Raymond James Financial, Inc. (NYSE:RJF) Q4 2023 Earnings Call Transcript

Raymond James Financial, Inc. (NYSE:RJF) Q4 2023 Earnings Call Transcript October 25, 2023

Raymond James Financial, Inc. misses on earnings expectations. Reported EPS is $2.13 EPS, expectations were $2.28.

Kristina Waugh: Good afternoon, and welcome to Raymond James Financial’s Fourth Quarter and Fiscal 2023 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, and thank you for joining us today. 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 our Investor Relations Web site. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two, 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 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 Investor Relations Web site. 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 presentation and press release. Now, I’ll turn the call over to Chair and CEO, Paul Reilly. Paul?

Paul Reilly: Good evening and thank you for joining us today. I’ve spent a lot of time in these last few weeks in front of our advisors. First, traveling with our top-producing independent advisors on a great trip, great to see the success in their business and the positive nature of how they feel about the firm. And then, attending our RCF Conference, our RIA division and clearing firm. Again, that division is over 10% of our private client group assets now. And it’s great to see the growth and the enthusiasm there also. Now turning to our results, despite the challenging environment, which included a regional banking crisis, heightened volatility, and rapidly rising interest rates, we generated record net revenues and earnings for the last fiscal year.

That’s our third consecutive year of record results in very different market environments, was achieved by staying true to our core; we put clients first, we act with integrity, we value independence, and think long-term. These core values are more than words on a page, they are lived day in and day out by our advisors and associates. This dedication and focus provide stability during tough economic times and what makes me confident about our continued success in the future. Reviewing fourth quarter results, starting on slide four, the firm reported record quarterly net revenues of $3.05 billion, a net income available to common shareholders of $432 million or $2.02 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $457 million or $2.13 per diluted share.

The increase in asset management revenues and interest-related revenues drove significant revenue growth over the prior year, with net revenues increasing 8%. Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters, including an incremental $55 million provision related to the previously disclosed SEC industry sweep on off-platform communications. This provision resulted in an impact during the quarter of $0.26 per diluted share. We generated strong returns for the fiscal fourth quarter with an annualized return on common equity of 17.3%, an annualized adjusted return on tangible common equity of 22.2%, a great result particularly given our strong capital base. Moving on to slide five, the year-over-year client asset growth was strong driven by organic growth in all of our affiliation options, along with market appreciation.

We ended the quarter with a total client assets under administration of $1.26 trillion, PCG-based and fee-based accounts of $683 billion, and financial assets under management of $196 billion. With our continuing focus on retaining, supporting, and attracting high-quality financial advisors, PCG consistently generate strong organic growth, which was evident again this year with domestic net new assets of $14.2 billion in the fiscal fourth quarter, representing a 5% annualized growth rate on beginning-of-the-period domestic PCG assets. For the fiscal year, domestic net new assets of $73 billion reflected a 7.7% annual growth rate, which is a leading result in the industry. During the fiscal year, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $250 million of trailing 12 production and nearly $38 billion of client assets of their pervious firms.

These results do not include our RIA and custody services business, RCS, which had another strong year in recruited results. More importantly, we continue to maintain a very low [regrettable] (ph) attrition levels of financial advisors at about 1%. These factors contributed to our annual NNA growth of 7.7%. Total clients’ domestic sweep and Enhanced Savings Program balances ended the quarter at $56 billion, down 3% compared to June of 2023. The Enhanced Savings Program, with its competitive rate and robust FDIC insurance coverage, continued to attract significant cash this quarter, partially offsetting a decline in client sweep balances largely due to quarterly fee billings and cash sorting activity. Total bank loans increased 1% from the preceding quarter to $44 billion, reflecting muted loan demand to our target markets, giving rising rates in the macroeconomic uncertainty.

Moving on to slide six, Private Client Group generated record results with quarterly net revenues of $2.27 billion, and pre-tax income of $477 million. Year-over-year, results were lifted by strong asset-based revenues and the benefit of higher interest rates on interest-related revenues and fees. The Capital Markets segment generated quarterly net revenues of $341 million, and a pre-tax loss of $7 million. Revenue declined 15% compared to the prior-year quarter mostly driven by lower fixed income brokerage in investment banking revenues. However, we were pleased to see a sequential improvement in M&A and advisory revenues this quarter. Additionally, our public finance business had improved results with debt underwriting growing 32% sequentially.

