Raymond James Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to Raymond James Financial's Second Quarter Fiscal 2023 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. Now I will turn it over to Kristi Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

Speaker 1

Good afternoon, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer and Paul Shukri, 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.

Speaker 1

Calling your attention to Slide 2. Please note certain statements made during this call may constitute forward looking statements. These statements include, but are not limited to, Information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments or economic conditions. In addition, words such as may, will, could, anticipates, expects, believes or continue or negative of such terms 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.

Speaker 1

We urge you to consider the risks described in our most recent Form 10 ks and subsequent Forms 10 Q 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 press release and presentation. Now I'll turn the call over to Chair and CEO, Paul Reilly. Paul?

Speaker 2

Good afternoon, and thank you for joining us today. Paul and I are joining you from Orlando, Florida. We have over 4,000 people attending our independent advisors conference. It's great to see such an upbeat mood and people really having a good time getting back together as well as all the other educational sessions we have here. Since our founding over 60 years ago, Raymond James has maintained an unwavering commitment to placing clients first through conservative decision making that keeps us well positioned over the long term.

Speaker 2

While remaining focused on the long term has not always been easy We are fully appreciated in good times. It has served us very well over time. And it's in times such as these, When even the financial system itself is challenged, that our philosophy not only carries us through but enables us to thrive. Just a few examples of our differentiated positioning that we have benefited recently from includes Tier 1 leveraged capital ratio of 11.5%, over 2x the regulatory requirement to be well capitalized. 88% of our bank deposits are FDIC insured, including nearly 95% of Raymond James Bank, amongst the highest in the entire industry, and A level rating with all three credit agencies, which Fitch reaffirmed in March at the height of the turmoil.

Speaker 2

A few weeks later, we were able to renew and upsize our 5 year Committed revolver with enhanced terms, thanks to the fantastic relationship we have with all of our bank partners. Further, we were able to buy back $350,000,000 of shares at what we believe were attractive prices, And we still have $1,100,000,000 of capacity remaining under our Board authorization. In times like these, we are reminded of the importance of keeping a long term client focused approach, And our stakeholders benefit and appreciate the firm's dedication to placing them first. Now turning to our results. Despite the challenging market and high market volatility during the 1st 6 months of the fiscal year, we generated record net revenues and record earnings.

Speaker 2

Reviewing 2nd quarter results starting on Slide 4, the firm reported record quarterly net revenues of $2,900,000,000 and net income available to common shareholders of $425,000,000 or $1.93 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was 446,000,000 or $2.03 per diluted share. The increase in interest related revenues driven by short term interest rates drove significant earnings growth over the prior year. Net revenues increased 7% and net income available to common shareholders grew 30 2%. And despite the challenging market conditions and our robust capital position, we generated Strong returns with annualized return on common equity of 70.3% and annualized adjusted return on tangible common equity of 22.3%.

Speaker 2

Moving to Slide 5. We ended the quarter with total client assets under administration of $1,200,000,000,000 PCG assets and fee based accounts of $666,000,000,000 and financial assets under management of $194,000,000,000 With our continued focus on retaining, supporting and attracting high quality financial advisors, PCG consistently generates strong organic growth, which is evident again this quarter with domestic net new assets of $21,500,000,000 representing an 8.4% annualized growth rate on the beginning of the period domestic PCG Assets. During the prior 12 months, we recruited to our domestic independent contractor and employee channels Financial Advisors with approximately $275,000,000 of trailing 12 production And nearly $38,000,000,000 of client assets at their previous firm, total clients' domestic suite and enhanced savings program balances Ended the quarter at $52,200,000,000 down 14% from December of 2022. The sequential decline reflects the expected cash sorting activity, which was partially offset by the launch of our enhanced savings program. We are pleased with the early success of our enhanced savings program.

Speaker 2

This product offered to PCG CCG clients, the Raymond James Bank is a fantastic option for clients seeking competitive rates while maintaining a high level of FDIC insurance. We believe this product is really unique in the industry and certainly appealing in the current environment. As of this week, Enhanced savings program balances have surpassed $4,500,000,000 Total bank loans Decreed 1% from the preceding quarter to $44,000,000,000 primarily reflecting a modest decline in securities based loans due to higher interest rate environment. We will touch on this more later on the call, but we plan to remain very prudent with growing our Private Client Group generated record results with quarterly net revenue of $2,140,000,000 and pretax income of 4 $41,000,000 Year over year, asset based revenues declined due to market declines. However, TCG's results were lifted by the benefit of higher interest rates and interest related revenues and fees.

Speaker 2

As Paul Schuppe will explain in more detail, this quarter was negatively impacted by some seasonal expenses as well as elevated legal costs. The Capital Markets segment generated quarterly net revenues of $302,000,000 and a pretax loss of $34,000,000 Revenues declined 27% compared to the prior year quarter, mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues. The extremely challenging market environment, particularly for Investment Banking, has strained the near term profitability of the segment. However, we are focused on managing controllable expenses as near term revenues are depressed. The Asset Management segment generated pretax income of $82,000,000 on net revenues of $216,000,000 The year over year decreases in net revenue and pretax income were largely attributable to lower asset Solid net inflows for Raymond James Investment Management helped boost financial assets under management, which should provide a tailwind in the fiscal Q3.

Speaker 2

The bank segment generated record net revenues of 5 $40,000,000 and pretax income of $91,000,000 Revenue growth was largely due to the continued expansion of the bank's Net interest margin to 3.63 percent for the quarter, up 162 basis points over the year ago quarter and 27 basis points from the preceding quarter. The NIM expansion reflected the flexible and floating nature of our balance sheet. Although as Paul Shukri will explain, we do expect some headwinds to NIM, which reached very high levels across the industry over the past couple of months. Looking at the fiscal year to date results on Slide 7. We generated record net revenues of $5,660,000,000 and record net income available to common shareholders of $932,000,000 up 4% and 21%, respectively, over the prior year's record.

