Raymond James Q2 2022 Earnings Call Transcript

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Provided by Quartr
April 28, 2022

There are 12 speakers on the call.

Operator

Good morning, and welcome to Raymond James Financial's Second Quarter Fiscal 2022 Earnings Call. This call is being recorded and will be available for replay on the Investor Relations website. Now I will turn it over to Christy Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

Speaker 1

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

Speaker 1

The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Call. Calling your attention to Slide 2. Please note certain statements made during this call may constitute forward looking statements.

Speaker 1

Call. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisition, including acquisition of Charles Stanley Group Plc call completed on January 21, 2022, as well as our announced acquisitions of TriState Capital Holdings and Sunridge Partners call. And our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, call. In addition, words such as may, will, should, call. Could, scheduled, plans, intends, anticipates, expects, believes, estimates, potential or continue or negative of such terms call or other comparable terminology as well as any other statements that necessarily depends on future events are intended to identify forward looking statements.

Speaker 1

Call. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements. Call. We urge you to consider the risks described in our most recent Form 10 ks and subsequent Forms 10Q and Forms 8 ks, call, which are available on our Investor Relations website. During today's call, we will also use certain non GAAP financial measures call to provide information pertinent to our management's view of ongoing business performance.

Speaker 1

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

Speaker 2

Good morning. Thank you for joining us today. Call. I'm going to begin on slide 4. I am very pleased with our results for the fiscal second quarter and the first half of the fiscal year, call, especially given the challenging market conditions.

Speaker 2

We continue to invest in growth across all of our businesses. Call. In the Private Client Group, excellent retention and recruiting of financial advisors contributed to best in class growth call. With domestic net new assets of 11% over the 12 month period. Furthermore, the company.

Speaker 2

The Charles Stanley acquisition, which closed during the quarter, significantly expanded our presence in the U. K, which is a very attractive market for Wealth Management. Call. In the Capital Markets business, while Investment Banking revenues were negatively impacted by the heightened market volatility during the quarter, call. We continue to see strong pipeline as the expertise we have both added organically and through niche acquisitions has been performing call.

Speaker 2

In the fixed income business, we announced the pending acquisition of Sunridge Partners during the quarter, which will enhance our platform with call. We have a great day to day job. We

Speaker 3

have a great day to day job. We have a great day to day job. We have a great day to day job. We have a great day to day job. We have a great

Speaker 4

day to day job. We have a great day to day job. We have a great

Speaker 2

day to day job. Call. Raymond James Bank grew loans an impressive 7% during the quarter, reflecting attractive growth across all of the loan categories. Call. The TriState Capital acquisition, which is expected to close by the end of our fiscal Q3, will add a best in class third party securities based lending capability, while also diversifying our funding sources.

Speaker 2

They will also bring a diversified asset manager in Chartwell, call, which will be a great addition to our multi boutique model in asset management. So as we always do in any market call. We continue to invest for the long term, always putting clients first. It's in uncertain market call. We have a number of questions such as these that remind us the importance of focusing on and making decisions for the long term.

Speaker 2

Call. While our strategy may not always be popular over short term periods, today I believe we are well positioned the expected increases in short term rates with record clients' domestic cash sweep balances, strong loan growth at Raymond James Bank, call. High concentration of floating assets and an ample balance sheet flexibility given solid capital ratios, which are all well in call. Turning to results. In the fiscal second quarter, the firm reported net revenues of 2.6 call.

Speaker 2

$7,000,000,000 and net income of $323,000,000 or earnings per diluted share of 1.52 call. Despite higher asset management and related administrative fees, reflecting the strong year over year growth in PCG assets and fee based accounts, call. Diluted EPS declined 10% compared to the prior quarter, primarily due to bank loan loss provisions call. For credit losses during the current quarter to support the strong loan growth compared to a benefit in the prior year quarter. Call.

Speaker 2

This quarter also had a higher effective tax rate, which Paul Schuepri will explain later on the call. Call. Excluding $11,000,000 of acquisition related expenses, quarterly adjusted net income was $331,000,000 call. Our earnings per diluted share of $1.55 Annualized return on equity for the quarter was 15% call. And adjusted annualized return on tangible common equity was 17.2%, an impressive result, call, especially in this very low rate environment and given our strong capital position.

Speaker 2

Moving to Slide 5. Call. We ended the quarter with total assets under administration of $1,260,000,000,000 and record PCG assets and fee based accounts call of $678,000,000,000 These figures include the assets from the acquisition of Charles Stanley, call, which was completed on January 21. Excluding the impact of the acquisition, total client assets under administration declined 2.8 call. 1st, compared to the immediately preceding quarter.

Speaker 2

Financial assets under management of $194,000,000,000 decreased 5% sequentially call. We ended the quarter with a record 8,730 financial advisors, a net increase of conference. Our focus on supporting advisors and their clients has led us to strong results in terms of advisor retention as well as recruiting call. Over the trailing 12 month period ending March 31, 2022, we recruited to our domestic independent contractor and employee channels call. Financial advisers with approximately $340,000,000 of trailing 12 production and approximately call.

Speaker 2

$53,000,000,000 of client assets at their previous firms. And highlighting our industry leading growth, we generated domestic PCG call. E. G. Net new assets of approximately $106,000,000,000 over the 4 quarters ending March 31, 2022, call.

Speaker 2

Representing approximately 11% of domestic PCG assets at the beginning of the period, call. 2nd quarter domestic PCG net new asset growth was nearly 9% annualized. Call. Client domestic cash sweep balances grew 4% sequentially to a record $76,500,000,000 call. Raymond James Bank continued to generate impressive loan growth, up 22% year over year and 7% during the quarter call to a record $27,900,000,000 This growth was driven by securities based loans and residential mortgages, largely to PCG clients call as well as strong corporate loan growth.