The extremely challenging market environment, particularly for investment banking, has strained the near-term profitability of segment results. And as we explained previously, the segment results are negatively impacted by amortization of share-based compensation from prior years as well as growth investments. We remain focused on managing controllable expenses as near-term revenues are depressed. The Asset Management segment generated pre-tax income of $100 million on net revenues of $236 million. The increases in net revenue and pre-tax income over the preceding quarter were largely the result of higher assets in PCG fee-based accounts at the beginning of a quarterly billing period and strong net flows in Raymond James Investment Management, which generated $920 million of net inflows during the fiscal fourth quarter, and $2.2 billion of net inflows in the fiscal year.

The Bank segment generated net revenues of $451 million and pre-tax income of $78 million. Fourth quarter NIM for the Bank segment, of 2.87%, declined four basis points compared to a year-ago quarter, and 39 basis points compared to the preceding quarter primarily due to a higher cost mix of deposits. We continue to add diverse higher-cost funding sources with our Enhanced Savings Program, and consequentially shifted more of the lower-cost sweep funding to third-party banks. In a few minutes, Paul Shoukry will discuss this further. While this negatively impacted the Bank segment NIM, there is an offset in higher RJBDP third-party bank fees. So, still a net positive for the firm overall, while also providing advisors an attractive deposit alternative to offer their clients.

Looking at fiscal 2023 results on slide seven, we generated record net revenues of $11.6 billion and record net income available to common shareholders of $1.7 billion, up 6% and 15% respectively over the prior year’s records. Additionally, we generated strong returns on common equity of 17.7%, and adjusted returns on tangible common equity of 22.5% for the fiscal year. On slide eight, the strength of the PCG and Bank segments for the fiscal year primarily reflects the benefit of strong organic growth in the Private Client Group, the successful integration of TriState Capital, and the benefit from higher short-term interest rates. 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 revenues despite incremental revenues from the SumRidge acquisition, which we completed in June of 2022.

And now, I will turn it over to Paul Shoukry for a more detailed review of our fourth quarter results. Paul?

Paul Shoukry: Thank you, Paul. Starting on slide 10, consolidated net revenues were a record were a record $3.05 billion in the fourth quarter, up 8% over the prior year and 5% sequentially. Asset management and related administrative fees grew 12% compared to the prior-year quarter and 5% sequentially due to the higher assets in fee-based accounts at the end of the preceding quarter. This quarter, fee-based assets declined 2%, which will be a headwind for our asset management and related administrative fees in the fiscal first quarter of 2024. Brokerage revenues of $480 million were flat year-over-year, and increased 4% sequentially. Year-over-year, the lower fixed income brokerage revenues in the Capital Markets segment were offset by higher brokerage revenues in PCG.

I’ll discuss account and service fees and net interest income shortly. Investment banking revenues of $202 million declined 7% year-over-year. Sequentially, the 34% increase was driven predominantly by higher M&A and advisory revenues as well as a solid quarter for public finance. 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 in the pace and timing of deals launching and closing given the heightened market volatility and geopolitical concerns. So, while we may not see significant improvement in the next fiscal quarter, we are hoping for better results over the next 6 to 12 months.

Other revenues of $54 million were down 33% compared to the prior year quarter, primarily due to lower revenues from affordable housing investments. The pipeline for that business remains strong, but several closings slipped to fiscal 2024 due to higher interest rates. Moving to slide 11, clients domestic cash sweep and enhanced saving program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 5.1% of domestic PCG client assets. Advisors continue to serve their clients effectively, leveraging our competitive cash offerings. The Enhanced Savings Program grew approximately $2.4 billion in deposits this quarter. A large portion of the total cash coming into 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.

