Raymond James Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to Raymond James Financial's 4th Quarter and Fiscal 2023 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. I'm Christie 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 Shuckery, Chief Financial Officer. The presentation being reviewed today is available on our Investor Relations website.

Operator

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 and 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 statements that necessarily depends on future events are intended to identify forward looking statements.

Operator

Please note 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 ks and subsequent Forms 10Q and Forms 8 ks, 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 presentation and press release. Now, I'll turn the call over to Chair and CEO, Paul Riley.

Operator

Paul?

Speaker 1

Good evening and thank you

Speaker 2

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 RCS conference, our RIA division and clearing firms. Again, that division is over Now turning to our results.

Speaker 2

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 3rd 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.

Speaker 2

This dedication and focus provides stability during tough economic times and what makes me confident about our continued success in the future. Reviewing 4th quarter results starting on slide 4, the firm reported record quarterly net revenues of $3,050,000,000 and net income available to common shareholders of $432,000,000 or $2.02 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $457,000,000 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 $55,000,000 This provision resulted in an impact during the quarter of $0.26 per diluted share.

Speaker 2

We generated strong returns For the fiscal Q4 with an annualized return on common equity of 17.3% and annualized Adjusted return on tangible common equity of 22.2%, a great result, particularly given our strong capital base. Moving on to slide 5. The year over year client asset growth was strong, driven by organic growth in all of our options along with market appreciation. We ended the quarter with a total client assets under administration of $1,260,000,000,000 PCG based assets and fee based accounts of 683,000,000,000 and financial assets under management of $196,000,000,000 With our continuing focus on retaining, supporting and attracting high quality financial advisors, PCG consistently generates strong organic growth, which was evident again this year With domestic net new assets of $14,200,000,000 in the fiscal 4th quarter, representing a 5% annualized growth rate on beginning of the period domestic PCG assets. For the fiscal year, domestic net new assets of $73,000,000,000 reflected a 7.7% annual growth rate, which is a leading result in the industry.

Speaker 2

During the fiscal year, we recruited to our domestic independent contractor and employee channels financial advisors with Approximately $250,000,000 of trailing 12 production and nearly $38,000,000,000 of client assets to their previous 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 levels of financial advisors at about 1%. These factors contribute to our annual NNA growth of 7.7%. Total clients domestic sweep and enhanced savings program balances ended the quarter at $56,000,000,000 down 3% compared to June of 2023.

Speaker 2

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 balances largely due to quarterly fee billings and cash sorting activity. Total bank loans increased 1% from the preceding quarter to $44,000,000,000 reflecting muted loan demand to our target markets, giving rising rates and the macroeconomic uncertainty. Moving on to slide 6. Private Client Group generated record results with quarterly net revenues of $2,270,000,000 and pretax income of $477,000,000 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 $341,000,000 and a pretax loss of $7,000,000 Revenue declined 15% compared to the prior year quarter, mostly driven by lower fixed income brokerage and Investment Banking revenues.

Speaker 2

However, we were pleased to see a sequential improvement in M and 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.

Speaker 2

The Asset Management segment generated pretax income of $100,000,000 on net revenues of $236,000,000 The increases in net revenues and pre tax income over the preceding quarter were largely the result of higher assets and PCG fee based accounts at the beginning of a quarterly billing period and strong net flows in Raymond James Investment Management, which generated $920,000,000 of net inflows during the fiscal Q4 and $2,200,000,000 of net inflows in The bank segment generated net revenues of $451,000,000 and pretax income of $78,000,000 4th quarter NIM for the bank segment of 2.87 percent declined 4 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 continued to add diverse higher cost funding sources with our enhanced savings program And consequentially shifted more of a lower cost sweep funding to 3rd party banks. In a few minutes, Paul Shukri will discuss this further. While this negatively impacted the bank segment NIM, there is an offset in higher RJ BDP third party bank fees. So still a net positive for the firm overall, while also providing advisors an attractive and positive alternative to offer their clients.