Speaker 2

Additionally, we generated strong annualized return on common equity of 19.3% and annualized adjusted return on tangible common equity of 24.2% for the 6 month period. On Slide 8, the strength of the PCG and Bank segment for the first half of the year primarily reflects Whereas the weaker capital markets results reflected the challenging environment for investment banking and brokerage revenues, especially when compared to the record activity levels in the year ago period. And now I'm going to turn the call over to Paul Shuckre for a more Detailed review of the 2nd quarter financials. Paul? Thank you, Paul.

Speaker 2

Starting on Slide 10. Consolidated net revenues were a record $2,870,000,000 for the 2nd quarter, up 7% over the prior year and 3% sequentially. Being able to generate record quarterly revenues during a period when capital market revenues were so challenged Asset management and related administrative fees declined 11% compared to the prior year quarter and increased 5% sequentially due to the higher assets in fee based accounts at the end of the preceding quarter, partially offset by fewer billable days in the fiscal second quarter. This quarter, fee based assets grew 5%, providing a tailwind for asset management and related administrative fees in the fiscal third quarter. Brokerage revenues of $496,000,000 declined 12% year over year and grew 2% sequentially.

Speaker 2

This year over year decline was largely due to lower asset based trail revenues in PCG as well as lower fixed income brokerage revenues in the Capital Markets segment. I'll discuss account and service fees and net interest income shortly. Investments Banking revenues of $154,000,000 declined 34% year over year and grew 9% sequentially. As experienced across the industry, M and A revenues were particularly challenged this quarter, declining 37% year over year and 15% sequentially. Despite a healthy banking pipeline And solid new business activity, there remains a lot of uncertainty in the pace and timing of deals launching and closing Given the heightened market volatility, it remains too difficult to say when conditions will become conducive to increase investment banking revenues.

Speaker 2

Moving to Slide 11. Clients' domestic cash sweep and enhanced saving Program balances ended the quarter at $52,200,000,000 down 14% compared to the preceding quarter and representing 4.9 percent of domestic PCG client assets. $2,700,000,000 in new deposits in March as the offering was only open to net new balances until April. And a good portion of these new balances were derived from brand new clients to the firm following the Silicon Valley Bank collapse. Highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.

Speaker 2

As Paul said, the enhanced savings program balances exceeded $4,500,000,000 this week, continuing to grow nicely and partially offsetting the anticipated decline in fleet balances, largely due to the quarterly fee billings in April. So while it's difficult to parse through the disclosures to make sure we're comparing apples to apples, Of

Speaker 3

the handful of peers who

Speaker 2

have reported thus far, we estimate year over year cash sweep declines for those peers were approximately 35% to 45%. This compares to a 35% year over year decline in our domestic suite balances through March. So this dynamic of declining suite balances has really been experience of roughly the same order of magnitude for most of the firms in our industry. And as most of you know, we have been expecting, communicating and preparing for this sorting activity for quite some time. Looking forward, we expect additional cash sorting activity, Although we believe we are much closer to the end of that dynamic than we are to the beginning if rates settle out near current level, As the average suite balance per account over the approximately 3,400,000 accounts domestically is now less than $15,000 And we hope to continue to offset any further cap sorting activity through our diversified funding including the enhanced savings program, price stakes deposit franchise and other initiatives.

Speaker 2

And when the sorting dynamic does stabilize, we would then expect to grow suite balances given our strong organic growth in PCG. Meanwhile, to be prudent, we would strive to maintain a strong funding cushion of domestic cash swept to 3rd party banks, not too much lower than where it ended the March quarter. We would also plan to keep elevated cash balances in the bank segment, which grew from $1,800,000,000 in December to $5,000,000,000 at the end of the fiscal Q2. While these actions don't optimize net interest margin over the short term, We believe they give us the most flexibility over the long term. Turning to Slide 12.

Speaker 2

Combined net interest income and RJ BDP fees from 3rd party banks was $731,000,000 up 2 26% over the prior year quarter and 1% over the preceding quarter The sequential decrease in our JVDP fees from 3rd party banks was more than offset by higher firm wide net interest income. The bank segment net interest margin increased 27 basis points sequentially to 3.63% for the quarter, And the average yield on RJBDP balances with 3rd party banks increased 53 basis points to 3.25%. Our long standing approach of maintaining high concentration of floating rate assets not only helped drive more immediate upside Looking forward, we expect combined net interest income and RJBDP fees from 3rd party banks to decline sequentially in fiscal 3rd quarter due to a decrease in 3rd party RJBDP fees given the lower average balances with 3rd party banks. We would also expect the bank segment's NIM to contract From the Q2, given the higher level of cash balances we plan to maintain during this volatile period as well as the impact from higher cost diversified funding sources. But as we have always said, Instead of focusing on maximizing NIM, we are focused on preserving flexibility and growing net interest income over the long term, which we still believe we are well positioned to do after the cash sorting dynamic is behind us.

Speaker 2

In the near term, We expect headwinds for the net interest income and RGBT fees for the reasons I just explained. Moving to consolidated expenses on Slide 13. Compensation expense was $1,800,000,000 And the total compensation ratio for the quarter was 63.3%. The adjusted compensation ratio was 62.8% during the quarter. The compensation ratio continues to benefit from higher net interest income and our JVDP fees from 3rd party banks.

