Raymond James Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to Raymond James Financial's Third 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 Christy Wong, Senior Vice President of Investor Relations at Raymond James Financial.

Speaker 1

Good evening, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer and Paul 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 general economic conditions. In addition, words such as may, will, could, anticipates, expects, believes or continue or negative of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements.

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'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Speaker 2

Good evening. Thank you for joining us today. Since our last earnings call, we hosted our 2 major advisor conferences for both the independent and employee affiliation channels and also had our Chairman's Council recognition trip for our top employee advisors. I'm so proud of our advisors' unwavering dedication to serving their clients and helping them to navigate these volatile and uncertain times. Our advisors have also expressed their appreciation of our commitment to managing the firm for the long term And always striving to be a source of strength and stability for them and their clients.

Speaker 2

It's these shared values that have resulted in our success through multiple cycles since our founding and what makes me confident about our continued success in the future. Now turning to our results. Despite the challenging environment and elevated market volatility since the Federal Reserve started raising interest rates, We generated record net revenues and earnings for the 1st 9 months of the fiscal year. Reviewing Q3 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 $369,000,000 or $1.71 per diluted share. Excluding expenses related to acquisition, adjusted net income available to common shareholders was $399,000,000 or $1.85 per diluted share.

Speaker 2

The increase in interest related revenues driven by Higher short term interest rates drove significant earnings growth over the prior year. Net revenues increased 7% and net income Available to common shareholders grew 23%. Quarterly results were negatively impacted by elevated provisions For legal and regulatory matters of approximately $65,000,000 and bank loan provisions for credit losses of $54,000,000 which was predominantly driven by significantly weakened macroeconomic assumptions for the Moody's CRE Price Index utilized in our CECL models. Notwithstanding these items, We had a solid quarter in a tough market environment. We generated strong returns with annualized returns on common equity of 14.9% and annualized adjusted returns on tangible common equity of 19.7%.

Speaker 2

We believe this is a leading result, especially considering our strong capital base. Moving to Slide 5. The strength of our PCG business really shine, driving record assets this quarter. We ended the quarter with record total client assets Under administration of $1,280,000,000,000 record TCG assets and fee based accounts of $697,000,000,000 and financial assets under management of $201,000,000,000 With our continued focus on retaining, supporting and attracting high quality financial advisors, PCG consistently generates strong organic growth, which was evident again this quarter with domestic net new assets of 14 $400,000,000 representing a 5.4% annualized growth rate on the beginning of the period domestic TCG assets. However, I'll note net new assets in our advisor count were negatively impacted by an independent contractor relationship whose affiliation with the firm ended in the fiscal Q3.

Speaker 2

This was a planned and mutual separation And more than 60% of the assets and advisors stayed with Raymond James. The impact of the portion that moved off platform this quarter was $4,600,000,000 in assets and 60 financial advisors. So our net new Asset metrics would have been even stronger after adjusting for this separation, which we do not believe will negatively impact our profitability. During the prior 12 months, we recruited to our domestic independent contractor and employee channels Financial advisors with approximately $282,000,000,000 of trailing 12 month production and nearly $38,000,000,000 of client assets at their previous firms. Total clients' domestic sweep and enhanced savings program balances It is a quarter at $58,000,000,000 up 11% from March of 2023.

Speaker 2

The enhanced savings program with its competitive rate and robust FDIC insurance continued to attract significant cash this quarter, Offsetting a decline in client suite balances largely due to quarterly fee billings and tax payments in April. Dola Bank loans decreased 1% from the preceding quarter to $43,000,000,000 primarily reflecting a modest decline in corporate loans as new origination demand continues to be tepid in the market. Moving to Slide 6. Private Client Group generated record results with quarterly net revenues of $2,180,000,000 and pre tax income of 411 $1,000,000 Year over year, asset based revenues declined due to market decline. However, PCG results were lifted by the benefit of higher interest rates and interest related revenues and fees.

Speaker 2

The Capital Markets segment generated quarterly net revenues of $276,000,000 and a pre tax loss of $34,000,000 Revenues declined 28% compared to the prior year quarter, mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues. The extremely challenging market environment, particularly for Investment Banking, has strained the near term profitability of the segment's results. As we explained at Analyst and Investor Day, the segment's results are negatively impacted by amortization, Share based compensation for prior years as well as growth investments. However, We are focused on managing controllable expenses as near term revenues are depressed. The Asset Management segment generated pretax income of $89,000,000 on net revenues of $226,000,000 The increase in net revenues and pre tax income over the preceding quarter were largely a result of higher assets and fee based accounts.