Speaker 2

Looking at fiscal 2023 results on slide 7, we generated record net revenues of 11 point $6,000,000,000 and record net income available to common shareholders of $1,700,000,000 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 8, 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 Investment Banking and Fixed Income Brokerage revenues despite incremental revenues from the Sunridge acquisition, which we completed in June of 2022. And now I'll turn it over to Paul Shuckry for a more detailed review of our 4th quarter results.

Speaker 2

Paul? Thank you, Paul. Starting on slide 10. Consolidated net revenues were a record $3,050,000,000 in the 4th 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.

Speaker 2

This quarter fee based assets declined 2%, which will be a headwind Brokerage revenues of $480,000,000 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 $202,000,000 As well as a solid quarter for public finance. We are cautiously optimistic that the environment for M and A is improving And we continue to see a healthy investment banking pipeline and solid new business activity.

Speaker 2

However, there remains a lot of And 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 $54,000,000 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.

Speaker 2

Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $56,400,000,000 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 $2,400,000,000 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

Speaker 1

decelerated. Through Monday of this

Speaker 2

week, Sweep and ESP balances are down approximately $620,000,000 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. Suite balances with 3rd party banks were $15,900,000,000 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.

Speaker 2

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 Looking forward, we have ample funding and capital to support attractive loan growth. Turning to slide 12. Combined net interest income in RZBDP fees from 3rd party banks was $711,000,000 nearly flat from the immediately preceding quarter as a Sequential decrease in firm wide net interest income was offset by higher RGBT fees from 3rd 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 RJVDP sequentially to 2.87 percent for the quarter, while the average yield on RJBDP balances with 3rd party banks increased 23 basis points to 3.6%.

Speaker 2

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 RJVDP fees from 3rd party banks to be around 5% lower in the fiscal Q1 as compared to the fiscal Q4. And that's just based on spot balances after the fee billings this quarter. As experienced over the past 2 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 are more focused on preserving flexibility and growing net interest income in our JBDP fees over the long term, which we believe we are still well positioned to do.

Speaker 1

As many of you may

Speaker 2

recall, Our expectation has always been that the industry would over earn on interest income early on in a rising rate environment And then experience some normalization of interest earnings as clients redeploy their cash to higher yielding alternatives. Moving to consolidated expenses on slide 13. Compensation expense was $1,890,000,000 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 $576,000,000 increased 1% sequentially.

Speaker 2

As Paul Reilly mentioned earlier, the fiscal Q4 included the incremental provision related to the previously disclosed SEC Industry Sweep on off platform communications of $55,000,000 resulting in an 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 Credit losses for the quarter of $36,000,000 increased $2,000,000 over the prior year quarter and decreased $18,000,000 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 $1,700,000,000 Reinforcing that we remain focused On managing expenses, while continuing to invest in growth and ensuring high service levels for advisors and their clients.

Speaker 2

Slide 14 shows the pretax margin trend over the past 5 quarters. In the current quarter, We generated a pre tax margin of 19.2% and adjusted pre tax 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 quarterend, total assets were $78,400,000,000 a 1% sequential increase. Liquidity and capital remained very strong. RGF corporate cash at the parent ended the quarter at $2,100,000,000 well above our $1,200,000,000 target.

Speaker 2

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 $1,500,000,000 of excess capital above our conservative 10% target, which would still be 2 times more than the regulatory requirements to be well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest We also have significant sources of contingent funding. We have a $750,000,000 revolving credit facility and nearly $9,500,000,000 of FHLB capacity in the bank segment. Slide 16 provides a summary of our capital actions over the past 5 quarters.

Speaker 2

During the fiscal year, the firm repurchased 8 point 35,000,000 shares of common stock for $788,000,000 an average price of $94 per share. As of October 25, 2023 approximately $750,000,000 remained available under the Board's approved common stock Purchase authorization. While we didn't complete any repurchases in the 4th quarter due to self imposed restrictions, Just to be prudent given our knowledge of the aforementioned SEC 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.

Speaker 2

Criticized loans as The 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 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 We have prudently limited the exposure to office loans, which represents just 3% of the bank segment's total loans.

Speaker 2

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

Speaker 2

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 interest 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 Our advisor recruiting activity has picked up significantly over the last 2 months with record numbers of large teams in the pipeline. In the Capital Markets segment, as we saw this quarter, there are some signs of improvement in Investment Banking And we continue to have a healthy M and A pipeline and good engagement levels. But while there's still reason 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 6 to 12 months.