Speaker 2

The sequential increase in compensation reflects higher revenues as well as the impact of salary increases effective on January 1 along with the reset of payroll taxes at the beginning of the calendar year. We are very pleased to generate a 62.8% adjusted compensation ratio given these factors and the extremely challenging market environment in Capital Markets. Noncompensation expenses of 4.96 $1,000,000 increased 25% sequentially. Adjusting for acquisition related noncompensation expenses And the favorable settlement received in the fiscal Q1, which are all included in our non GAAP earning adjustments, Non compensation expenses grew 16% during the quarter. This increase was largely driven by higher Legal and regulatory costs, including an unfavorable arbitration award totaling $20,000,000 along with higher communication and information processing expenses, which reflect continued technology investments and the seasonal impact of year end mailing.

Speaker 2

The bank loan provision for credit losses for the quarter of $28,000,000 largely reflects the charge off of a C and I loan has been challenged for several quarters as well as higher allowances in the CRE portfolio. I'll discuss more related Credit quality of the bank segment shortly. In summary, we remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. While there has been some noise with elevated legal and regulatory expenses this quarter And there are always some seasonal expenses that hit in the 1st calendar quarter of the year. None of the non compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year.

Speaker 2

But legal and regulatory expenses are inherently difficult to predict. Slide 14 shows the pretax margin trend over the past 5 quarters. In the current quarter, we generated a These strong results given the industry wide challenges impacting capital markets. On Slide 15, At quarter end, total assets were $79,000,000,000 a 3% sequential increase largely reflecting the $3,200,000,000 increase of cash balances in the bank segment during the quarter. Liquidity and capital remain very strong.

Speaker 2

RGM corporate cash at the parent ended the quarter at $1,800,000,000 well above our $1,200,000,000 target. The Tier 1 leverage ratio of 11.5% And total capital ratio of 21.4% are both more than double the regulatory requirements to be well capitalized. The 11.5 percent Tier 1 leverage ratio reflects over $1,000,000,000 of excess capital above our conservative 10% target, which would still be 2x the regulatory requirement to be well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. We were pleased to have our A- credit rating reaffirmed by Fitch in mid March.

Speaker 2

In the announcement, Fitch cited the firm's strong capital cushion, Significant deposit funding and access to unsecured debt markets, among other drivers, is the reason for the rating. Also in April, we renewed our revolving credit facility and expanded it from $500,000,000 to $750,000,000 Our strong balance sheet and long standing relationships with our banking partners enabled us to upsize the 5 year committed corporate revolver with enhanced terms to further strengthen our contingent liquidity sources. The ability to execute this facility So I'd like to thank all of you for your continued support and partnership. We also have other significant sources of contingent funding. For example, just to be proactive, given the market uncertainty in March, we increased our SHLB borrowings in the bank segment by only $500,000,000 from December 31 to March 31.

Speaker 2

And given our strong cash position, We've already paid $200,000,000 of that down in April. That leaves us more than $9,000,000,000 of FHLB capacity in the bank segment. Slide 16 provides a summary of our capital actions over the past 5 quarters. During the fiscal Q2, the firm repurchased 3,750,000 shares of common stock for $350,000,000 at an average price of $93 per share. As of April 26, approximately 1.1 $1,000,000,000 remained available under the Board's approved common stock repurchase authorization, and we currently intend on continuing our planned repurchases as we discussed previously, particularly as this market volatility has provided attractive opportunities for us And we don't plan on using as much capital to support balance sheet growth over the next 3 to 6 months.

Speaker 2

Lastly, on Slide 17, We provided key credit metrics for the bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of loan portfolio remains healthy. Criticized loans as a percentage of total loans held for investment ended the quarter at just 0.92%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 0.94%. The bank loan allowance for credit losses and corporate loans as a percentage of corporate loans held for investment was 1.67% atquarterend.

Speaker 2

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. I know there's been a lot of on commercial real estate across the industry given the challenges with property value and interest rates. So let me briefly cover our portfolio. Across the bank segment, we have CRE and REIT loans of approximately $8,800,000,000 which represents 20% of our total loans. Our office portfolio is only 17% of these real estate loans.

Speaker 2

So our office portfolio only represents approximately 3.5% of the bank segment's total loans. Based on the underwriting and origination, along with the most recent appraisals, the average loan to value of this office portfolio is somewhere around 60%, Which is probably a little bit higher now given pressure on valuations in the industry, but still providing us a lot of cushion on this portfolio on average. Overall, we have deliberately limited the exposure to office real estate, and we underwrote office loans with what we believe are conservative criteria, but we continue to monitor each loan closely given the industry wide challenges. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Speaker 2

Thank you, Paul. And as I said at the start of the call, I'm pleased with our results for the 1st 6 months of fiscal 2023 and our ability to generate record earnings during what continues to be a very volatile market. And while there is still a lot of near term economic uncertainty, Steve? We are in a position of strength, and I believe we are well positioned to drive growth over the long term across all of our In the Private Client Group, next quarter results will be favorably impacted by the 5% sequential increase of assets fee based account. However, we do expect to have some headwinds from lower RJPEP fees from 3rd party banks given lower average balances.

Speaker 2

Focusing more on the long term, I'm optimistic we will continue delivering industry leading growth As current and prospective advisors are attracted to our client focused values and our leading technology and product solutions. For example, in our current advisor recruiting pipeline, we have several commitments from teams with $5,000,000 to $20,000,000 of annual production. In the Capital Markets segment, while M and A pipelines remain healthy and engagement levels are good, The pace and timing of launching and closing transactions will be challenged until market conditions stabilize. And in the fixed income space, The depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. However, SumRage enhances our position as this business typically benefits from elevated rate volatility and has produced excellent results since joining us.