Speaker 2

Now moving on to the results on Slide 6. Call. The Private Client Group generated quarterly net revenues of $1,920,000,000 and pretax income of $213,000,000 call. On a year over year basis, revenues grew 17% and pretax income grew 11%, call, primarily driven by higher assets and fee based accounts. The Capital Markets segment generated quarterly net revenues of 413 call over the prior year period, primarily driven by lower fixed income brokerage revenue and equity underwriting revenues.

Speaker 2

Call. Sequentially, quarterly net revenues decreased 33%, driven by lower Investment Banking revenues, primarily due to the impact of increased call. A technology driven fixed income market maker specializing in investment grade and high yield corporate bonds, Municipal Bonds and Institutional Preferred Securities. This acquisition is further evidence of our continued commitment to providing cutting edge technology to advisors, clients and stakeholders. We currently anticipate the acquisition to close in the Q4 of 2022 subject call.

Speaker 2

The Asset Management segment generated net revenues of $234,000,000 call. And pre tax income of $103,000,000 on a year over year basis, revenues grew 12% and pre tax income grew 18% call over the fiscal Q2 of 2021, primarily the result of higher assets under management. Call. Raymond James Bank generated quarterly net revenues of $197,000,000 and pretax income of $83,000,000 call. Net revenue growth was primarily due to higher asset balances as the bank generated attractive growth in its loan portfolio call, along with net interest margin expansion.

Speaker 2

Despite revenue growth, pre tax income declined 25% compared to a year ago quarter call. Caused by the bank's loan loss provision for credit losses in the current quarter, reflecting strong loan growth call compared to the bank's loan benefit for credit losses and comparative periods. Looking to the fiscal year to date results on Slide 7, call. We generated record net revenues of $5,450,000,000 during the 1st 6 months of fiscal 2022, call, up 19% over the same period a year ago. Record earnings per diluted share of $3.61 increased call.

Speaker 2

14% compared to the 1st 6 months of fiscal 2021. Additionally, we generated strong annualized call. Return on equity of 18.1 percent and annualized adjusted return on tangible common equity call of 20.6 percent for the 6 month period. Moving to the fiscal year to date segment results on Slide 8. Call.

Speaker 2

The Private Client Group, Capital Markets and Asset Management segments all generated record net revenues call and record pre tax income during the 1st 6 months of the fiscal year, again reinforcing the value of our diverse and complementary businesses. Call. Now for a detailed review of our Q2 financial results, I will turn the call over to Paul Shukri. Paul? Thanks, Paul.

Speaker 2

Starting with consolidated revenues on Slide 10. Quarterly net revenues of $2,670,000,000

Speaker 4

call. Grew 13% year over year and declined 4% sequentially. Record asset management fees grew 25% call. Over the prior year's fiscal second quarter and 6% over the preceding quarter, Private Client Group assets and fee based accounts call. This call is being recorded and will be available for replay on the call.

Speaker 4

We ended the quarter relatively unchanged compared to December 2021. However, adjusting for the acquired assets call. Charles Stanley, PCG assets and fee based accounts declined approximately 3%, creating a headwind for asset management company's revenues in the fiscal Q3. So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal Q3. I'll discuss account and service fees and net interest income shortly.

Speaker 4

Call. Skipping ahead to Investment Banking revenues. As Paul described, this line item declined significantly compared to the preceding quarter. But at $235,000,000 it was still a very strong quarter compared to our results call prior to fiscal 2021. Given the heightened market volatility, we would not be surprised to match this quarter's results for the next two quarters, which will result in the investment banking revenues ending fiscal 2022 call close to the record set in fiscal 2021.

Speaker 4

While our pipelines are strong, there's a lot of uncertainty over the next two quarters that could impact investment call. Other revenues of $27,000,000 was down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments, call. Previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid call. Moving to Slide 11, call.

Speaker 4

Clients' domestic cash sweep balances ended the quarter at a record $76,500,000,000 up $3,000,000,000 call. 4% over the preceding quarter and representing 7% of domestic PCG client assets. Call. Notably, dollars 17,000,000,000 or 22% of total cash sweep balances are held in the client interest program, the call. The vast majority of which are invested in very short term treasuries and could be redeployed to generate much higher yields over time, call either at our own bank or with 3rd party banks as interest rates increase and demand for cash balances recover.

Speaker 4

Call. Turning to Slide 12. Combined net interest income and BDP fees from 3rd party banks was $224,000,000 call, up a robust 9% from the preceding quarter. This growth is largely a result of strong asset growth call. And the higher net interest margin at Raymond James Bank, which increased 9 basis points to 2.01% for the quarter.

Speaker 4

Call. The increase of the bank's NAND during the quarter was attributable to a higher yielding asset mix given the strong loan growth call. As the March interest rate increase really won't start benefiting the bank's NIM until the fiscal Q3. For example, following the March rate increase, call. The bank's current spot NIM is around 2.15%.

Speaker 4

The average yield on RZBDP balances with 3rd party banks call. Increased to 32 basis points in the quarter and the spot rate is just over 50 basis points, reflecting the March rate increase. Call. Both the NIM and the average yield from 3rd party banks are expected to increase further with additional rate increases call. As less than 25% of the firm's interest earning assets have fixed rates and those assets have an average effective duration of less than 4 years.

Speaker 4

Call. And all of the deposit suite relationships with 3rd party banks are floating rate contracts. So we should have significant upside from rising short call. To that point, let me walk through how we are positioned to rising short term interest rates. Call.

Speaker 4

Based on current clients' domestic cash sweep balances, which decreased by over $2,000,000,000 to $74,000,000,000 thus far in April, call largely due to the quarterly fee billings and income tax payments. Using static balances and an instantaneous 100 basis point increase in short term interest rates, call, which includes the 25 basis point rate increase in March. We would expect incremental pretax income of nearly 600 call and 35% reflected as account and service fees. This estimate assumes a blended deposit beta call of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle. Call.