Speaker 2

And in the fixed income space, the dynamics of last year persist. Depository clients are Decline in 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 5 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, we should create a headwind to revenue.

Speaker 2

We remain confident that strong growth of assets in 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, 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 chaos 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.

Speaker 2

With little activity in the market, corporate loan growth has been pepid. However, spreads have improved and with ample cash Sitting on 3rd 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 position And 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 Thank you for all you do. That concludes our prepared remarks.

Speaker 2

Operator, will you open the line for questions?

Speaker 3

Thank you. Our first question comes from Dan Fannon with Jefferies. Your line is open. Thanks.

Speaker 2

I 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. Okay.

Speaker 2

Bob, 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 because in the market's been very, very If you look at industry data, advisor movements down about 15% industry wide, if you believe the data. But what we're seeing in terms what we're not seeing a number of advisors, we're seeing a size of team.

Speaker 2

So just last month, we added a bank platform of $3,000,000,000 in assets, dollars 27 advisors. And when we look at the backlog, especially in the last 2 months, The number of teams that are generating $10,000,000 to $20,000,000 of revenue, we've never had so many Come through at 1. So that has been a really big pickup that's in 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 kind of negotiating line. So as well as people that We haven't announced. So it's been a pickup from a little slower activity.

Speaker 2

But I would say that between last year and this year, it's just Last year was larger teams. At the end of this year, it's just significant number of very large teams that are in the pipeline. Thanks. That's helpful. And then just a question as you think about this coming fiscal year and expenses, If the capital markets activity remains somewhat depressed or around these levels, should we think about non comp expense?

Speaker 2

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. Yes. I mean for Capital Markets specifically, most of the expenses are comp expenses. And we have We continue 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.

Speaker 2

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 this segment generated this year, About $150,000,000 a bit dollars 135,000,000 a bit or so was related to growth expenses and retention expense deferred comp Expenses that we're advertising throughout the year, so more than the entire loss of the segment was really growth related or deferred comp related. So overall, non compensation expenses, we expect will continue to grow.

Speaker 2

We manage them very well this When we I talked about excluding the legal and regulatory and the loan loss provision very close to that one $7,000,000,000 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 etcetera. So they were negatively impacted this year by legal and regulatory after a very benign year last year. But So net net, we would continue to expect non compensation expenses to grow, while also Very focused on managing the controllable expenses that we can manage, while still ensuring high support levels for advisors and their clients. Great.

Speaker 2

Thank you.

Speaker 3

Our next question comes from Kyle Voigt with KBW, your line is open.

Speaker 1

Hi, good evening. So just with the nearly $1,500,000,000 of excess capital Above that 10% target, you mentioned suspension of repurchases in the quarter due to knowing about the regulatory matter. I guess when we think about the pace of repurchases in fiscal 2024, Paul should we still think about that $300,000,000 to 3 $50,000,000 per quarter run rate or should

Speaker 2

we expect a little bit

Speaker 1

of a catch up given there were no repurchases last quarter and given how much excess capital you have on the balance sheet?

Speaker 2

Yes. I think when you think about excess capital, I would just start with capital prioritization The 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 PPG, but really across our businesses. And then we're also active on the acquisition front, looking at opportunities That's our good cultural fit 1st and foremost, but that would also be good strategic fit. And pricing Across all M and A right now is challenging that there are gaps between buyers and sellers.

Speaker 2

But we feel like we can Yes, through continued dialogue finding good opportunities there over time.

Speaker 1

And then to

Speaker 2

the extent that we can't invest the capital in growth and we have 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 We didn't do any this quarter. I think we have about $250,000,000 more to offset the issuance associated with TriState Acquisition and 2 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 $200,000,000 a year.

Speaker 2

But if we have the excess capital, which we currently have and we Dean the price to be attractive, then we would obviously be opportunistic above and beyond That's offsetting the dilution.

Speaker 1

Great. Thank you. And then just

Speaker 2

for a follow-up.