Speaker 2

While we expect continued industry wide challenges over the next couple of quarters, over the long term, We are well positioned across the Capital Markets business for growth given the investments we made over the past 5 years, which have significantly increased our productive capacity and market share. We will continue to prudently manage expenses in these businesses As the near term revenues continue to come under pressure, obviously, we will take more significant actions In the Asset Management segment, financial assets under management are starting the fiscal third quarter up 5% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the fiscal Q3. We remain confident that strong growth of assets in 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, which generated solid net inflows this quarter to help drive further growth through increased scale, distribution, operational and marketing synergies. And in the bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding source.

Speaker 2

While we'll continue to support our PCG clients When their demand for loans eventually recover, we will be very prudent in growing corporate loans given market uncertainty. We believe there will be more attractive opportunities in the future if spreads widen to reflect the higher cost of funding and or higher premium required for credit risk across the entire banking industry. And Just as we did during uncertain market environments in the past, we have been and will continue to be opportunistic in selling certain loans to further derisk the corporate portfolio, especially when we believe the secondary market prices do not fully reflect the downside risk. So overall, our approach in the bank segment over the next 3 to 6 months is to build as much dry powder as possible for what we believe will be a more attractive and opportunistic environment for loan growth in fiscal 2024. In closing, we believe we are well positioned with strong prospects for future growth and ample cash and liquidity.

Speaker 2

Advisors and their associates for their continued perseverance and dedication to providing excellent service to their clients each and every day. The strength and stability of our firm is a direct reflection of your commitment. So thank you all for all you do. And with that, operator, that concludes my remarks. Then we'll open up the line for questions.

Operator

Thank

Speaker 4

The first question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.

Speaker 2

Great. Good afternoon. Paul, Paul, how are you? Good. I hopped on a minute late, but a question just on the net interest income outlook.

Speaker 2

I just want to make sure I understood the commentary. So is the expectation that it's going to take a near term step back And then can grow off of whatever that new base is? Or Paul, are you saying that you'll kind of resume growth off of the fiscal second quarter level? And I guess related, I heard that you're going to operate, I think, with higher reserves. So just how much of a drag is that?

Speaker 2

And I guess what would make you comfortable bringing that down? I'll let the other Paul go through the NIM, but I don't think we anticipate right now higher reserves. I mean reserve cash maybe will be carrying a little more cash, but I don't know which reserve you're referring to. Yes, I was referring to the cash reserve. Just the cash.

Speaker 2

Yes. There's more cash in the bank. Yes. So we did increase the cash balances at the bank. Just given the volatility in March, we thought it would be prudent.

Speaker 2

So we finished the quarter up, I think, dollars 5,000,000,000 So we were up $4,000,000,000 for the quarter, ending the quarter at $5,000,000,000 of cash at the bank segment. And so that is a drag on NIM because you're earning Closer to 5% on that versus the 7% or so we're earning on new loans that we're putting on the book. But we think that's prudent Given the volatility and in terms of the outlook going forward, near term, we do expect a pullback Net interest income and BDP fees, when you look at those on a combined basis, Yes. We plan on keeping the cash swept to 3rd party banks at around the current level, just because we think That $9,000,000,000 gives us a nice cushion. It also offers clients maximum FDIC insurance, which we all know is Really important for clients right now.

Speaker 2

And so by doing that, even at $9,000,000,000 those fees are probably Average balance, it will be down 25% sequentially. And so those fees will be down 25%, roughly depending on what happens with rates and other things. And then the net interest income We'll be pressured by having higher cash balances and then higher cost of funding that we raised since Launching the enhanced savings program in March. So all net together, I think that would result in probably somewhere around a 10% decline sequentially. And then As we start growing balances from there, then that would be probably a good jumping off point.

Speaker 2

Got it. Okay. Great color. I guess maybe just I want to follow-up on the same topic. And Paul, you just mentioned the enhanced savings program.

Speaker 2

It looks like you're having Nice success there. And I'm assuming that it's still reasonably early in terms of the advisor penetration. Just love to maybe talk about kind of the expectation for growth there. And maybe could advisors be More active moving their customers cash there in the near term, just given that it's new. And so that could Do you pressure the I guess the rate on the liability side?

Speaker 2

Or do you have data Just suggesting that the majority that you're seeking cash has already moved out of the accounts. I would tell you, when we look at sort of the trends, it looks like a lot of the sorting activity, the higher yield Activity has occurred. When we rolled out the enhanced savings program in March, it was actually to new money to the firm Until we expanded it in April to certain security sales and new money to the bank. But we raised $2,700,000,000 of brand new flows to the firm during the month of March, and most of it was Yes, mid March during the banking turmoil. So we were pleased to see that those cash balances come in.

Speaker 2

But even then, We're close to $5,000,000,000 today, these balances. That represents roughly 10% Of the sweep and enhanced yield savings balances, whereas most of our peers are at 50% of their balances being in enhanced yield savings. Our relative cost of funds when you look at those two balances together is still very attractive even though we've been able to be More generous to clients on the sweep balances in terms of passing on rates via the sweeps as well. So we feel like we're well positioned. And Right now, what we're really hoping to do is a lot of clients hold money market fund positions and would prefer to have FDIC insurance.

Speaker 2

And so a lot of those balances now are moving to the enhanced yield savings, which we think is really a win win for the clients and the firm.

Speaker 4

And the next question comes from the line of Kyle Voigt with ABW. Please proceed with your question.

Speaker 3

Hi, good evening. Maybe just a first question on the leverage ratio, obviously sitting at 11.5%. Just curious whether you still feel that 10% target is a good level to think about as a near term target, especially with The macro environment and kind of the uncertainty that we're facing with the macro right now.