Speaker 4

Importantly, this analysis does not incorporate the TriState Capital acquisition, which should provide call. Incremental upside to higher short term interest rates as the vast majority of their $13,000,000,000 of balance sheet assets are also floating rate assets call as they have always shared a similar approach to limiting duration risk. Moving to consolidated expenses on Slide 13. Call. Starting with our largest expense, compensation.

Speaker 4

The compensation ratio for the quarter was 69.3%, call, which increased from 67.7 percent in the preceding quarter, but remained below the year ago period compensation ratio call of 69.5 percent and below our 70% target in a low interest rate environment. Call. The sequential increase was mainly the result of lower capital markets revenues, which led to the revenue mix call. Who cover their own overhead expenses are typically higher than the associated compensation of our other businesses. Call.

Speaker 4

On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the Q1 of each year as well as annual salary increases and continued hiring to support our growth. Call. Non compensation expenses of $388,000,000 increased 14% sequentially, call. Predominantly driven by the bank loan provision for credit losses compared to a loan loss release in the preceding quarter, call as well as higher communication and information processing expenses. Excluding the bank loan provision and acquisition related expenses, call, which creates some noise in the comparison.

Speaker 4

Non compensation expenses of $356,000,000 grew 3% over the preceding quarter. Call. Also keep in mind, expenses included just over 2 months of results for Charles Stanley, which closed on January 21st. Call. So overall, we have remained focused on the disciplined management of all compensation and non compensation related expenses, call, while still investing in growth and ensuring high service levels for advisors and their clients.

Speaker 4

Call. In the fiscal Q2, we generated a pre tax margin of 16.2% and an adjusted pre tax margin of 16.6%, call in line with our 16% target in this low interest rate environment. Based on the expectation for the additional increases in call. We will revisit our pre tax margin and compensation ratio targets at our upcoming Analyst and Investor Day call scheduled for May 25. Hopefully, by then, we will have more clarity on other important variables such as the outlook for investment banking revenues, the call.

Speaker 4

The level of business development expenses as conferences and travel continue to ramp up and the impact of recently closed and pending acquisitions. Call. On Slide 15, at the end of the quarter, total assets were $73,100,000,000 call. A 7% sequential increase reflecting the addition of approximately $3,000,000,000 in assets, mostly segregated client cash balances from call. Charles Stanley as well as solid growth of loans at Raymond James Bank.

Speaker 4

Liquidity and capital remained call. RGF corporate cash at the parent ended the quarter at $2,200,000,000 call. Increasing 59% during the quarter, primarily due to significant special dividends from our well capitalized subsidiaries during the quarter. Call. The total capital ratio of 25% and a Tier 1 leverage ratio of 11.1% are both more than double the call.

Speaker 4

The regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and invest in growth. Call. The effective tax rate for the quarter did increase to 25.4%, up from 20.1% in the preceding quarter. Call. The primary drivers of the sequential increase are the favorable impact from share based compensation that vested in the preceding quarter call.

Speaker 4

And non deductible losses on our corporate owned life insurance portfolio due to equity markets that are used call to fund our non qualified benefit plans compared to a non taxable gains on these portfolios in the preceding quarter. Call. Slide 16 provides a summary of our capital actions over the past 5 quarters. As of April 27, 2022, call. $1,000,000,000 remains available under the Board approved share repurchase authorization.

Speaker 4

Due to regulatory restrictions, call. We do not expect to repurchase common shares until after closing the TriState Capital Holdings acquisition currently expected to call. As we explained on prior calls, our current plan is to offset the share issuance

Speaker 3

call. This call is being recorded

Speaker 4

and will be available for replay on the call. But given the heightened market volatility, we'll obviously keep a watchful eye on market conditions between now and then. Call. Lastly, on Slide 17, we provide key credit metrics for Raymond James Bank. Call.

Speaker 4

The credit quality of the bank's loan portfolio remains healthy with most trends continuing to improve. Call. The bank loan loss provision of $21,000,000 was primarily driven by strong loan growth during the quarter. Call. The bank loan allowance for credit losses as a percentage of loans held for investment ended the quarter at 1.17%, call, down from 1.5% at March 2021 and essentially unchanged from 1.18% at December 2021.

Speaker 4

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

Speaker 4

As I said at the start

Speaker 2

of the call, I am pleased with our results. And while there are many uncertainties, I believe we are well positioned to drive growth across all our businesses. Conference. In the Private Client Group, next quarter results will be negatively impacted by the expected 3% sequential decline of asset management call. And combined with solid retention, I am optimistic we will continue delivering industry leading growth as advisors are attracted to our client focused values and leading technology platform.

Speaker 2

Furthermore, the addition of Charles Stanley call. It provides an opportunity to accelerate our growth in the U. K. Wealth management market through multiple affiliation options similar call to our Advisors Choice offerings in the U. S.

Speaker 2

And Canada. In the Capital Markets segment, M and A pipeline remains robust, call. The closings will be heavily influenced by market conditions throughout the remainder of the fiscal year. And while market uncertainty and geopolitical concerns call. In the near future, I am confident we have made significant investments over the past 5 years to strengthen our platform and to grow our team and productive capacity, positioning us well to grow over the long term.

Speaker 2

In the fixed income space, call. Although depository clients are still flush with cash and searching for yield optimization opportunities, we expect results to be more volatile over the next few quarters given call. Additionally, we expect the pending acquisition of Sunridge Partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace. In the Asset Management segment, call. While the financial assets under management are starting the fiscal Q3 lower due to equity markets, we are confident that strong growth of our assets call.

Speaker 2

And fee based accounts in the Private Client Group segment will drive long term growth of financial assets under management. Call. In addition, upon the close of TriState Capital, we expect Chartwell Investment Partners, which will operate as

Speaker 4

call. This call is being recorded and

Speaker 3

will be available for replay on the call. We are

Speaker 2

a subsidiary of Carillon Towers Associates to help drive further growth through increased scale, distribution and operational and market synergies. Call. And Raymond James Bank should continue to grow as we have ample funding and capital to grow the balance sheet. Raymond James Bank is well positioned call for rising short term rates, and we expect TriState Capital to further enhance this benefit to the firm given their floating rate asset concentration call and their leading position in 3rd party SBL business. Before closing, I want to call your attention to our annual corporate responsibility report call that was released during the quarter.

