1% sequential increase. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $2 billion, well above our $1.2 billion target. And we remain well capitalized with Tier 1 leverage ratio of 12.3% and a total capital ratio of 23.3%. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.

The effective tax rate for the quarter was 21.8%, reflecting the favorable impact of non-taxable corporate-owned life insurance gains in the quarter. Looking ahead, we believe 24% is an appropriate estimate for the effective tax rate. Slide 16 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 1.7 million shares of common stock for $207 million at an average price of $122 per share. Including $43 million of shares repurchased in April, we completed the expected $250 million of these shares repurchases since January 1st and fulfill the repurchase commitment associated with the dilution from the tri-state capital acquisition. As of April 19, 2024, approximately $1.14 billion remained under the board’s approved common stock repurchase authorization.

Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. We are committed to maintaining capital levels in line with our stated targets. And we’ll discuss more on our overall capital management strategy at our upcoming Analyst Investor Day. 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 1.21%, up from 1.06% from the preceding quarter. The Bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.06%.

The Bank loan allowance for credit losses on corporate loans as a percentage of the corporate loans held for investment was 2.05% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios. Before I turn the call back over to Paul, I just want to say that I am absolutely honored to be named president and future CEO of this great firm. I’m excited to partner with my colleagues and friends, Scott Curtis, Tash Elwyn, and Jim Bunn in their expanded roles to continue leading Raymond James with the same values that guided Bob James, Tom James, and Paul Riley since our founding. I am optimistic about our future, as all of our businesses have critical mass, significant headroom for continued growth, and a highly competent management team that embody our firm’s advisor and client-first values.

Now, I’ll turn the call back over to Paul Reilly to discuss our outlook. Paul?