Speaker 2

The bank segment generated net revenues of $514,000,000 and pretax income of $66,000,000 3rd quarter NIM for the bank segment of 3.26% rose 85 basis points over the year ago quarter, but as expected decreased 37 basis points from the preceding quarter, primarily due to higher funding costs. We continue to add diverse, higher cost funding sources and shifted more of the lower cost sweep funding to 3rd party banks. While this negatively impacted the bank segment's NIM, Pal Shuky will walk us through how this benefits both clients and the firm overall. Looking at the fiscal year to date results on Slide 7, we generated record net revenues of $8,600,000,000 And record net income available to common shareholders of $1,300,000,000 up 5% And 22%, respectively, over the prior year's records. We aren't seeing many other firms in our industry generate record so far this year.

Speaker 2

Additionally, we generated strong annualized return on common equity of 17.9% And annualized adjusted return on tangible common equity of 22.7% for the 9 month period. On Slide 8, the strength of the PCG and Bank segments for the 1st 9 months of the year primarily reflects the benefit With strong organic growth in the Private Client Group, the successful integration of TriState Capital and higher interest related revenues. When compared to the record activity levels in the year ago period, weaker capital markets results reflect the challenging environment for investment banking and fixed income brokerage revenue despite incremental revenues from the Sunridge acquisition. And now I'll turn it over to Paul Shuckrete for a more detailed review of our Q3 financial results.

Speaker 3

Paul? Thank you, Paul. Starting on Slide 10, consolidated net revenues were a record $2,910,000,000 in the 3rd quarter, Up 7% over the prior year and 1% sequentially. Being able to generate record quarterly revenues During a period when capital market revenues were so challenged across the industry reinforces the value of having diverse and complementary businesses anchored by the Private Client Group business, which reached record client assets this quarter. Asset management and related administrative fees declined 4% compared to the prior year quarter and increased 5% sequentially Due to the higher assets and fee based accounts at the end of the preceding quarter, along with one additional billable day in the fiscal third quarter.

Speaker 3

This quarter, fee based assets grew 5% to a new record, providing a tailwind for asset management and related administrative fees in the fiscal Q4. Brokerage revenues of $461,000,000 declined 10% year over year and 7% sequentially. This year over year decline was largely due to lower fixed income brokerage revenues in the Capital Markets segment as well as lower asset based trail revenues in PCG. I'll discuss account and service fees Net interest income shortly. Investment Banking revenues of $151,000,000 declined 32% year over year and 2% sequentially.

Speaker 3

As experienced across the industry, both underwriting and M and A revenues continued to be challenged this quarter. We are optimistic that the environment is improving and we continue to see a healthy investment banking pipeline and solid new business activity. However, there remains a lot of uncertainty in the pace and timings of deals launching and closing given the heightened market volatility. So while we may not see significant improvement in the fiscal Q4, we expect better results over the next 6 to 12 months. Moving to Slide 11.

Speaker 3

Clients' domestic cash sweep and enhanced saving program balances Ended the quarter at $58,000,000,000 up 11% over the preceding quarter and representing 5.2% of domestic PCG Advisors continue to serve their clients effectively, leveraging our competitive cash offerings. The enhanced savings program attracted approximately $8,500,000,000 in new deposits this quarter. A large portion of the total cash coming in to ESP has been new cash brought to the firm by advisors, Highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability. The enhanced savings program balances exceeded $11,900,000,000 this week, continuing to grow modestly And partially offsetting the decline in sweep balances largely due to the approximately $1,300,000,000 Of quarterly fee billings in July. As I said on last quarter's call, It feels like we are closer to the end of the cash sorting dynamic than we are to the beginning.

Speaker 3

And we have certainly seen a deceleration of the activity over past several months. However, we are not ready to declare the end of that dynamic. We will need more time with stable balances This quarter's sweep balances with 3rd party banks increased $7,500,000,000 to These 3rd party balances grew faster than we expected last quarter as a strong growth of enhanced saving program balances at Raymond James Bank allowed for more balances to be deployed off balance sheet. While this dynamic has negatively impacted The bank segment's NIM because of the geography of the lower cost sweep balances being swept off balance sheet, It ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility. Looking forward, we have ample funding and capital to support attractive loan growth.