Speaker 2

The report, which can be found on our Investor Relations website, highlights our foundational commitments to our people, company's website. Sustainability, community and governance illustrates our long standing approach to doing business rooted in our value call and brought to life through our people driven culture. Call. This report summarizes many of the inspiring things that our advisors and associates across the firm do to contribute to their communities and the things we do as a firm to help the environment. As always and foremost, I want to thank our advisors call and their associates for their perseverance and dedication to providing excellent service to their clients each and every day.

Speaker 2

Call. With that, operator, please open the line up for questions.

Speaker 5

Thank you very much.

Speaker 3

The

Speaker 5

call. Call. And we'll proceed with our first question on the line from Alex Blostein with Goldman Sachs.

Speaker 6

Call. So I wanted to start with the question around capital. You guys saw the Tier 1 leverage drop down over 100 basis points quarter over quarter at the holding company level. It looks like it's all coming from the broker dealer. Call.

Speaker 6

The cash balance was picked up there and liabilities did as well. So maybe flesh out a little bit sort of what happened, what drove the increase This quarter that's kind of weighing on Tier 1 leverage a bit here. And then more importantly, is that something you expect to reverse pretty quickly? And I guess regardless, Should we still expect you guys to buy back all the stock that you expect to issue on the back of TriState closing?

Speaker 4

Call. Yes. Thanks, Alex. I think before going into sort of the quarter to quarter movements, just stepping back, at 11% Tier 1 leverage ratio, we're still well over 2x the regulatory requirement to be well capitalized at 5%. Call.

Speaker 4

It's just important to note that we still have a significant amount of capital to continue investing in growth, growing the balance sheet and growing our businesses. Call. With that being said, since the beginning of the fiscal year, our client cash balances have increased over 15%, which is An amazing number. If you think about it, we're 6 months into our fiscal year. And most of that has come, as you mentioned, to the broker dealer on the In the client interest program, the vast majority of which are used to fund short term treasuries.

Speaker 4

We're talking 30 day, 60 day type treasuries pursuant to the segregated asset SEC rules. So these are the first cash balances that will be redeployed either on balance sheet or off balance sheet company. As demand from 3rd party banks recover after the increase in short term interest rates and call. Just to kind of dimension that impact to our Tier 1 leverage ratio, before the pandemic, These balances were hovering right around $2,000,000,000 So at $15,000,000,000 of really overflow is what I would call this And the client accommodation, that's eating into about 300 basis points of the Tier 1 leverage ratio. And frankly, when we set the 10% target No, a little less than a year ago.

Speaker 4

We don't look at this impact on this portion of the balance sheet the same as we do Other portions of the balance sheet because again, they're invested in 30 or 60 day treasuries, which are obviously highly liquid. So It's really just geography in terms of putting this on the balance sheet here versus putting it with 3rd party banks where it's not on the balance call. The Tier 1 leverage ratio, which we will do when their demand resumes or funding our own bank, which we would earn a higher spread on, call. So hopefully that answers your question there.

Speaker 6

Got it. So don't want to But it sounds like the 10% Tier 1 leverage minimum is not quite the minimum. In absolute terms, we should really think about company. Where that balance sits and where that sort of confirms and how that impacts capital ratios a little bit more dynamically. Is that right?

Speaker 4

Call. Yes. I mean, I think that's a good way of thinking about it.

Speaker 6

Okay, great. And then just piggybacking on the point you made around the building cash levels. Call. Obviously, we've seen that across the industry, but with rising rates, the conversations around cash sorting, obviously picking up pretty materially. Call.

Speaker 6

In the last cycle, if my math is right, I think you guys have seen about a 15% to 20% decline in sort of peak to trough Cash balances across the franchise. Given the changes in the customer mix and how much you've grown, is that still the right framework to think about? How much call. You could leave in this cycle, understanding the pace of rates is likely to be much faster this time around.

Speaker 4

Call. Yes. I think you're right. In the last cycle, it was around the 15% to 20% decline. But I mean, remember, we just, in the last 6 months, increased Balance is by 15%.

Speaker 4

So if that if we see a decline over the next year or 2 as rates rise, and really the decline happens after the first 100 basis points, call. Then it's not really that big of a deal considering we just got that in the last 6 months here, and it's sitting in short term treasuries. And call. Remember, that decline in cash balances will be more than offset by the increase in short term interest rates based on our assumptions. Call.

Speaker 4

And the other factor that you need to consider is when you do have a decline in cash like that due to cash sorting, call. The value of that cash becomes more valuable. So as an example, today, the spot yield of our balances with 3rd party banks is right around 50 basis points, which is right around Fed Funds target. Before the pandemic, we were getting Fed Funds target plus 10 or 15 basis points. So yes, the spread on not only those balances but also loans in a more cash tight environment, the cash becomes more valuable call.

Speaker 4

And that offsets a portion of the impact from declining cash balances in the system as well.

Speaker 6

Call. Great. So if I could squeeze in one more busy morning, obviously between a bunch of calls here. But TriState, so I believe you initially call. Targeted $3,000,000,000 of sort of funding replacement on their balance sheet once the deal closes.

Speaker 6

Call. Is that still the case? I think in the 1st year, you targeted, you said about $3,000,000,000 Why wouldn't you go a little faster given that their deposit beta. I think it's going to be

Speaker 7

a lot higher than yours.

Speaker 3

Yes. I

Speaker 4

mean, you asked about the cash sorting issue just The new prior question, so we're going to look at they bring a diversified funding sources. They have very good depository clients, Many of which are also clients on the asset side. They're going to continue running independently, of course. So we're going to do What makes the most sense for both them and us. We're not beholden to the assumptions we used in the due diligence and valuation process And nor are we going to make decisions to boost short term results that may compromise long term results.