Speaker 2

Yes. That's the hard one to peg with events like happening today in the press. Even we're going to be more cautious until The industry is sorting down and that we see kind of a level field. We think that the 10% is a good target, but in the short term, we're probably not Be over aggressive to it, especially if we're not growing the bank aggressively. We don't think that's the smart Right now, we will continue to let SBL balances and mortgage our client balances on those.

Speaker 2

Those are the priority. We're not sure it's a good time to get into the We're increasing the corporate side of the lending right now just because of the market. So shorter term, I think the capital ratio is going to be over the 10%, but we're not going to change the goal. But during the volatility like we've seen with Today's news and other things, we're going to be cautious till we're pretty comfortable the market settles down. The only thing I would add to that is a lot of other banks have to worry about The impact of unrealized losses on their securities portfolio, and we have some of those as well, obviously.

Speaker 2

But I think we would be north of 10% even if we factored in all of those losses because we kept duration relatively contained on our balance sheet. So Yes. We're in a position of strength when you look at our capital ratios and feel like we have a lot of flexibility.

Speaker 3

Great. And then just maybe a follow-up question to that. Just with your stock price, Where it's at today, obviously, in the Q1, calendar Q1, you were up the buyback a bit here. But I was just wondering if you can kind compared to the current valuation of your stock to maybe any opportunities that you're seeing in the M and A market. If you kind of could expand upon Some of those opportunities that you're seeing and what segments you're seeing more opportunity in light of everything that's happened in the banking space as well?

Speaker 3

That would be helpful.

Speaker 2

Yes. We've done a really good job of staying close to the people that we would like to join the firm And those opportunities are clearly up, and that includes the M and A and the private client space. Again, whether they get transactable because of price or other issues or some are more complex than others. But those conversations that Kind of went away, some have come back. But price adjustments for the buyer and seller aren't always in line With the market, we as we've said in here, don't expect a near term increase in our M and A volume Until this market settles out, I think lending has to kind of return and that's not our view not going to happen until we see interest rates settle and people get used So but we think there will be M and A opportunity.

Speaker 2

We have both the capital and liquidity to handle that. Our balance sheet, you know, it's very leveraged and we have access. So we're as most downturns, we've been able to take advantage of the market. Our presumption is we would be able to, but again, that all depends on buyers and sellers and opportunities and other factors in the market.

Speaker 4

And the next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Speaker 5

Thanks, guys. Good afternoon. So can we start with the outlook for NII? If I heard you correctly, I think you guys have guided to down 10% firm wide NII. Can you help with some of the underlying assumptions in terms of NIM firm wide?

Speaker 5

And maybe how are you thinking about the ultimate amount of cash that you need to run with on the balance sheet? And obviously, it would be helpful to know what you're assuming for interest rates for the Q2 on the bidding of the 10% decline.

Speaker 2

Yes. The 10% decline, Alex, includes the BDB piece as well. So it's kind of a combined basis as we show it in the presentation. And that factors in The 25 basis point increase that the market is expecting in May. And so In terms of the cash that we plan on holding on the bank's balance sheet, we plan on holding more than we need for during these volatile times More than we hopefully need during these volatile times, just to stay prudent.

Speaker 2

And as Paul said, We're being deliberate in growing corporate loans and we're being actually opportunistic in selling corporate loans. Not much balance sheet growth forecasted over the next at least during this period of volatility. And in some cases, For example, we've already sold over $400,000,000 of corporate loans that we had rated lower from a credit perspective, and we're able to get near par value For those loans, we had marks on them that were higher than what the price we were able to get. We don't believe that the market is fully factoring in potentially the downside risk on certain loans. And so just as we've done In other volatile periods, we're sort of being opportunistic, knowing that we're just building dry powder, both capital and hopefully funding dry powder to Accelerate growth when the opportunities look more attractive.

Speaker 5

Got you. Okay. Yes, combined makes a lot more sense. I appreciate that. My second question was around non comp expenses.

Speaker 5

And I appreciate that you guys think this is close to what you were budgeting for. But If we look at non comp ex provisions and backing out the $20,000,000 of the arbitration fee, it looks like it was up almost $30,000,000 sequentially. So maybe help us reconcile what's driving the growth and just given your outlook for effectively peak rates revenues in challenging capital markets backdrop, when should we expect you guys to become a little bit more aggressive on cost savings initiatives?

Speaker 2

Yes. The first two quarters are always a little bit lumpy in terms of the non compensation expenses. So if you look at it kind of on a combined basis, backing out the acquisition related costs and backing out the loan loss provision, which is how we made the guidance, It's around, I think, dollars 830,000,000 for the 1st 6 months of the year, which actually trends lower than the $1,700,000,000 guidance I provided for the non comp expenses excluding provision. So we still we're not changing that guidance For the time being, because none of the other than legal and regulatory, which is inherently unpredictable, and we had a $20,000,000 arbitration award, which we were not expecting, obviously, this quarter. We are Most of the other line items are kind of coming in, in line with what we forecasted when we provided that guidance.

Speaker 2

But of course, if things change between now and The next 6 months of the fiscal year, then we certainly will update that and let you all know. I think that Harrison looks bigger because of the $30,000,000 last year Last quarter, recovery that we non GAAP to. But we think they're in line. And Yes, legal fees certainly were higher. That settlement was higher.

Speaker 2

But that's really driving and that's kind of lumpy. We think the run rate and the guidance is still And the ballpark from what we can see. And with that being said, while it's coming in line with what we expected, we're also, Given the market environment going to be very deliberate in managing all those expenses while still investing in growth and high service levels.

Speaker 4

And the next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.