As many eligible clients have now taken advantage of this product, the pace of flows into the Enhanced Savings Program has understandably decelerated. Through Monday of this week, sweep and ESP balances are down approximately $620 million for the month of October, as growth in ESP balances was more than offset by the quarterly fee billings, as expected. We continue to believe we are closer to the end of the cash sorting dynamic than we are to the beginning. However, until rates stabilize, we would not be surprised to see further yield-seeking behavior by clients. Sweep balances with third-party banks were $15.9 billion at the quarter end, giving us a large funding cushion when attractive growth opportunities surface. The strong growth of Enhanced Savings Program balances at Raymond James Bank has 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 in capital to support attractive loan growth. Turning to slide 12, combined net interest income and RJBDP fees from third-party banks was $711 million, nearly flat from the immediately preceding quarter, as a sequential decrease in firm-wide net interest income was offset by higher RJBDP fees from third-party banks. If you recall, on our last earnings call, we anticipated a 5% sequential decline in these interest-related revenues, so we are pleased with the better-than-expected result, which was partly a function of higher-than-anticipated yields on RJBDP third-party balances.

The Bank segment’s net interest margin decreased 39 basis points sequentially to 2.87% for the quarter, while the average yield on RJBDP balances with third-party banks increased 23 basis points to 3.6%. 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 around 5% lower in the fiscal first quarter as compared to the fiscal fourth quarter. And that’s just based on spot balances after the fee billings this quarter. As experienced over the past two quarters, this guidance may prove to once again be conservative if cash sweep balances stabilize around current levels, and or if the bank assets grow more than anticipated during the rest of the quarter.

But as we have always said, instead of concentrating on maximizing NIM over the near-term, we’re more focused on preserving flexibility and growing net interest income in RJBDP fees over the long-term, which we believe we are still well positioned to do. As many of you may recall, our expectation has always been that the industry would over earn on interest income early on in a rising rate environment, and then experienced some normalization of interest earnings, as clients redeploy their cash to higher yielding alternatives. Moving to consolidated expenses on slide 13, compensation expense was $1.89 billion, and the total compensation ratio for the quarter was 62%. The adjusted compensation ratio was 61.4% during the quarter, which we are very pleased with, especially given the challenging environment for capital markets.

Non-compensation expenses of $576 million increased 1% sequentially. As Paul Reilly mentioned earlier, the fiscal fourth quarter included the incremental provision related to the previously disclosed SEC industry sweep on off platform communications of $55 million, resulting in impact during the quarter of $0.26 per diluted share. Combined with the provision in the fiscal third quarter, we are confident that we are now fully reserved for this matter. The bank loan provision for credit losses for the quarter of $36 million increased $2 million over the prior year quarter, and decreased $18 million compared to the preceding quarter. I’ll discuss more related to the credit quality in the bank segment shortly. In summary, while there has been some noise with elevated provisions for legal and regulatory matters this year, adjusted non-compensation expenses, excluding loan loss provision.

And those legal and regulatory provisions came in very close to our annual expectation of $1.7 billion. Reinforcing that we remain focused on managing expenses while continuing to invest in growth in ensuring high service levels for advisors and their clients. Slide 14 shows the pretax margin trend over the past five quarters. In the current quarter, we generated a pretax margin of 19.2% and adjusted pretax margin of 20.3%, a strong result given the industry-wide challenges impacting capital markets in the aforementioned legal and regulatory provision. On slide 15, at quarter end, total assets were $78.4 billion, a 1% 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.

The Tier-1 leverage ratio of 11.9% and total capital ratio of 22.8% are both more than double the regulatory requirements to be well capitalized. The 11.9% Tier 1 leverage ratio reflects nearly $1.5 billion of excess capital above our conservative 10% target, which would still be 2x more than the regulatory requirements 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 and nearly $9.5 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 year, the firm repurchased 8.35 million shares of common stock for $788 million, an average price of $94 per share.

As of October 25, 2023, approximately $750 million remained available under the Board’s approved common stock repurchase authorization. While we didn’t complete any repurchases in the fourth quarter, due to self-imposed restrictions, just to be prudent, given our knowledge of the aforementioned SEC, off-platform matter, we remain committed to our planned repurchases to offset dilution from the TriState Capital acquisition, and the share-based compensation as we previously discussed. 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 1.17%.