Speaker 1

I 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. I guess 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.

Operator

Although I think

Speaker 1

there were some acquisitions in there and some unusual or higher than expected raises that went into effect over that period. I guess 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?

Speaker 2

Hey, you touched on it. I mean that 16% growth in PCG admin comp does include growth investments Charles full year of Charles Stanley is in there as well as all of the support staff for all of the advisors that we bring on board that Their compensation goes into the admin cost as well. So we invest In the platform, in this year, we had on top of that, as you pointed out, we are very generous in passing The success of the the financial success with associates in the form of higher raises last year and that's reflected in these numbers as well. Looking forward, we are focused on while expecting continued growth in this line item. Certainly, we'd expect it to sort of be a reduction in the growth rate from what we experienced this year given the aforementioned factors.

Speaker 1

Great. Thank you.

Speaker 3

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

Speaker 1

Hi. This is Ben Rubin filling in for Brennan. Thank you for taking my question. I first want to ask about the Yeah, 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. And 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?

Speaker 1

And then also what type of balance Does your NII guide interpret as we look to the next quarter?

Speaker 2

Thank you. Yes. The near term NII guide factors in very modest loan growth just given The environment is still being pretty in terms of the demand being pretty muted, particularly on the corporate side now. But we were pleased to see the growth during the quarter and a lot of it was driven by securities based loans and residential mortgages. And while we expect mortgages volume to decelerate given much higher rates now, we are optimistic about The securities based loan portfolio in both Raymond James Bank and TriState as we look forward over the next 12 months.

Speaker 2

And that's Based on two factors. The first is the payment the repayments of those balances have really stabilized as they As you would expect, accelerated significantly as rates were rising, almost doubling in some cases over the last 12 months. And so that is stabilized and we are starting to see new origination. And on the TriState Capital side, a lot of Benefit from what they call transitions or essentially existing clients bringing on and recruiting new advisors. So we are optimistic about that portfolio going forward over the next 12 months.

Speaker 2

I would just add, we are open for business. We have more than adequate cash offer certainly to capital and it's really just the loan demand. So Hopefully, the SDLs continue to go from being repaid to starting to grow as we saw the indication last quarter. The mortgage business is obviously slow. And the commercial loans, we're open to it, but it's a very slow market And spreads are widened for the deals that are coming out.

Speaker 2

But again, it's more of a muted market. So you saw this quarter, we're open

Speaker 1

Great. That's very helpful. And then for my follow-up, I'll kind of touch back on what Dan's first question about net new assets. So net new asset growth in the quarter was 5%. It's a bit below the high single digit percentages you guys have been printing in recent years.

Speaker 1

I was just wondering if you can give me some color if there was any noise, And the adviser departures that were lumpy

Speaker 2

that may have impacted the quarter and whether or not this, let's call it,

Speaker 1

mid single digit range Just a more appropriate or should we kind of is it some revert back to the high single digits once the advisor market if it does improve from here? Thank you.

Speaker 2

I think for the quarter, I mean, we it's been a dynamic year in a lot of ways in terms of as you look at advisor count, I think that We had one program that we previously talked about that we exited from the platform. We kept 60% of the advisors 40% Last and it cost us $4,600,000,000 in assets and 60 advisers. But we think from a profitability and long term it was the right program. If you look just this month again adding a $3,000,000,000 bank program and 27 advisors just a one recruit. A lot of big projects like that.

Speaker 2

So we're still optimistic whether we can get the double digits we had in a couple of quarters. That's a big number depending on the markets, but we expect to do very, very well. That will be up to Kind of recruiting and what happens with capital markets. So I don't know if you have anything to add, Paul.

Speaker 3

Our next question comes from Steven Chubak with Wolfe Research. Your line is open.

Speaker 2

Good afternoon, Paul and Paul. Hey, Steve. Hey. So wanted to start off with a question Spread revenue came in better than your guidance in the quarter. It also trended better than what we saw at Some of your peers and given you have a larger proportion of client cash that swept to 3rd party banks, To what extent did the spread revenue benefit from improved pricing from those partner banks Provide any incremental boost.