Speaker 4

So we're going to, call as we do with all of our decisions, make them based on what's best for our investors over the long term.

Speaker 3

Conference call.

Speaker 2

I just want to reiterate, TriState operating as an independent subsidiary has to take care of its clients' cash call. So it's not just math, right? We just they need they'll have a lot of client balances to manage. Company. And the $3,000,000,000 was just a rough estimate of the excess where we could replace them without they felt without impacting their business.

Speaker 5

Call. Thank you very much.

Speaker 4

We'll get

Speaker 5

to our next question on the line

Speaker 8

call. So call. Wanted to start off with just a question on TriState. The rate backdrop is clearly much more constructive since the deal was first announced. Call.

Speaker 8

And given the revenue upside is coming from less compensable spread income, I was hoping you could provide some thoughts on call. The updated TSC accretion expectations based on the current forward curve and how we should be thinking about where PPNR margins could potentially settle out with higher rates and a fully integrated TSE deal as we think about your normalized earnings power.

Speaker 4

Yes. I think there's a lot Baked into that question, and I don't think it's there's a lot that has changed since we announced the acquisition and the 8% to 12% type accretion. But I don't think maybe at the Analyst Investor Day, we can get into more detail with all the different variables. One thing I will say call. Is that their loan growth since we announced the transaction, and they're separate public companies.

Speaker 4

So I also don't want to get Too much into their own results or what the upside is to higher rates going forward for their results until after we close the transaction. But call. I think I can say that the loan growth since they since we announced the transaction has been much Stronger than we were projecting. Of course, we try to use conservative projections, but they've had really continued to have strong loan growth announcing the transaction. So that coupled with the higher increases in short term rates that we were expecting.

Speaker 4

And again, vast majority of their assets are Floating rate assets, certainly are nice tailwinds for us going forward.

Speaker 8

Call. And Paul, I mean, any insight you can share just in terms of how we should think about that terminal PPNR margin? I think the big debate is You're going to be integrating this deal. The accretion tailwinds have certainly been favorable call over the last few quarters. You did note the loan growth is also coming better.

Speaker 8

The big debate is how much of that revenue you're going to allow to fall to the bottom line to get reinvested back in the business. I just want to get some sense as to how we should be thinking about peak margin potential over the next couple of years.

Speaker 4

Call. Yes, Stephen, I would say that the peak margin potential is going to be driven more by the increase in short term interest rates than the impact that has on our 75 Plus $1,000,000,000 of client cash balances than any particular transaction that we've closed or that is pending. Call. I would say, I would look at that. And as I said earlier on the call, that impact in the first 100 basis Points we're projecting to be somewhere in the $600,000,000 range.

Speaker 4

So it's obviously significant accretion to earnings for us in the first 100 basis points.

Speaker 8

Call. Very helpful. And then just if I could squeeze in one more just on the securities portfolio.

Speaker 4

Call. I know historically you guys have

Speaker 8

tended to favor more short end versus long end gearing. Certainly given the pace of Fed call. I think that's anticipated that's going to serve you pretty well here. But given the forward curve is actually starting to bake in a couple of Fed cuts A few years out, wanted to get some perspective on whether there's any appetite to actually extend duration call. Given some of the higher MBS proxies in particular, which could potentially protect you in the event looking a couple of years out that the Fed does in fact start easing and maybe we don't have or and we don't have the soft landing that many of us were hoping for.

Speaker 2

Call. Yes. So at this point, we've I think we've undertaken some criticism for being flexible. And call. Flexibility just isn't maximizing short term earnings for us.

Speaker 2

It's maximizing the business model to be able to take advantages of acquisitions, investments and Keeping flexible in difficult times, which right now is uncertain. So after waiting, we're certainly not ready to lock in short term rates or Longer term rates, while we're in the middle of what we think will be an increasing interest rate cycle, but that doesn't mean at some point in the future call. Where we think with asset liability management, we wouldn't lock in a portion, but that's not on the near term goals right now.

Speaker 5

Call. We'll get to our next question on the line call. From Manan Gozalia, Morgan Stanley. Go ahead.

Speaker 9

Hey, good morning, Paul and Paul. Call. I wanted to get your thoughts a little bit more on the deposit beta and the 15% assumption for call this cycle. So first, if you can remind us where deposit rates peaked in the last cycle? And then call.

Speaker 9

If I think about the differences this time around, on a macro level, we're getting a much faster pace of rate hikes than last time. Inflation is higher. The Fed is going to shrink their balance sheet sooner. And for Raymond James specifically, the bank is a lot larger call. And you have the upcoming acquisition of TriState.

Speaker 9

So with that in mind, what are your thoughts on call. How the deposit beta dynamic will play out and what that will do to deposit rates this cycle?

Speaker 4

Call. Yes. I mean, there are a lot of differences this cycle versus last rate cycle. So your guess is probably as good as ours. We're going to be very competitive and call.

Speaker 4

Try to be generous with our clients. The 15% kind of assumptionguesstimate that we have for the first 100 basis points, call. Which includes the 1st rate increase in March where the deposit beta was obviously extremely low across the industry, call. We have a few basis points on average for the cost of funds in the sweep, and that's when Fed Funds target topped out at about 2.5%. So call.

Speaker 4

Usually, the investable cash, going back to the cash shorting topic, gets invested in short term alternatives like purchase Money market funds, I think we have the best purchase money market fund platform in the industry for our clients who are looking to optimize their yields. So call. That's kind of how we're thinking about it in terms of bifurcating the cash in the account and how we pass on in the Sort of operational cash component of the accounts, but we're obviously going to look at the competitive environment as rates rise and call.

Speaker 2

I think if you look too that all cycles are different and things happen different. So the first thing call. You have to be flexible and responsive. We've done a good job even planning out various scenarios and cycles, what we do well in advance. Call.