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.07%. The bank loan allowance for credit losses on corporate loans, as a percent of total corporate loans held for investment was 2.03% at 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 a potential recession on our corporate loan portfolio. Given industry-wide challenges, we continue to closely monitor the commercial real estate portfolio, and more specifically the office portfolio. We have prudently limited the exposure to Office loans, which represents just 3% of the Bank segments 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 from the start of the call, I am pleased with our results for the fiscal 2023 and our ability to generate record earnings even in challenging market conditions. The record results this fiscal year once again highlight the strength of our diverse and complementary businesses. 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. In the Private Client Group, next quarter results will be negatively impacted by the 2% sequential decline in assets and fee-based accounts. Near-term, we expect some headwinds to enter sensitive earnings at both PCG and the Bank segment given ongoing cash sorting activity.

However, I am optimistic 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. Our advisor recruiting activity has picked up significantly over the last two months with record numbers of large teams in the pipeline. In the Capital Market segment, as we saw this quarter, 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 are still reasons for optimism, we expect the pace and timing of transactions to be heavily influenced by market conditions and would expect activity to likely pick up over the next six to 12 months. And in the fixed income space, the dynamics of last year persist.

Depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope once rates and cash balances stabilize, we can start to see an improvement. So, while there are some near-term challenges, we believe the capital markets business is well positioned for growth given the investments we’ve made over the past five years, which have significantly increased our productive capacity and market share. In the Asset Management segment, financial assets under management are starting the fiscal quarter down 2% compared to the preceding quarter, which should create a headwind to revenue. 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 through increased scale, distribution, operational and marketing synergies. 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 securities-based loan payoffs 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 tepid. However, spreads have improved, and with ample cash sitting on third-party banks and lots of capital, we are well-positioned to lend once activity increases.

In closing, entering fiscal 2024, we believe our strong competitive positioning in all of our businesses along with our ample capital and liquidity has us well-positioned to drive future growth. I want 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 uncertain times when clients need trusted advice the most. Thank you for all you do. That concludes our prepared remarks. Operator, will you open the line for questions?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon: Thanks. Was hoping you could expand upon the record backlog you talked about for advisors joining your platform, maybe some context around the size and scope of that? And also, it seems like there is more industry movement. You mentioned attrition being very low for the year. Just wondering if you’re seeing any uptick in terms of attrition across your platform more recently as you mentioned more advisor movement across the industry?

Paul Reilly: Okay. Well, that’s a good question. I think that, first, the attrition still stayed around 1%, that’s slightly up from last year but it’s in the same ballpark, kind of rounding. So, we’re happy to see that given the market has been very, very competitive. If you look at industry data, advisor movement is down about 15% industry-wide, if you believe the data. But what we’re seeing in terms — what we’re not seeing in number of advisors we’re seeing in size of team. So, just last month, we added a bank platform with $3 billion in assets, 27 advisors. And when we look at the backlog, especially in the last two months, the number of teams that are generating $10 million to $20 million of revenue, we’ve never had so many come through at once.

So, that has been a really big pickup that’s — and the pipeline, not saying we’re going to close them all, but we’ve never had this many at one time where we’re down to the final negotiating line, as well as people that have committed we haven’t announced. So, it’s been a pickup from a little slower activity, but I would say that, between last year and this year, it’s just last year was larger teams at the end, this year it’s just significant number of very large teams that are in the pipeline.

Dan Fannon: Thanks, it’s helpful. And then just a question as you think about the coming fiscal year and expenses, if the capital markets activity remain somewhat depressed or around these levels, should we think about non-comp expenses or how should we think about non-comp expense and levers that you think or you’re looking to pull to potentially improve the profitability and/or even maintain profitability in a more challenged revenue environment?

Paul Shoukry: Yes, I mean for capital market specifically, most of the expenses are comp expenses. And we had continued to invest in that business, even through this difficult environment, we were opportunistic, as we explained in our Analyst Day, in adding about a dozen MDs particularly to our healthcare group and other groups. So, we’re still investing in the business long-term. We think it’s attractive. We have a great platform there. Really, if you look at the losses that the [debt] (ph) segment generated this year, about $150 million of it or $135 million of it or so was related to growth expenses and retention expense — deferred comp expenses that we’re amortizing throughout the year, so more than the entire loss of the segment was really growth-related or deferred comp-related.