Speaker 3

Turning to Slide 12. Combined net interest income and RGBTP fees from 3rd party banks was $708,000,000 up 91% over the prior year quarter and down 3% compared to the preceding quarter. The sequential decrease in firm wide net interest income was partially offset by higher RGBT fees from 3rd party banks. If you recall, on our last earnings call, we anticipated a 10% decline in these interest related revenues. So we are pleased with a better than expected decline of just 3%, which was partly a function of higher than anticipated growth of enhanced savings program balances.

Speaker 3

The bank segment's net interest margin decreased 37 basis points sequentially to 3 point 2 6% for the quarter and the average yield of RJPDP balances with 3rd party banks increased 12 basis points to 3.37%. While there are many variables that will impact the actual results, We currently expect combined net interest income in RJBDP fees from 3rd party banks to be around 5% lower in the fiscal 4th quarter compared to the fiscal 3rd quarter as we expect some further contraction of the bank segment net interest income to be partially offset by an increase in RGBTP fees from 3rd party banks. As we have always said, instead of concentrating on maximizing NIM over the near term, we are more focused on preserving flexibility And growing net interest income and RGBT fees over the long term, which we believe we are well positioned to do. Moving to consolidated expenses on Slide 13. Compensation expense was $1,850,000,000 And the total compensation ratio for the quarter was 63.7 percent during the quarter, which we are very pleased with, especially given the challenging environment for capital markets.

Speaker 3

Non compensation expenses of $570,000,000 increased 15% sequentially. As Paul mentioned earlier, the quarter included elevated provisions for legal and regulatory matters of approximately $65,000,000 And a bank loan provision for credit losses of $54,000,000 The $65,000,000 of provisions for legal and regulatory matters was made up of several items that all hit this quarter. Some of those items were closed out and publicly disclosed, and some of the other items are still in process, and we therefore will not be able to provide Much more detail on those in this call. Additionally, this quarter included seasonally higher conference and event related expenses. The bank loan provision for credit losses for the quarter of $54,000,000 increased $26,000,000 over the preceding quarter, Largely reflecting weaker assumptions for commercial real estate valuations in the Moody's CRE Price Index and in particular, the office price index, which resulted in higher allowances.

Speaker 3

I'll discuss more related to the credit quality in the bank segment shortly. In summary, while there has been some noise with elevated legal and regulatory matters over the past two quarters, None of the other non compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year. But as you all know, legal and regulatory expenses and provisions for loan losses using the CECL methodology are inherently difficult to predict. Importantly, we remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. Slide 14 shows a In the current quarter, we generated a pretax margin of 16.7% and an adjusted pretax margin of 18.1 percent, a strong result given the industry wide challenges impacting capital markets And the aforementioned provisions.

Speaker 3

On Slide 15, at quarter end, total assets were $78,000,000,000 A 2% sequential decrease, largely reflecting lower client cash balances and CIP during the quarter. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $1,700,000,000 well above our $1,200,000,000 target. The Tier 1 leverage ratio of 11.4% And total capital ratio of 22% are both more than double the regulatory requirements to be well capitalized. The 11.4 percent Tier 1 leverage ratio reflects over $1,000,000,000 of excess capital above conservative 10% target, which would still be 2 times the regulatory requirement to be well capitalized.

Speaker 3

Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. We also have significant sources of contingent funding. We have a $750,000,000 revolving credit facility, which was recently renewed and upsized in April and nearly $10,000,000,000 of FHLB capacity in the bank segment. Slide 16 provides a summary of our capital actions over the past 5 quarters. During the fiscal Q3, the firm repurchased 3,310,000 shares of common stock for $300,000,000 at an average price of nearly $91 per share.

Speaker 3

As of July 26, 2020 Approximately $750,000,000 remained available under the Board's approved common stock repurchase authorization. And we currently intend on continuing our planned repurchases as we have discussed previously. Lastly, on Slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at just 0.94%.

Speaker 3

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at just 1.04%. The bank loan allowance for credit losses on corporate loans As a percentage of corporate loans held for investment was 1.9% at the quarter end. We believe This represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints, Higher interest rates and the potential recession on the corporate loan portfolio. As we have done from time to time when we believe there's an Attractive risk reward. During the quarter, we proactively sold approximately $450,000,000 of corporate loans at an average price of around 98 percent of par

Speaker 2

value. There continues to be a

Speaker 3

lot of attention on the commercial real estate Across the industry, given the challenge with property values and interest rates. So let me briefly cover our portfolio. Across the bank segment, we have CRE and REIT loans of approximately $8,800,000,000 which represents 20% of total loans. Our office portfolio is $1,400,000,000 only representing approximately 3% of the bank segment's total loans. Overall, We have deliberately limited the exposure to office real estate and we underwrote office loans with what we believe were conservative criteria.