Speaker 6

Great. Thank you very much. Appreciate you taking the question this evening. Maybe stepping back and perhaps it's just too soon to tell, As you think about some of the structural changes that may evolve for the banking industry on the other side of the banking collapse and maybe your early stage conversation with the regulators. How do you see the evolution for regulatory capital or leverage ratios?

Speaker 6

Does that affect your $0.10 bogey? And then maybe how you think about long term growth in earning assets and the NIM associated with that?

Speaker 2

Well, first on capital, I think even at 10%, we're well set over what anyone is Our competitors and other things. We're we think that's still a very conservative target. Can't see any regulations That would make anything even close to that. So we'd still have buffer there. So we're not worried about capital.

Speaker 2

Like everything, given the environment, we've been focused on liquidity. That's why we've rolled out the enhanced savings program And they're very hard in that. Even after the quarter, we paid our $1,200,000,000 in asset management fees come out of there. We had tax payments that usually go over 1,000,000,000 Our cash balances are still steady. So on the liquidity side, the question is just how much do we have to raise than the higher yielded programs.

Speaker 2

But We feel good about our liquidity and not even touching our really our FHLB advances or that 9 $1,000,000,000 buffer. So 3rd then becomes just when you start investing in that order, when you start investing in the growth in assets and And that we're just going to have to decide. We're not going to be really aggressive. Where we see opportunities, we'll take them. If we see M and A opportunities we We'll act on them and we just don't think given the banking market, rising rates And if people are predicting a recessionary environment, it's the time to be very aggressive in growing corporate loans.

Speaker 2

I would say our growth plans are not really to expand the balance sheet much in this next quarter. I think you asked a question about the future NIM prospects for the industry. And I think the banking industry Pretty efficient. The good news is we already have a very conservative level of capital. So I think we're well, as Paul said, well positioned for those changes.

Speaker 2

But To the extent the capital rules do change or increase, and certainly that the cost of the average deposit in the industry, as all the big banks were saying, even the largest banks were That's increasing as well. Then you would expect all else being equal for spreads to expand across the industry to preserve a reasonable NIM And a reasonable return on equity for the industry. And so to the extent that we can be patient now and wait for more attractive opportunities, at least It's a more stable environment. We think that will serve our shareholders well over the long term. I think if you really look at the industry over the last few years, Certainly, deposits were extremely cheap and rates are going up.

Speaker 2

But honestly, spreads weren't really what you'd expected historically given The types of loans folks are making, so it's natural in this kind of environment where people are being careful and the cost of funds are higher That I think spreads are going to expand. We believe that. So we can't say when, but we believe that will happen. And that's why we'll be a little more prudent In this next quarter or 2 with the balance sheet as we watch what happens in the market. We've shown also in the other times whether we sold off COVID loans So other things during those periods, we found we've shown we could expand the balance sheet pretty quickly.

Speaker 2

So we're not worried about that. We're just worried about making sure we do it in the right environment.

Speaker 6

Just a quick follow-up and just a jumping off point there. As you think about maybe, Paul, if you could just unpack, I think I understand the difference between the sort of bank versus the 3rd party sweep impact, but maybe unpack maybe where we are on a spot basis for the NIM? And then as you think about This year, how to think about maybe earning asset levels because I hear a couple of different things, cautious loan growth, maybe some run off in the corporate loan portfolio from sales, Maybe some shrinkage on the investment securities book. How to think about maybe framing where the end of year might be in terms of your associated with that?

Speaker 2

Hard to know where we're going to be. A lot can change as we've learned in the last month or 2. A lot can change certainly in the next 6 months. And we're going to, as Paul said, we're going to be there for our clients in the Private Client Group business. Half of our loans are securities based loans and mortgages.

Speaker 2

And to the extent Yes, demand picks back up over the next 6 months. Now they've been pressured in a higher in a rising rate environment, but demand could come back if clients get Used to the new normal in terms of rates, and we want to be there to support them. As Paul said, we'll also be more conservative in sort of growing Corporate loans, at least until we have a better conviction around the risk adjusted returns and growing that book. So in terms of the jumping off NIM, and I would expect just with the higher cash balances and The higher cost of funding, which again, we our patients have surfaced well with the higher cost of funding as well because, Again, like I said, we only have 10% of our sweep and enhanced yield savings balances in the enhanced yield savings program. Many of our competitors are at 40% or 50%.

Speaker 2

So we have a lot of ability to grow those balances. But As we grow those balances, it would pressure NIMs. So we think there's probably 20 basis points or so of pressure In the upcoming quarter, maybe up to 30 basis points, again, depending on what happens with the rate increases. And again, that's due to the higher funding sources and the elevated

Speaker 4

And the next question comes from the line of Manan Gosalia with Morgan Stanley.

Speaker 2

Can you take us through what happened

Speaker 7

with cash floating in March and maybe since then? And I'll ask you, you noted in your press release last month that cash balances as of March 21 were near 51,000,000,000 So it looks like about $1,500,000,000 flowed out in the last week if you exclude the enhanced savings program. So maybe take us through what you were hearing from FAs and customers back then and what gives you the confidence that this will slow from here?

Speaker 2

Yes. I would say just jumping to kind of where we are today, for example. So We ended the quarter with sweep balances and enhanced saving program balances at $52,200,000,000 You fast forward to where we are today, and we're right around $52,000,000,000 in sweep and enhanced saving program balances. And that reflects the Fee billing that we do quarterly, which was over $1,200,000,000 and also annual income tax payments. So We feel comfortable and confident that the sorting dynamic is closer to the end than it has been to the beginning.