Speaker 2

We know banks are seeking out alternative sources of liquidity. There's a lot of demand for that whether you benefit from any I think our better performance than many peers is really just Collection of our long term focus of kind of maintaining a flexible approach that's focused on giving clients as much FDIC insurance You see that with the growth in enhanced savings program balances, which give us more flexibility in that dry powder that Effectively puts more sweep balances with 3rd party banks as we await growth of the bank's balance sheet as Paul Discussed earlier. And that dynamic as you point out Steve is absolutely correct. The banks the demand from 3rd party banks It's only increasing by the week. And as contracts renew, we are able to renew at more favorable terms.

Speaker 2

So that played a role, but bigger picture of what really played a role was us just maintaining that sort of long term flexible approach To managing the balance sheet and offering clients as much FDIC coverage as we possibly can to our various products. That's Great. And for my follow-up, wanted to drill down in some of the October deposit trends, Paul, that you had cited. Given the sensitivity of spread revenue to changes in deposit mix, I was hoping you could provide some additional granularity disaggregating the sweep and ESP deposit levels and maybe help size the impact of the advisor payout? When you say the advisor payout, are you referring to The quarterly fee billings or what are you The quarterly fee billings, which honestly I care less about that.

Speaker 2

I really just was hoping to get the ESP and Sweep deposit level is disaggregated given the sensitivity. Got it. Yes. So we were down a couple of days ago 600 But this does bounce around from day to day. I mean, we had a $200,000,000 positive day yesterday.

Speaker 2

So From quarter end, We have $500,000,000 so we the balances are at numbers we're not used to high and low coming in and But we the enhanced savings program is up probably $200,000,000 to $300,000,000 so far this month. And so the net the offset to that would obviously be the sweep balances, which frankly are doing Much better than we would have expected given that we had the quarterly fee billings earlier this month as well. So net net for cash to be down $500,000,000 to $600,000,000 when you add those two components, considering the $1,200,000,000 of quarterly fee billings, we're pretty pleased With our situation right now, but again, this day to day can change today or tomorrow. So we're going to monitor it closely. Thank you, Howard.

Speaker 2

Sorry. Go ahead. Yes. Go ahead. The core thing for us, I mean, just not on earnings, but the fact that we have so much money It's a 3rd party PAGS that we could use if we wanted it.

Speaker 2

And we really haven't been borrowing. So we have a lot of comfort to be able to go ahead and still have all the flexibility we need. But there has been the mix change from DSP With higher deposit costs, that's what you should see. That's that. Got it.

Speaker 2

That's helpful color. Thanks for taking my questions. Thanks, Steve.

Speaker 3

Our next question comes from Mark McLaughlin with Bank of America. Your line is open.

Speaker 1

Hi. Thanks for taking my question. I was hoping you could provide us with some more color around deposit cost And specifically the pickup in money market and savings account yields?

Speaker 2

Yes. So I think we just sort of covered the growth in enhanced savings program balance. For us, I mean, in terms of deposit costs that is The biggest factor, because that does cost somewhere around 5%. And so to the extent that the mix of The total client cash balances shift to those advanced savings program balances. You're picking up probably 350 or so 3.5 percentage points of cost effectively.

Speaker 2

So I would say that's probably the biggest factor in The higher deposit costs. And why you saw the NIM really contract sequentially was largely due to That's intentionally growing the higher cost deposits. But again, a lot of that is geography, Effectively what we have done is raised the higher cost deposits in the bank segment through the enhanced savings program And then essentially shifted more of the lower cost suite balances to 3rd party banks. And so That shows the NIM in the bank segment contracting sequentially, but you see the corresponding benefit to the firm with 3rd party fees, which shows up in the PCG segment. And that's why, as Steve pointed out, we were able to generate better than That's better than industry trends at least on the sequential basis.

Speaker 1

Yes, very clear. I appreciate that context. Also for my follow-up, how is feedback and adoption for RCS been? I was curious on what the mix between outside advisors Joining the platform was versus the transition of existing advisors on the platform?

Speaker 2

I think that the growth has been great. We're Over 10% now of our assets in the ERCS division. When we first probably opened it, we had a bigger movement of Internal people who wanted to go RIA and just switch platform, which again is part of the noise in advisor count. When Advisors move from our employer independent division. We count them as advisors once they're in the RCS.