Speaker 3

But we will continue to monitor each loan closely given the industry wide challenges. Now, I will turn the call back over to Paul Reilly to discuss our outlook. Paul? Thank you,

Speaker 2

Paul. As I said at the start of the call, I'm pleased with our results for the 1st 9 months of fiscal 2023 and our ability to generate record earnings during what continues to be a challenging environment. And while there is still near term economic uncertainty, I believe we are in a position of strength and are well positioned to drive growth over the long term across all of our businesses. In the Private Client Group, next quarter results will be favorably impacted by the 5% sequential increase of assets in fee based accounts. And I'm optimistic over the long term, we will continue delivering industry leading growth As current and prospective advisors are attracted to our client focused values and leading technology and product solutions.

Speaker 2

In the Capital Markets segment, 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 is reason for optimism, we expect the pace and timing of transactions to be heavily In the fixed income space, depository clients are experiencing decline deposit balances and have less cash available for investing Securities putting pressure on our brokerage activity. We hope that once rates and cash balances stabilize, we could start to see an improvement. So while there are some near term challenges over the long term, we believe the capital markets business is well positioned for growth Given the investments we've made over the last 5 years, it has significantly increased our productive capacity and market share. We will continue to prudently manage expenses in these businesses as near term revenues continue to come under pressure.

Speaker 2

Obviously, We'll have to take more significant action if the industry headwinds prove to be more long term. In the asset management segment, financial assets under management are starting the fiscal 4th quarter up 3% Compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the quarter. We remain confident that strong growth of assets in fee based accounts and the Private Client Group segment We'll drive long term growth of financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth through increased scale, distribution and operational and marketing synergies. In the bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding sources And prudently growing assets to support client demand.

Speaker 2

We have seen securities based loan payoffs decelerate and expect demand for those loans to eventually recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been tepid. However, we believe the yield environment has improved With ample cash sitting with 3rd party banks and lots of capital, we are well positioned to lend once activity picks up. In closing, we have strong prospects for future growth given our strong competitive positioning in all of our businesses and our ample capital and liquidity. I want to take this time to thank our advisors and associates For their continued perseverance and dedication to providing excellent service to their clients each and every day, especially in these uncertain times When clients need trusted advice the most, thank you all for what you do.

Speaker 2

And with that, operator, Would you please open the line for questions?

Operator

Thank you very much. Please press the 1 followed by the 4 on your telephone. You will hear a 3 tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. To make sure we address as many questions as possible, please limit yourself to one question and one follow-up.

Operator

And our first question comes from the line of Steven Chubak with Wolfe Research. Please go ahead.

Speaker 4

Hey, Paul and Paul, it's Michael and Agnestakis on for Steven here. I guess, just starting one off On mid to the balance sheet reinvestment strategy here, you highlighted potentially capitalizing on some of the yield opportunities in loans Down the road, but given the improving sorting picture, the funding capacity you have on the off balance sheet cash and The fact that we're near peak rates is adding duration to lock in some higher yield here something that you're considering more actively?

Speaker 2

I think you've known us long enough that we don't play the betting on interest rate games. So We like a floating rate balance sheet that served us well even though maybe for a couple of years we got criticized It made it kind of easy to get through this last year. And we certainly have some duration in our balance sheet and bank in terms of mortgages and other things. Again, we're not looking at trying to make an interest rate bet overall.

Speaker 4

Okay. That's helpful. And for my follow-up, maybe switching to the capital market side. We're hearing a lot of Peers highlight green shoots as well as a potential recovery in DCM and ECM, but capital raising activity at Ray J was relatively weaker during the quarter, is that just a function of the mix or were there other factors at play? I know you said you expect better results in 2024, but how should we be thinking about the outlook for that business relative to what your peers have been highlighting?

Speaker 4

Thank you.

Speaker 2

I think we've all been in the same boat. I mean, we've had The mix of our businesses are different, so the timing of quarters, but we've already had a number of transactions closed for this quarter. But we see green shoots in that both activity level, backlog, new deals are all positive Factors, but we just don't see a big rush to get everything done. So although we expect the business to improve, Our history and our cycles just tell us that they take a little longer than we would all like or a lot of what bankers Expected. So I think we're going to all track along in the industry on this.