Speaker 2

So our best guess right now is it will be like the last cycle, just faster. So we may have to move quicker, but we think the relative spreads and things will still be there. We certainly have a lot more cash. And economically, even though when you lose balances, you still gain that interest income call. Because of the rate differential.

Speaker 2

So it should be positive at least through the next couple of raises and then longer term is whatever longer term is.

Speaker 9

Yes. I guess a follow-up to that is what the rate sensitivity, the $600,000,000 will look like For the next 100 basis points, right? Because per se, we're going to get several rate hikes in short order presumably by the time we get call. To June, July, we'll be talking about the next 100 basis points. So any thoughts on what that $600,000,000 should look like?

Speaker 9

Just based on your comments, call. Assuming we need to haircut that a little bit, but would love your thoughts on that.

Speaker 4

I think what most people are assuming is that company. The incremental benefits with incremental rate hikes are going to decline significantly, still be a benefit net net, but decline relative to the first 100 basis So time will tell. Got it.

Speaker 9

And just one quick clarification, and sorry if I missed this earlier, but can you quantify If there was any material hit to AOCI this quarter?

Speaker 4

Certainly, I don't think I would call it material. You saw that call. Our equity balance sheet equity was flat during the quarter despite strong earnings net of dividends. So I think the AOCI impact was somewhere around $300,000,000 for the quarter. And that's again call.

Speaker 4

A testament to our aversion to taking too much duration risk, we keep that securities portfolio very short, and call. We're actually shortening it now. We're buying treasuries now with sort of 2 year lives today just to position ourselves, as Paul said, to give us even more flexibility Going forward, given all the uncertainty around rates.

Speaker 5

Call. Thank you. We'll get to our next question on the line is from Bill Katz with Citigroup. Go ahead.

Speaker 10

Call. Okay. Thank you very much for taking the questions this morning and your prepared commentary. Just coming back to capital for a moment. Call.

Speaker 10

So, Paul, if I hear you correctly, some of the

Speaker 4

sort of the pressure on

Speaker 10

the Tier 1 leverage ratio sequentially probably abates a little bit, just given how client cash will move around a little bit. Call. And you obviously get the favorable impact from higher rates and notwithstanding a flat investment banking outlook and the deal with TSE. Call. You mentioned maybe some caution around buyback.

Speaker 10

I'm sort of curious why that would be the case at this point in time given what should be call. Your pre set capital ratios net of everything.

Speaker 2

Yes. The only cautionary isn't backing out of our plan to buy back the TSC purchase price. It's just we're in a very uncertain economic environment. And if things tanked, We'd have to look at if the market really tanked and no telling what happens or if the geopolitical thing really Heightens and becomes global, we'll be more cautious and more on pace. Now if the price of that happens on the And stock prices were affected.

Speaker 2

We'll probably still be able to accomplish it, but we're just we always look at the macro outlook. Number 1 for us is safety and flexibility. And secondary is execution. So it was nothing more than a broad cautionary in a world that anything can go right now. And the worst case is we take a look at it, but this capital and liquidity stay number 1, but we still plan to execute that buyback,

Speaker 4

call. And maybe the one thing I would add to that is whether we buy back that stock in call. 1 or 2 quarters following closing or 3 to 4 quarters following closing, it seems like a long time in the models, but for us, it's call. We make decisions for the next 3 to 5 years, not for the next 3 to 5 quarters. And the timing of the buybacks really doesn't impact call.

Speaker 4

Results all that much a year to 2 years out. So if it makes more sense given all the factors that Paul just described to Wait a couple of quarters and we'll wait a couple of quarters. We're going to on the side of caution just as we always do.

Speaker 10

Okay. And then maybe Two part unrelated question. I apologize for nesting it this way. But on the P and L, communications had a pretty big sequential call. Any geography changes here?

Speaker 10

Any impact from Charles Stanley that you could help us maybe unpack a little bit?

Speaker 4

Call. Yes, you nailed it. It's really a lot of the impact from Charles Stanley. They had around 40 $5,000,000 of total expenses reflected in the quarter since they closed and a portion a big portion of that hit the Communication information processing line. So I think that's what you're really seeing there It's just the impact from the 2 months of Charles Stanley acquisition and some of those line items.

Speaker 10

Got you. And then just a related question is, call. I appreciate we both trying to get at the pretax margin discussion. But as you look at your core business today, I think one of the things you've talked about is call. You've been spending pretty regularly now over the last couple of years to sort of build the scale and the opportunity set.

Speaker 10

Is there anything in the core businesses that you've been underinvesting in? And I'd be call. And I'd be curious, would you be willing to change the payout grid on the private client side to accelerate growth even more? Or is sort of a 75% blended payout a reasonable thought

Speaker 2

Well, I think we've spent well on our infrastructure, and it's very leverageable. Call. The systems that we've put in, on all the back office have been a significant investment. We are we have increased our technology run rate again this year. So we're we'll continue to invest in technology As we move our all of our systems forward and the next big investments really around our client apps as we've felt that we've gotten More work to do, but a leading wealth planning desktop.

Speaker 2

So now we're putting that same technology to the client app. So the advisor and client have that same intimacy. So but outside of that, no, I think we're well invested. We're not conference. Really looking at anything and we've invested now.

Speaker 2

I mean, people asked if we're ever going to acquire anything and we've got 3 in the hopper, one closed and Hopefully, to close soon. So we've got a lot going on, and we think we've been investing well across the firm and believe in long term Growth will be great with these acquisitions. They weren't focused on short term growth, although once integrated, I think they'll do very well.

Speaker 3

Call. We'll

Speaker 5

take our next question on the line

Speaker 11

call. Maybe just give me some clarity on the PCG call. AG Asset Management revenues and the guidance of that being likely down 3% or so in fiscal 3Q. Call. I guess we're seeing the fee based assets essentially flat over the past two quarters.