Speaker 2

As I said on the comments, The average cash per account in the suite program now is right around $15,000 which is sort of a low point as far as we look back and have that data. So we're confident that things are closer to the end, but we don't know how much longer obviously that dynamic Meanwhile, we'll continue to be offer attractive products to our clients that give them good yields and give them good FDIC coverage Sue, keep deposit balances as strong as we can. I think you asked the SA reaction there Look, their job was to invest idle cash and they put it in money markets and they didn't leave the system, they put it in money markets Then they put it in treasuries, CDs to get yields. And they said, just give us the yield. We like the program.

Speaker 2

So once we rolled it out, We've had money flowing in, and so our job is to manage just how much of it we really need. It's in the system. We have a very good product, And we're just going to have to balance that given operations. We feel very comfortable at our levels right now and with the reserves we have on top that really haven't touched. So I think it's going to be just a process of managing how much of the higher cost funds you need, giving Movement in the market, so.

Speaker 2

One other metric that I think is pertinent on this topic is sort of the Sort of deposit aggregate deposit beta since rates started rising. And really, You have to look at it both at the sweep program and also adding the enhanced saving program balances. And on a spot basis, that Aggregate deposit beta has only been for us 25% to 30%. And we've been which is lower than The competitors that we've seen so far, again, they have much higher mix of the higher cost funding at this juncture. And that's with us Some incremental higher cost deposits, 25% to 30% aggregate deposit beta at this point is much lower than I think we all expected at this point in the cycle.

Speaker 2

So we have a lot of kind of capacity and bandwidth to add higher cost funding while still generating attractive returns.

Speaker 7

That's helpful. And maybe as a related question then. Can you talk about the puts and takes on the 3rd party bank fee rates from your as we think over the next few quarters, so after the test stops hiking rates? I'm assuming that deposit betas will continue to rise and be a drag, but I guess at the same time, the demand for these deposits Will also likely be strong. Is there some offset from the 12.5 basis points or so spread that you make on that portfolio?

Speaker 2

There's no doubt. I mean, there's huge demand for deposits in the system. So the extent you have cash, It's banks are hungry for it. So the question is, yes, what happens with rates? And you would assume with that demand, you might get the spread should increase, Right.

Speaker 2

So yes. So if the Fed stops raising or you have a recessionary cash returning Out of the markets, back into the regular sweep programs and deposit programs, you think you'd our prediction is you would Yes. Those spreads would increase, but we're not there at this point today. So It's really hard looking forward right now. If we want to look forward a year or so, we feel a lot more comfortable the next quarter just because we've been in the middle of So it's March of a very dynamic market.

Speaker 7

So it sounds like if Balance is relatively flat. Your 3rd party bank fees should also be relatively flat beyond the 2nd quarter?

Speaker 2

Yes. Well, you have to look at the average balances will be down 25% even if we keep them flat with where they ended the quarter. So but beyond that, then It will just depend on where the the balances will drive it more so than the spread that we earned from the 3rd party banks. I guess it's the easiest way to describe it.

Speaker 7

Yes, got it. Got it. And then just a quick clarification on the office portfolio. You mentioned an LTV of 50%. How much of that is based on new appraisals versus valuation at the time the loan was made?

Speaker 2

It's a little bit of both, both on the to the extent that we have new appraisals that's factored into it. But I mean,

Speaker 6

I think you can assume, as I

Speaker 2

said in the prepared remarks, that Valuations are probably lower now than even that new appraisal date. So but the point being is We still have a reasonable cushion and underwrote those properties conservatively, but we also expect there to be some challenges if the Economy continues to soften, particularly for real estate. And in that percentage, too, the extent you have REIT loans where Even our experience in 'eight and 'nine was that those diverse portfolios came through pretty well. And then when you have single property loans, You're more idiosyncratic, and so you just have to watch. But our total mix of commercial office is relatively low for any bank.

Speaker 4

And the next question comes from the line of Jim Mitchell with Seaport Global. Please proceed with your question.

Speaker 2

Hey, good evening. Just maybe circling back on the Hand Savings program, maybe a clarification, Paul. Are you saying in March you had restrictions that required net new money and now those restrictions are off? And if that's the case, How do you dial that back if you want to? Is it just price?

Speaker 2

Or just want to make sure I understood what you're saying on the enhanced savings product. Yes. The restrictions are we opened it up for sales of certain securities for people that wanted to move from money markets back into cash, Which is the only reason they've been in the money markets was the spread. So we've opened that up. And we have two choices.

Speaker 2

We can say, We've given time limits. If we need more, we can extend the time limits. Or if we want to cut it off, we can cut it off. Or You can always do that with rate and let it find and seek its own level. So we have all those options, And we're just watching the balances.

Speaker 2

We're comfortable at these cash balances. We're actually comfortable lower, but we're Raymond James. We always seem to Be accused of having excess capital and excess balances. So we'll just dial it back or stop it or If we open it up to other securities type that you really need it, there's treasuries, there's CDs, there's other things that have stayed on the system seeking yield. So we have a lot of flexibility.

Speaker 2

It just depends how much we need. Okay. So is this strategy from here If and when we start to see sweep balances stabilize, and it sounds like at least the outflows are slowing a little bit in April, we'll see if that continues. But if that Does stabilize? Do you sort of is this a level of deposits that you're comfortable with?

Speaker 2

You would sort of stop or slow the enhanced savings, if you could stabilize all in cash levels at current levels? Is this the defending levels that you're thinking about? Yes. We think we're at a level, even when we were at The quarter when we dropped below 50, we were fine. But we'll keep it till we have extra in this environment.