Speaker 2

Hopefully, it improves. We'll play along. We're positioned. We have a lot of clients interested, a lot of mandates, but for them to come we've had those for the last year. So the question is when Are people really able to transact in the market?

Speaker 2

I just want to add something to your first question on banking. Although We don't make duration plays. We are seeing spreads widen in loans. And we think there's an opportunity again by keeping our capital and cash that At the right time and the right loans, we'll be able to grow more on spread than making interest rate bets as a strategy.

Speaker 5

Our next question comes from

Operator

the line of Kyle Voigt with KBW. Please proceed with your question.

Speaker 6

Hi, good evening. Maybe first question on cash and ESP balances. With now having built Backed over $16,000,000,000 of third party deposits and noting in your prepared remarks that you have adequate liquidity for growing the balance sheet. Do you anticipate taking any steps near term or have you already taken any steps yet to reduce some of the incentives in place to grow those ESD balances Much further from current levels.

Speaker 3

Hey, Kyle. The ESP program is a product that we created to serve clients and to help advisors Bring in assets from their clients. And so, really what's driving our growth strategy with ESP is 1st and foremost, client demand and advisors are asking us to keep this product available for their clients. And of course, there's some capacity constraints given we offer up to $50,000,000 of FDIC insurance. So there's a network of banks and there's capacity constraints associated with that, but we're not looking to sort of manage those balances down based on our near term needs.

Speaker 3

Long term, We know we're confident we'll need the funding. And so this gives us ample opportunity to grow the balance sheet when client demand for loans resurfaces.

Speaker 2

And it's an easy adjustment for us. It's an easy adjustment for us too because you can adjust rate, Which gives you some attrition, and you can, you know, stop the program if you had to or slow it down. So as of right now, cash sorting has slowed, but it hasn't stopped. If you look at everyone's reports, We will continue to leave the program open to our advisors as long as we have capacity.

Speaker 6

Understood. And then for my follow-up, I was hoping we could dig into SBL demand a little bit. During the Investor Day, it seemed like you were Hopeful that we are nearing a point where SDL demand was starting to come back and it looks like balances remained flat quarter on quarter after a few quarters of declining. So first, just wondering if you believe those balances have finally troughed. And then given the recent equity market resurgence here, is that having any incremental impact on kind of Clients' willingness to borrow against securities.

Speaker 6

So just if you can talk about SBL demand overall and then any leading I guess you might be seeing on the SBL demand side. Thank you.

Speaker 3

Yes. I think we have certainly seen a deceleration of pay downs, Which is what really picked up as rates increased and borrowing cost increased. We saw the expected pay downs over the last 6 to 12 months. It's kind of particularly in June and even in July, those Paydowns have really slowed down. And so we think this is a good baseline.

Speaker 3

We're not smart enough to call a trough or a floor, but We do we are optimistic that over the next 6 to 12 months, if the market stay relatively resilient, we'll see kind of A pickup of demand off this level off these sort of levels going forward.

Speaker 6

Great. Thank you.

Operator

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

Speaker 5

Hey, good afternoon. Thanks. Hey, Paul, I want to go back to your guidance on cash revenues. So down 5% from this quarter. At the same time, cash balances seem to be stabilizing.

Speaker 5

As you pointed out, the sorting has been slowing down. We got another rate hike here today. So I'm just trying to understand the assumptions behind this guidance. And as part of that, can you give us an update on our GBDP balances at the bank as well as at 3rd party banks?

Speaker 3

Yes. So a lot of pieces to that question, Alex. But hopefully 5% is a conservative guide. Last quarter, we guided down 10% and it actually ended up being down 3%. So we were very pleased to outperform our guide from last quarter.

Speaker 3

Just given the uncertainty, we think it's always prudent to give conservative guidance around these type of things. So you're right, there are a lot of puts and takes. We would expect the PDP fee portion to be up just as balances are up so significantly quarter over quarter. So as long as that stays Somewhat resilient over the course of the quarter, we would expect those BDP fees to be up. And then conversely with the interest income at the bank, we would expect pressure there just because We'll have a full quarter impact of all of the ESP balances that we raised during the Q3.