Speaker 11

And I understand that's really due to adding the Charles Stanley assets. So organically down they're down 3%. I guess the question is, I guess, where are those Charles Stanley revenues coming through in that segment then? Call. Just given what you said,

Speaker 9

it would imply that none

Speaker 11

of those revenues are really coming through that Asset Management line.

Speaker 4

Yes. I think it's just a function of timing, Kyle. So we We did have those revenues coming through those lines for just over 2 months of the quarter, but the assets weren't really reflected until the end of the quarter. So call. All we're saying is that despite the assets appearing being flat sequentially, those revenues will decline somewhere around 3 Starting next quarter because we already have accounting for those revenues, at least 2 months of it so far this quarter.

Speaker 4

Call. Got it.

Speaker 11

Thanks. And then just given how yields trended through the 1st or through the calendar Q1, call. Just wondering if you had any details regarding how is the AFS portfolio trended in the quarter. So maybe anything on end of period AFS balance call. And I guess do you view the securities reinvestment rates right now as attractive enough to really start moving some of the CIP deposits into the bank to ramp up growth in that securities portfolio more meaningfully.

Speaker 4

We're doing that modestly. I mean the we've Shortening the duration with treasuries to 2 years from the 3 to 4 years that we were buying an agency mortgage back and The incremental spread on what we're buying versus what's running off from the legacy portfolio is just north of 1%. Call. We think it's somewhat attractive. I mean that comes with duration, and we want to stay flexible, as Paul pointed out before.

Speaker 4

So we're not going Do that in a dramatic way, but we do have a lot of cash in CIP that is invested in very short term treasuries and the 30 to 60 day treasuries. And so to the extent that we can deploy some of that incrementally into the bank to earn a higher yield And sort of wait until this demand from 3rd party banks recover, then we think that, that would be a good trade off. But it's not going to be call. Too significant, I would say, in terms of growth of the securities portfolio. But we do expect ongoing growth between now and the end of the fiscal year.

Speaker 4

Call.

Speaker 11

Got it. And then just a follow-up question on that one is that CIP is now sitting at $17,000,000,000 in balances. Call. Is there a certain percentage of those balances we should think about you wanting to migrate and deploying the bank versus moving off balance sheet to free up capital? Given what you just said, is it fair to think about a majority of those?

Speaker 11

You really want to move off balance sheet into the 3rd party suite?

Speaker 4

Call. Yes. I guess we don't have any sort of predetermined objectives in terms of where it goes. We think that there's we know that about call. $15,000,000,000 of those balances are $13,000,000,000 today because they have declined by a couple of 1,000,000,000 so far in April due to fee billings and tax payments call.

Speaker 4

Is sort of what we consider overflow balances that would prefer FDIC insurance When capacity recovers for that with 3rd party banks and or when Raymond James Bank needs that capacity as well. Call. Over time, we would expect somewhere around $10,000,000,000 or north of $10,000,000,000 of that to get redeployed from CIP to call. 3rd party banks, Raymond James Bank or redeployed into higher yielding alternatives for clients.

Speaker 5

Call. Thank you very much. We'll get to our next question on the line from Devin Ryan from GMP Securities.

Speaker 2

Call. Apologies, I hopped on a minute late, and I know there's been a lot of questions on Pretax margin and expenses, I don't think you hit this yet. I'm just trying to think about just the comp ratio, and I appreciate we're going to hit a lot more details on call. May 25. But when we look back a couple of years ago, your comp ratio is 65%, 66% when rates were more, call it, normalized.

Speaker 2

Conference. Without making a call on capital markets and kind of considering a few

Speaker 7

of the small acquisitions you've done, I call. I just want

Speaker 2

to think about maybe what's structurally different today. A lot of conversation in the market around expense inflation and higher base salaries and base overall compensation. So is that call. Meaningful to change kind of the narrative of the comp ratio or the mix being so different that it changes

Speaker 7

kind of the way we should

Speaker 2

be thinking about Comp going forward in the structure relative to prior period of kind of more normalized rate environment. Call. Yes. So this quarter's comp ratio was a surprise to us given capital markets were down and given that a lot of our FICA and other stuff hits this quarter, comp. It really didn't come through the quarter.

Speaker 2

It was at the end of the quarter. So as rates go up, those comp ratios will go down because they're non compensable. They'll be pretty significant. And again, Capital Markets, if it recovers from the pace it is, it will drive it down also. So we're looking call.

Speaker 2

We feel pretty good about where it's headed in the interest rate environment. And call. We do see pressure. Our recruiting has actually been pretty good. There is market pressure.

Speaker 2

So my guess, it will be a slight headwind for everyone, but we don't see it being a call? Significant number. But we're looking at that and looking at the adjustments and sensitive to People that aren't in the top part of their payouts, making sure they're compensated so that they can kind of survive a high inflationary environment. But so That would be on the other side somewhat, but it's going to be well outpaced by, I think, interest spreads and a more Normalized return to capital markets. Right.

Speaker 2

Okay. Thanks, Paul. And then call. Just one, thinking about kind of the U. K.

Speaker 2

Opportunity, obviously, with Charles Stanley now closed, I appreciate it's still call. Very small for Raymond James, but can you remind us, Paul, how you're thinking about the addressable market in the U. K. For the firm And whether you're having dialogue with other firms there. I know you're talking to Charles Stanley for some time and knew them well.

Speaker 2

So are there more opportunities like that? How should we think about the expansion in

Speaker 7

the U. K, organic versus inorganic? And really, I guess, the thought is, Does Charles Stanley now having that kind of deal, not necessarily behind you, but completed, does that set you up for more deals in the region?

Speaker 2

So strategically, it's a very fragmented market. With Charles Stanley, I think it puts us close to the top 10 just outside. And So we think there's a lot of opportunity. Charles Stanley really has high quality people, high quality back office, But they've been slower on growth mainly because they've been more capital constrained. We've had a much Smaller but a much quicker growing, probably an industry leading growth in terms of inorganic, I mean, recruiting It's U.