Speaker 2

We'd rather if more flows in, we'll For a while, you can always again lower rate, have it flow out the other yielding instruments. But Yes, we're not you're not trying to get it back into the 70s, that's for sure. We had excess too much cash then, but there is no place to put it. But I think somewhere in the 50s level, we'll try to we would start slowing it down. Right.

Speaker 2

Okay, great. Thanks for the clarifications.

Speaker 4

And the next question comes from the line of Brennan Hawken with UBS. Please proceed with your question.

Operator

Good afternoon. Thanks for taking my questions. One, just it sounded like from Paul, should brief comments on the comp ratio that if unless we see some kind of substantial change in capital markets environment that the comp ratio is probably this is probably a reasonable zone to think about until that Flex. Number 1, is that right? And then if we do see a recovery in the capital markets revenue, what kind of order of magnitude would you expect to feed through and pull down that comp ratio?

Speaker 2

Yes. I mean, it's a mix it's always complicated because Revenue mix matters when you talk about our comp ratio. So we expect PCG revenues to be up given the higher fees, Assets and fee based accounts, but that has a higher compensation ratio associated with it than our net NII does, Obviously. And so but again, to the extent, capital markets revenues rebounds to healthier levels, not even record levels, but that they were enjoying in the last couple of years, but just healthy levels, then that would be that would Results, all else being equal, and an improvement to the comp ratio. So again, it's just hard given the revenue mix.

Speaker 2

I think 63% roughly for us historically has been very low, and that's been helped by The high levels of interest income and BDP fees that are not directly compensable to the producers, but I think the revenue mix going forward will dictate what the result will be. I think anywhere close to 63 percent I mean, our guidance was 66 Central lower just a year ago, a little bit more than a year ago. And that would have been historically a pretty attractive place to be. I'm not saying that's where we're going to get to, but if we can stay anywhere close to this range, we'd be pleased with that.

Operator

Got it. Okay. Yes, that makes sense with the 10% decline in RJPPP. So one more on cash and deposit dynamics. I'm sorry it's been a real dead horse to beat here.

Operator

But You gave the trends quarter to date in the enhanced program, which is really helpful. Could you also speak to like overall trends in cash quarter to date? And then if What we're seeing in the enhanced program would be selling out of the purchase money fund and into the Deposit program, wouldn't then we see you moving in the direction of the peers? Paul Schuckery, I think commented a few times on how you're at 10% and peers are at 50%. Does that mean you're going

Speaker 2

to converge to that level? Or would you be pulling on some of those price and Are there levers that you referenced before to prevent that from happening? Yes. So the number one thing in the banking business, I think maybe people forgot over the last decade, liquidity in protecting stable deposits. So that's number 1.

Speaker 2

So that's It really depends on the deposit level. And to the extent we've given kind of a general target to you on the deposit levels, you just You have to compete with rates and to grow them unless market conditions change, and we don't know when that will happen. So Yes. If the market keeps doing that, my guess is ours will go up over 10% and theirs will go up over 50% because you get those deposits repriced and To price you're repricing more, that's going to be a trend for everybody. It will be industry wide.

Speaker 2

If it's idiosyncratic For one institution, for some reason that they need a lot more, it's going to go up higher. So a lot of that's market I think the biggest thing people forget when we limited kind of the money we put into banks for many years at 50 Percent. And then when TriState joined, we upped it. We have less leverage. About 70% of our deposits go roughly to our banks.

Speaker 2

We have competitors at 90. And if you're up, and it's not a criticism there, but if you're at 90, you got to be more aggressive for funding. We have more of a buffer. So we'll just watch it and play it by ear and watch it closely and do what we have to do to make sure we And the outcome will be how much of higher cost deposits we have to have, but we're not doing it just to raise Costs, we're only going to do that if we need it. And the only other thing I'll add to that is we have over $40,000,000,000 Purchased money market funds, our clients have over $40,000,000,000 of purchased money market funds on the platform.

Speaker 2

So all the cash really stayed within the system. To the extent that and we earn very little So to the extent that our clients prefer to have the FDIC insurance At the attractive rate that we would be willing to offer that we are offering today, then it could really be a win win for the client and For the firm, because now that cash, even though it's higher cost funding relative to our suites, can give us Generate more economics than it's staying in the purchase money market funds. So you kind of have to look at the holistic picture to determine whether or not it's really a win win. And as Paul said earlier, we always strive to look for those win win opportunities for both clients, advisors and the firm. And part of the comfort we've had is just our nature.

Speaker 2

When you look at Raymond James Bank history to have about 95% of the deposits insured, We went way out of our way and paid money in programs to make sure they were insured. Just as a matter of course, we weren't worried about We aren't worried about uninsured deposits that 2 years ago, deposits were flushed. But typical for us, we just look down range and say, okay, For the premium, it's worth it to have for clients to be protected, and I think it keeps our funding sources more stable.

Operator

Okay. Thanks for that color. That's helpful. And also for the added points on your philosophy. Could you touch on the point about overall cash trends quarter to date beyond just the enhanced?

Speaker 2

Yes. As I said, we Today, right around where we ended the quarter, we're right around $52,000,000,000 of sweep And enhanced saving program balances. I think the enhanced saving program balances are over $4,500,000,000 And again, To be flat in the month of April with the tax payments and the quarterly fee billing, we think is A good result and hopefully, pretends well for the dynamic going forward.

Operator

Yes. Sorry, I missed that. Thanks for hitting on it for me again.

Speaker 2

No worries. And there are no further questions

Speaker 4

at this time. I'll now turn the presentation back to Mr.

Speaker 2

Yes. Good. Thank you all for joining us. I know you're all busy given All the dynamics in the market. So obviously, uncertain market, but again, I think the conservative way we run the firm really

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Earnings Conference Call
Raymond James Q2 2023
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