Speaker 3

And as we raise those balances, we moved to lower cost balances from the bank to the 3rd party banks. So There's some geography involved in that from one to the other. But when we put those things together and our best guess that balance is going forward, Which can change dramatically over the next couple of months. That's where we come up with the down 5% between both BDP fees and NII. But again, We're hoping that we can exceed that guidance if things hold.

Speaker 3

And in terms of what we're seeing so far In the month of July, really the balances have stabilized. I mean, we did see a decrease in the sweep balances due to the quarterly fee billings in July, which is What you would expect, but outside of that, we really have seen kind of a sort of absolutely a Deceleration of cash sorting activity, I mean, outside of those declines from the quarterly fee billings cash,

Speaker 5

the sweep balances were fairly stable outside of those quarterly fee billings

Speaker 3

and the ESP balances either those quarterly fee billings and the ESP balances continue to grow.

Speaker 5

Okay. That makes more sense. Second question to Paul, Paul Senior on Investment Banking, I guess. So I hear your comments around the pipeline is getting better and it sounds Like you guys are hopeful that in 6 to 12 months revenue will sort of come back up here. So are you effectively implying that investment banking revenues will be this kind of $150 ish million range for the next couple of quarters.

Speaker 5

And then if that's the scenario, are there is there room to more aggressively manage the expense base To bring that business to profitability or breakeven even in that sort of scenario or you really need to see a much better revenue picture To become profitable in capital markets.

Speaker 2

Well, I actually got us both pretty well there. You're calling me old and Paul, young. I think that it's really hard to tell. If you look at backlog and things, you could say it'll start improving. But I think if COVID market really goes, you'll see it with everybody.

Speaker 2

So I don't know what our position would be that would make it a lot different in the market when it returns. So we do have a lot more capacity. We invested A lot of those investments are with people that we recruited and did acquisitions and they kind of they're part of us now. So yes, we've already looked we've trimmed some costs and we think it will continue longer term. We would do more, but we're really trying to keep the team in place that we 5 years in building.

Speaker 2

I think they'll be very, very productive. So hopefully that everyone's green shoots turns into trees. And it's we're hoping for. I think Paul gave 6 to 12 months before we think industry wide, not just us, it'll really start hitting. But that's the unknown.

Speaker 2

It really just is the unknown. We certainly have the capacity. And once the market picks up, I think we're well positioned. Clients are engaged. But that's the $1,000,000 question we can't answer.

Speaker 2

But if we ever got to the point we thought it was More of a permanent or longer term kind of hiatus, we would manage costs as tightly as we could.

Speaker 5

I got you. All right. Thank you, both.

Operator

The next question comes from the line of Brennan Hawken with UBS, please proceed with your question.

Speaker 7

Thanks for taking my question. So I know, Paul, that you I won't

Speaker 5

go into junior or senior.

Speaker 7

Paul, CFO, Paul, You commented that we are limited in what you could say on the legal charges, which is totally understandable, not all resolved. But Now this is the 2nd quarter in a row we've had some legal charges. And is it right to assume we're probably going to see a 3rd quarter because you said they're not all resolved? And so therefore, should we expect some bleed into next quarter? How should we think about that?

Speaker 5

Yes. I mean, There could

Speaker 3

be certainly additional reserves and there probably will be additional reserves in future quarters. But we're hoping that there'll be A pretty big drop off from the $66,000,000 or so that we saw this quarter. That was obviously unusual for us if you look back at our history. Time will tell, but it was obviously this quarter was obviously elevated relative To sort of what you look at for an average reserve for a quarter for us.

Speaker 7

Okay. Fair enough. And then Wondering if you could give a little bit of color around the ending of the relationship with the independent Contractor that you spoke about that impacted the NNA this quarter. What kind of counterparty was that? And what led to the decision by either them or you to go in a different direction?

Speaker 2

Yes. I think we're not going to talk about firms or stuff, but I think that just based on Our strategy it was an independent contractor firm, a normal independent contractor firm based on their strategy and what they wanted to do and ours and And us looking at our profitability and I think what they thought they could do in other things, we just thought it would be better to have another home And they went ahead and we supported their move. And we again, as we said, we kept a lot of the advisors. Advisors had a choice. And so I would call it just strategic differences in both of our businesses and Profitability, as we've said, we don't think that there's a negative impact to our profitability on that change.

Speaker 2

So we're both making our bets and both going in the directions we think we're right.

Speaker 6

Okay. Thank you for the color.

Operator

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

Speaker 5

All right. Thanks. Good afternoon. Paul, just maybe can you talk a little bit about Can you speak to the maturity profile of the AFS book? It's still yielding around 2, a little over 2%.