So, overall, as to the firm, non-compensation expenses we expect will continue to grow. We manage them very well this year when we talked about excluding the legal, and regulatory in the loan loss provision, we’re already close to that $1.7 billion target we laid out a year ago. And we expect it to continue growing from this level because a lot of those costs are growth expenses, whether it be the FDIC insurance expenses, we continue to put more deposits at the bank, et cetera. So, they were negatively impacted this year by legal and regulatory after a very benign year last year, but net-net we would continue to expect non-compensation expenses to grow, while also being very focused on managing the controllable expenses that we can manage while still ensuring high support levels for advisors and their clients.

Dan Fannon: Great, thank you.

Operator: Our next question comes from Kyle Voigt of KBW. Your line is open.

Kyle Voigt: Hi, good evening. So, just with the nearly $1.5 billion of excess capital above that 10% target, you mentioned the suspension repurchases in the quarter due to knowing about the regulatory matter. When we think about the pace of repurchases in fiscal 2024, Paul, should we still think about that $300 million to $350 million per quarter run rate or should we expect a little bit of a catch up given there were no repurchases last quarter and given how much excess capital you have on the balance sheet?

Paul Shoukry: Yes, I think when you think about excess capital, I would just start with the capital prioritization framework that we’ve been following almost since our inception really, which is, first and foremost, to use the excess capital to invest in growth. So, Paul talked about the prospects that we have for organic growth, which we’re pretty bullish on right now just given the pipeline, not only in PCG, bur really across our businesses. And then we’re also active on the acquisition front, looking at opportunities that are a good cultural fit, first and foremost, but that would also be good strategic fits. And pricing across all M&A right now is challenging because there are gaps between buyers and sellers, but we feel like we can, through continued dialogue, find good opportunities there over time.

And then to the extent that we can invest the capital in growth and we have this — our ongoing dividend, which is 20% to 30% of earnings, and then buybacks. And we do have to play some catch-up on the buybacks since we didn’t do any this quarter. I think we have about $250 million more to offset the issuance associated with TriState acquisition in two years of share-based compensation. So, we’ll get back to doing that. And then we have a commitment to offset dilution going forward, which is about $200 million a year. But if we have the excess capital which we currently have and we deem the price to be attractive, then we would obviously be opportunistic above and beyond that offsetting of dilution.

Kyle Voigt: Great, thank you. And then just for a follow-up, just want to touch on the admin comp line within the PCG segment, moved lower sequentially in the quarter, came in a bit lower than expected. If we take a step back and look at the full-year, that admin comp grew by more than 15%, which is a similar rate to fiscal 2022, although I think there were some acquisitions in there and some unusual or higher than expected raises that went into effect over that period. As we look out to fiscal 2024 or over the medium-term, just how should we think about growth in that admin comp line on a normalized basis?

Paul Shoukry: You’ve touched on it, that 16% growth in PCG admin comp does include growth investments, a full year of Charles Stanley is in there, as well as all of the support staff for all of the advisors that we bring onboard, that their compensation goes into the admin comp as well. So, we’ve invested in the platform, and this year we had, on top of that, as you pointed out, we were very generous in passing on the financial success for the associates in the form of higher raises last year, and then that’s reflected in these numbers as well. Looking forward, we are again focused — again while expecting continued growth in this line item, certainly would expect it to sort of be a reduction in the growth rate from what we experienced this year, given the aforementioned factors.

Kyle Voigt: Great, thank you.

Operator: Our next question comes from Brennan Hawken with UBS. Your line is open.

Benjamin Rubin: Hi, this is Ben Rubin filling in for Brennan. Thank you for taking my question. I first want to ask about the composition of the loan book. We did see some growth in the loan book and the balance sheet for the first time in several quarters. I guess, my first question is, how are you thinking about balance sheet growth on the loan side in fiscal year 2024, maybe on commercial versus consumer underwriting? And then also, what type of balance sheet growth does your NII guide interpret as we look to next quarter? Thank you.