Speaker 2

They're not registered. They're RIA, so they're one firm, right? So we drop them out of the advisor count. So but the assets I think the proof point of that is the growth in the NNA and assets, which I think for the year and for the quarter have been about most of the players in the market. It's the speed and the recruiting outside has picked up too now that we've gotten the platform much more robust and Increase the technology as it can play.

Speaker 2

Hopefully, the long term growth will come from the outside, but we do have People here if they want to operate in the RA format they're welcome to switch affiliation options, but that has slowed down over the last couple of years from the initial Opening of it, the report people came over.

Speaker 1

Appreciate the color. Thanks guys.

Speaker 3

Our next question comes from Jim Mitchell with Seaport Global. Your line is open.

Speaker 4

Thanks. Good afternoon. Hi, guys.

Speaker 2

Maybe Paul, I mean you talked a lot about sorting,

Speaker 1

I guess starting to decelerate, ESP growth decelerating, You have some pricing benefits on 3rd party suites. If we look beyond the Q1 or next quarter in terms of The guidance on rate sensitive revenue, do you start to see things stabilizing? I guess, I'm not asking for Specific guidance, but if you could kind of help us think through the puts and takes on when we start to see those revenues maybe potentially stabilize?

Speaker 2

I don't think anyone can really tell you exactly when cash shorting will fully stabilize across the industry. I know a lot of firms have been trying to convince you of that for the last 12 to 18 months, but we've been trying to be pretty transparent with you guys. And so what we have said in the last 3 months We feel like we're closer to the end of the sorting dynamics in the beginning and you sort of are seeing that in the numbers. So But we're not going to sort of declare an end to that dynamic until we have several months of data to support that. But To your point longer term, we are excited about the position that we're in now with the strong capital With the $16,000,000,000 almost of cash with 3rd party banks that gives us a lot of dry powder to really grow the balance When the attractive opportunities come and we think we'll be in a position of strength there because not a lot of other firms in our space will have the capital And funding to pursue that attractive growth.

Speaker 2

So we're in a great position. Again, It's a reflection of that long term client focus, the flexible balance sheet that we've always strived to maintain even when being criticized for it over the last few years, but it puts us in a pretty good position now. I think Jim, I think for us to really be able to call it in is really When interest rates stabilize, if the Fed is starting to raise rates again, that ultimately hits securities and it hits money market funds, We have a higher rate of competitors, we have to raise rates. I mean that's really the dynamic. It appears that That is closer to the end of the cycle of doing that and we stabilized and sorting will stabilize also.

Speaker 1

Right. That's fair. And maybe just as a follow-up on the credit side. Some pretty big additions to reserves. You said you feel comfortable.

Speaker 1

I guess what changes that? You mentioned macro. Just trying to think through How you're feeling about the credit provision story there given that loan growth has been pretty flattish?

Speaker 2

We think credits are We like the profile. We like the risk. We've always tried to be proactive on adding to reserves to make sure we're well reserved and Often are ahead of movement. The one thing we don't control sometimes is our models, some of our macroeconomic Models are based on Louise. They changed their outlook that has impact to us.

Speaker 2

But we try to stay ahead of the credit for As you can see in 2009, we were very tough credit period. We did pretty well, but we're pretty credit tough. Maybe what's different this cycle starting in COVID is We have sold off loans, so we didn't like the credit yield trade off and risk trade offs. We continue to do that Kind of a one off basis. So that's been an extra tool that we've used to manage credit.

Speaker 2

So we're feeling pretty good now. The economy is still out of control, but We've got other issues, but it seems like even if things slow down, which they may, as long as people are employed And mine, we think we'll get through it pretty well.

Speaker 1

Right. So the additions are more macro Driven rather than specific concerns internally?

Speaker 2

Yes. I would say the additions this quarter were sort of a number of Item of specific loans where we as Paul said, try to get in front of it with additional reserves When possible, there are also modest amount of charge offs reflect sequentially. So we nothing dramatic. We feel Good about the portfolio overall, but we try to get ahead of things, especially when the market environment As unpredictable as it is, as Paul said. For last quarter, the macro had a bigger impact than it did this quarter.