Speaker 5

So just great to get your thoughts And how quickly that portfolio runs off and you get a chance to reinvest that at higher rates.

Speaker 3

Yes. And we I mean, the average maturity on that portfolio is somewhere in the 4 year range. And so it takes some time for it to run off. We're Probably it's going to see maybe a $1,500,000,000 or so of a runoff a year at current level. So it'll take some time.

Speaker 3

And frankly, we grew that securities portfolio over during that COVID period because we had pretty significant increase in client cash balances as you Paul, and there really wasn't demand from 3rd party banks. So we took it on to our own balance sheet to accommodate those cash balances. And fortunately, we kept the vast majority of those as Paul indicated in very, very short term treasuries It didn't take too much duration risk. And so now as we look forward, we're really going to grow that or Let that securities portfolio run off, so the liquidity in the balance sheet should be somewhere around 10% of The bank's balance sheets combined, which will let us reinvest a lot of those repayments to Bank loans, which again, as Paul said, have higher spreads and higher yields on them. So that will be a nice kind of tailwind for us over the next Several years hopefully.

Speaker 5

Right. And then when you just think about NII after This coming quarter down, I guess combined down 5%, maybe NII down a little more. How do you think about do you feel like once you kind of catch up in ESP balances are not growing as rapidly that that NIM starts to and the bank starts to stabilize and NII can be flat to up or Still think that further declines. And just to be clear,

Speaker 3

when we raise those ESP balances, Cash is fungible. The cash that we move off balance sheet to 3rd party banks is still making a higher spread than the cost of EIP balances, while we sort of await investment in higher yield higher yielding assets and loans. It's still a net not a huge net positive, but it's still a net positive for us. So we offer the clients a product that's attractive, allows advisors to gain more wallet share from their clients. And We essentially place that cash with 3rd party banks until we have better investment opportunities.

Speaker 3

There's a lot of geography involved in terms of what shows up in NII and BDPs, but we obviously look at it from a consolidated basis. So it's really a win for the Clients are win for the advisors and a win for the firm and gives us a lot of capacity to grow the balance sheet Over time. So that's kind of how we're thinking about it. And to the extent that we can When demand returns for loans, both corporate loans and then loans to the private client group clients, Then it will certainly be a nice tailwind to our net interest income.

Speaker 2

I think if you look industry Yes. If you look industry wide, there's still a competition for cash. And as long as there is an upward in the Fed's raising rates, It's going to impact, I think, rates on both ends. And until that dynamics once that dynamic stabilizes Or if it ever does go the other way, which some people predict, we haven't believed the board curve for over a year now. But once that does happen, spreads should improve, but that's we don't know.

Speaker 2

So we're operating, we know, on the ESP balances. They're not cheap, but we still make a spread off of them. So it's positive, the NII. And so there's no harm in Raising them for clients and we make a little money too.

Speaker 4

And just to be

Speaker 3

clear, one last comment on this is because I've got some Questions over the email is, we are guide the 5% guide that I provided on NII and BDP PE fees is really based on today's rate action. So we're not trying to factor in the forward curve or anything like that. As Paul said, I'm not sure we totally buy the forward curve. I'm not sure if we're certainly not going to give guidance based on the Fed cutting rates anytime soon.

Speaker 5

Perfectly fair. Thanks. Thanks, Paul.

Operator

Please press 1 for. And the next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Speaker 2

Hey, good afternoon. Thanks for taking the question.

Speaker 5

I was hoping you might be able to provide some color on Marketplace for recruiting advisors today, how you see that evolving and how you might characterize the pipeline? Thank you.

Speaker 2

So I think I've gotten this question almost every quarter now, the 13 years since I've been CEO. It's competitive. I mean, it's, I think all firms are kind of in the market. The costs have gone up somewhat certainly over the years. So we have maintained our position not being the highest bidder in these cases And using it as positive selection, but it's certainly competitive.

Speaker 2

You have the broker dealer employee channels, you have The independent firms and the RAA aggregators competing, especially at the high end for all of their clients. So The good news for us is we continue to compete very well. We continue the pipeline is strong. The biggest change probably over the last 2 years is the number of just very large teams that we talked to versus years ago. So But the pipeline is great.

Speaker 2

It's been picking up every quarter with a slow start. It's continued to pick up each quarter. And So we're optimistic, but it is competitive.