Speaker 2

K. Market. So we hope the combination that we can, between their support, our capital and our ability to recruit and grow, Hopefully, to combine the best of all those worlds. Now it's going to take a while to integrate that, right? I mean, we've closed, but we've got call.

Speaker 2

We have a year long project just to look at systems integration, best of class, making sure that we call. As always, our focus is first retention. We've had a we don't want to mess up our consecutive series of integrations where we've kept the people. Call. And part of that is we're very, very thoughtful in how we put things together.

Speaker 2

We don't slam them together. We haven't assumed anybody or any system was going to come out on top, and they're doing call. Both teams on both sides, I think, a great job of looking at that, and then we will integrate the system. So it'll take a while to gear that up, but call. We think both.

Speaker 2

So we're not going to look at any acquisitions during that integration period. But after it's integrated up and running and we get it running as we'd like to, I think there are opportunities in that market, and you can see that RBC enters the market with an acquisition. So I think others see that opportunity too and but it's going to take a little while to integrate it. I guess the bottom line, but we're very optimistic and really like the people. Yes.

Speaker 2

Okay. That's great. One last one here, just on On the capital markets side of the business or I guess the institutional side, the M and A pipelines are strong as

Speaker 7

I heard. You guys have a pretty diverse focus there, which maybe insulates more from volatility in other parts of the market. I guess,

Speaker 2

what are you guys seeing in terms of closure rates, how much are deals getting pushed out and then new deals filling back into the pipeline? Just trying to

Speaker 7

think about Kind of the push and pull in that business, I appreciate that it can change to the extent markets remain volatile or vice versa. But Just the comfort in kind of the, I don't know, the next 12 months for the M and A Advisory business coming off of, obviously, a great prior 12 months.

Speaker 2

Yes. So comfort is a hard word to use in this environment right now. We think at this run rate, Even in this environment, we can continue. But certainly, there's a lot of upside. What we're seeing is most deals in pause, not canceled In the pipeline, we see new deals coming in and into the pipeline.

Speaker 2

So I would call call. Strong, maybe it's more robust. We've had a very good pipeline, and the problem is it's been paused. So part of that is A little bit market valuation, certainly on the underwriting side, but the M and A side a little bit. And then the uncertainty is Had people sit back and wait, making sure that with the political uncertainty globally, that That's not really going to hurt the market.

Speaker 2

So I would say right now, it's pause deals that are still in the pipeline. Now if there's If the geopolitical thing heats up, you may some of those pause may turn to cancel or if the market really tanks, but the market stays steady and People get more comfortable geopolitically, I think there's a lot of upside, too. So it's just hard to call because those are the 2 impacts.

Speaker 5

Call. We'll take Next question is on the line from Jim Mitchell with Seaport Research.

Speaker 4

Call. Maybe just quickly on the reserve ratio, I think you bounced around 1.15% to 1.2% the last 2 quarters. Is that the right sort of target for you guys given the mix of loans right now? And so as we think about provisioning going forward, try to stick to that level? Call.

Speaker 4

Yes, I think that is given the mix of our assets, 1.2% seems reasonable. That was roughly the percent that we Saw on the provision this quarter. But again, we're using CECL models. So if macroeconomic conditions deteriorate, you could see provision call. Increase and vice versa as macroeconomic conditions improve.

Speaker 4

Was there any was CECL contribute in any way

Speaker 2

to this? Or was it just all growth?

Speaker 4

Call. Most of it was growth related. As you saw, we had really strong growth at the bank this quarter.

Speaker 6

Right.

Speaker 4

Call. And can you remind us what your betas were in the second 100? I appreciate there's you can't predict it, but maybe in the last cycle What the betas were in the second 100 basis points? Yes. If my memory serves me correctly, I think we're closer Industry to the 50% range for the last couple of increases in as we got from 200 to 250 basis

Speaker 5

call. Thank you very much. And we'll proceed with our final question for today from the line of Chris Allen with Compass Point. Go right ahead.

Speaker 4

Call. I think most of them have been covered. I guess I wanted to quickly just follow-up on the Sunridge Partners deal. Call. The press release make it sound like an electronic market maker I'm sorry, market maker on electronic trading platforms, but looking at their website, it seems a bit more call, potentially advisor facing.

Speaker 4

So maybe give us some color there and whether this deal was more driven by the need technology improvements on the fixed income trading side or whether there's other synergy opportunities moving forward? Call. Yes.

Speaker 2

I think it's there's a lot of pieces to it. 1st, culturally and risk management wise, as we've been talking them for quite call. We think they're a great fit. And what it adds strategically for us is the weakest part of our fixed income platform has been the corporate area versus our competitors, we're a lot smaller in the corporate bond area. So they bring really great expertise there.

Speaker 2

Call. Secondly, they do have trader assisted technology where they're able to sort and execute trades with a lot of analytics. And we believe that that system can be migrated to other parts of our business too to help tech enable the trading, which is important. Call. But it's relatively small, but we really like the app.

Speaker 2

So we think it may be something we can convert To the advisor side of our business. So there's lots of pieces we really like. We really like the people, the risk management and the technology we think can be really spread to lots of part of our fixed income business.

Speaker 4

Good. Thanks, guys.

Speaker 2

Call. Thanks, Chris. Well, I appreciate everyone coming on today. I know it's a crowded day. I think that given our Disciplined that we're really into a market with rising rates that will do really well.

Speaker 2

We have plenty of capital to deploy even with our 3 acquisitions and We'll stay true as we always have to our guiding conservative principles. But I think given call. I think we're still in good shape to make all the commitments unless something weird happens in the market. But if it does, again, call. With all of our capacity and flexibility, I think relatively we'll be in good shape.

Speaker 2

So appreciate you joining us, and we'll talk to you next quarter.

Speaker 5

Call. Thank you very much. And that does conclude the conference call for today. We thank you for your participation and as you may disconnect your lines. Have a good day.

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Earnings Conference Call
Raymond James Q2 2022
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