Speaker 2

It wasn't a big macro outlook change

Speaker 1

Okay, great. Thank you very much.

Speaker 3

Our next question comes from Devin Ryan with JMP Securities. Your line is open.

Speaker 4

Okay, great. Thanks, Paul. And most have been covered here,

Speaker 2

but if you wanted to touch on

Speaker 4

the fixed income businesses briefly. So debt underwriting obviously had its best quarter in Time, it can be a little bit of seasonality there, but did have a better result than some peers. So just curious whether that's idiosyncratic deals Or if you're actually seeing conditions for

Speaker 2

that business maybe starting to improve

Speaker 4

a little bit from depressed levels. And then I guess conversely the fixed income brokerage Business took a little bit of a step lower from already a pretty tough level. So just whether you see any catalyst on the horizon that could drive better results there as well?

Speaker 2

I think the fixed income debt certainly the activity was up. We did have a pretty big deal in the quarter also. So That was part of the pickup. And a long term client we're in rotation. That would be Our turn for kind of the big underwriting.

Speaker 2

So it's a little bit of both. I would say that certainly the big deal had an impact. And I just the lack of interest rate kind of as Paul talked about with depositories Without excess cash, they're waiting for stabilized too. So that part of our franchise has certainly been slow. And I think in general, The trading is that as you look at spreads whether in AAA Unis or mortgage securities or stuff they have very high spreads right now.

Speaker 2

People are just Waiting for rates to pick out because certainly the spreads there are higher than they've been in a while, but the activity is So I think people are waiting to feel like they know where interest rates are going to stabilize until then. It's going to be a tough day, maybe a little better. It's hard for it to get a lot lower. It's not impossible. But When it really picks up, I think you're going to have to see more of a stabilized outlook in interest rates.

Speaker 2

Got it. Okay. The big add is that some of which has been extremely well disjointed us. So they've been a great addition and well ahead of What we would expect in a traditional business, if it had lows, it's interest rate environment.

Speaker 4

Yes. Got it. Okay. Good color there. And then just follow-up briefly just on kind of corporate M and A.

Speaker 4

I hear all the comments around growth opportunities with capital and obviously opportunity buybacks. But just more broadly, how You would just characterize the flow of deals that you're seeing across the firm right now.

Speaker 2

And then just where the appetite At the moment, just given

Speaker 4

the higher cost of capital, how much of that calculation and maybe appetite for M and A has changed because you guys clearly have been acquisitive over the last several years

Speaker 2

I think that first, cost of capital is with packing deals. So it's 2 things. 1st, it's pricing. So with the buyers, the cost of capital is saying, well, this is significantly higher And pricing has been slower to come down, which isn't unusual in other M and A cycles that I've lived through. The price is Slowest to adjust.

Speaker 2

And so that we have empathy for M and A bankers. As we look at things too, we have the same thing. When you look at Debt was free and you layer on a 7 or 8 or 9 whatever the cost rate is especially for a lot of M and A firms where it's more Higher risk debt, I mean, this impacts the price, it just has to. So we see that both in the M and A business is back up, so you See people doing deals now in the Q4. We don't expect the next quarter to be a lot different, But backlogs good.

Speaker 2

People are waiting, but that gap which I think a lot of it's from lending and pricing And the cost of capital is impacting it all the terms. And I'd say the same thing when we run It has an impact even with our excess capital. We assume we have to replace it. It makes it tougher. Most prices adjust a little bit.

Speaker 2

Our cost of capital falls. It's going to be hard. Or people just Wait it out long enough and go okay the lower price is the new price. It's going to take one of those factors for it to really pick up. So that's why we keep 6 to 12 months outlook in our M and A that just we think that the markets don't even see that, but let's see if it adjusts or not.

Speaker 2

I don't think it's going to happen overnight. Okay. That's great. I'll leave it there. Thanks, guys.

Speaker 2

All right. Thanks, David.