Speaker 5

Great. Thanks. And just a follow-up question on the ESP balances. Just curious how you think about the duration of those ESP deposits versus your sweep deposits and other funding sources. And how

Speaker 6

does that sort of how

Speaker 5

do you take that into consideration when you think about ultimately reinvesting and putting some of those deposits to work?

Speaker 3

Yes. Well, it's a relatively new product for us. We launched it in March. So, we'll learn more as we have more with it and as rates stabilize and those sorts of things. So we want there We always try to have cushions around kind of how we think about funding deployment and maybe even more so A bigger cushion when you're dealing with a new deposit product in a volatile and uncertain rate environment.

Speaker 3

And So you look at where we are today, we've had a target of 3rd party balances of around $10,000,000,000 that we talked about Just 6 months ago and now we're up to $16,000,000,000 or north of $16,000,000,000 of third party balances. And the banks are still holding very high cash balances more than they need in a normal environment. And so Yes. We have a significant funding cushion and opportunity over the next several months to really kind of have better History and understanding of the sort of the reinvestment of the enhanced saving product balances.

Speaker 2

I think you could also look at most of the ESP balances came from cash balances elsewhere, Money markets, treasuries, I mean, so it was really, I think, if you look at the assets, a cash yield play. It just happened It's secured with FDIC and more people viewed it as more secure with FDIC insurance. So It's not like it came out of everybody ran from equities and for the products. So and if you look at the percentage of our assets In cash, we're certainly not at we're more closer to historic levels than we are record levels. But as Paul said, we are always more cautious with the new product and understand it can move and also are used to competing.

Speaker 2

So We will see in the quarter, but again, we have a big cushion right now. That's why we haven't slowed down deposits, just understanding But, you know, it could have a little more volatility, but we'll see.

Speaker 5

Great. Thank you.

Operator

And our last question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.

Speaker 8

Great. Thanks so much. Good evening,

Speaker 2

Paul and Paul. I'll just keep it

Speaker 8

at one. Most was covered here. But, do want to ask about corporate M and A for the firm. And We obviously saw recent press around a reasonably sized public independent broker that Could be mulling a sale. And so I thought that was interesting.

Speaker 8

And so without getting into details around where Raymond James might be interested, specifically, it would be great just to hear about Kind of what you guys are seeing in the marketplace because it would seem that conditions could be getting better for you guys as well just With valuations recovering, your stocks up as well. Confidence is improving in the marketplace to some degree. And We just assume that's a little bit of a better environment for M and A. So just love to talk about what you guys are seeing in the marketplace today. And if you can, what that pipeline Of opportunities is looking like right now relative to, I don't know, a year ago.

Speaker 2

Well, thanks, Devin. As you know, we just hired A new head of our corporate development practice, so we certainly didn't do that to slow down. And I didn't see the article you're alluding to, but we've Always have had a course of firms that we believe would fit us well, especially in the private client group space where we really, Really know them all and our focus hasn't changed. And as we've said in the past, most they're private Not for sale, so it doesn't help. But we stay close and if it ever changes, we want to be there only or first call.

Speaker 2

So We continue to keep that strategy. And then on the M and A, with Suraj, who's joined us, is really focused on Also other opportunities. We've looked at M and A firms that we talked to pre market Adjustment and because we thought valuations are way off and we continue dialogue with those that we think fill holes in the practice. And again, pricing has gotten much better there. We've had a few assets in the asset management space and Some we've talked to and couldn't come up with pricing versus the market, but that's not unusual for us.

Speaker 2

And looking at other ancillary technology fit in place like Sunridge, which has really been a huge positive. So Our eyes are not off the ball at all for M and A. In fact, we always assume the tougher the market, the better opportunity To really add people to the family. So again, it has to be a culture fit, Strategic, be able to integrate it and then it's price. And so we're pretty price disciplined too.

Speaker 2

So we're working away And we always have. So but, you know, we went where we didn't close any for a while and we closed 3 quickly. So, you know, who knows?

Operator

And there are no further questions. Mr. Riley, I'll turn the call back to you.

Speaker 2

Thank you for joining. I know it's always a busy time with everyone with earnings, but I really Feel like we're in great shape. You can see our asset growth, our recruiting growth in certain capital markets is a tough market, but that will return to and have a great franchise in that business when the market returns. They'll return, and we believe we can continue growing the other businesses. So Thanks for joining and we'll talk to you next quarter.

Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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Earnings Conference Call
Raymond James Q3 2023
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