Speaker 3

Our final question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 1

Hey, good evening. Thanks for squeezing me in here. Just a question on the bank capital rules. So you've seen some proposals from the banking regulators including Basel III and GAAP proposal, just curious how you see that impacting the opportunity set for your Capital Markets business given you're under the 100,000,000,000 Asset threshold, just curious to hear about the opportunity set for yourself. But then as you look out over the coming years, I'm I'm sure eventually you probably hope you crossed $100,000,000,000 and grow to that level.

Speaker 1

Just how do you think about that impacting potentially your Capital Which area you think might be more impacted? And how do you think about preparing for that?

Speaker 2

Well, a couple of things. First, at our $78,000,000,000 and 1 percent growth, it's going to take a lot of time to hit 100. And I think people That's one of the big jumps in our assets because of the TriState acquisition. We have no plans to acquire another bank. In fact, it took us 5 years of looking to acquire TriState, which was the perfect fit to join the family.

Speaker 2

So we're not looking for another banking Franchise, almost anything else we do doesn't significantly drive our asset size. So we think we've got That's certainly a 5 to 6 5 year. You have to cross and then you get a year to comply. So and it could be much longer. So I most of all the rules as I think there was $100,000,000,000 And so I think we have time to do that.

Speaker 2

Having said that, we're already internally doing studies on the impact of Reporting requirements, the capital requirements, the technology, So everything is going to be impacted and the regulatory expectations will still change going across $100,000,000 So we have both inside and outside help. We've been hiring some people. This is kind of 5 years in advance. So we're not taking it for granted. We know it will grow.

Speaker 2

But as you said on those, the $100,000,000,000 became the old $500,000,000,000 before they changed the rule and $250,000,000,000 So It has brought a lot of those rules down for significantly higher heavy higher lift. But I think right now That's in the future for us. Still always. And just to add one thing to that timeline. One of the reasons They'll be we expect to be around that long is because one of the things we did during COVID is Really accommodated client cash balances on the balance sheet through the securities portfolio.

Speaker 2

So we expect over the next year, for example, for a lot of the bank's Loan growth would be essentially funded with securities that mature out of that portfolio. So you don't get as much net growth even from The loan growth because of the repositioning of those assets. Thanks Paul. That's a good clarification. We still expect to grow the bank loan portfolio.

Speaker 2

So but it's just it's being funded on balance sheet not off balance sheet.

Speaker 1

Great. Just a follow-up on that point. As banks that are impacted by the rules either pull back of certain areas or reprice certain How do you think about the opportunity set for you guys to step in given that the rules won't apply for you for many years? Where do you see the biggest opportunity set Your capital markets business or more broadly from these rules impacting a lot of banks.

Speaker 2

I think that if you look at acquiring Capital market businesses or fixed income businesses or asset management business is really going to significantly impact our asset So what would really impact it is acquiring a bank because we're acquiring balance sheet. Those businesses, especially the M and A, Fixed income, even today we operate when we when Morgan Keegan joined 7 or 8 years ago, we had a 1,000,000,000 in inventory. Today, we have less we've operated well under 1,000,000,000 in inventory. So I don't we think there's a lot of room to acquire a lot of business those businesses in that space without really Altering trajectory I talked about to $100,000,000 It's the banking side that impacts the balance sheet really. And that's not our focus.

Speaker 1

Okay. Thank you.

Speaker 3

This concludes our Q and A session. I will now turn the call back to Paul Reilly for closing remarks.

Speaker 2

So first, I appreciate the time. It's been It was really outside kind of a regulatory charge. It would have been a really outstanding quarter, but still is a very good quarter. And so we're focused still going into an uncertain market, but we've always I think And our business have outperformed because of our capital and cash, especially in down markets. It would be nice to see enough capital markets The interest rates come in and it will be kind of an easy year, but we always assume we have to work for it every year.

Speaker 2

Market is competitive. So We're just doing what we've done. We've been managing expenses. A lot of people say, what are you going to do to manage expenses? We have been doing that, especially over the last few quarters and We plan to continue to do that until we can see growth to support those.

Speaker 2

So appreciate you joining the call and all time spent with us and We'll talk to you

Speaker 1

soon. This

Speaker 3

concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Raymond James Q4 2023
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