Raymond James Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2023

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Raymond James Financial's First 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 Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

Speaker 1

Good afternoon, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer and Paul Shukri, Chief Financial Officer. The presentation being reviewed today is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions.

Speaker 1

Calling your attention to Slide 2. Please note certain statements made during this call may to 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 in 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 10Q and Forms 8 ks, which are available on our Investor Relations website. During today's call, we will also use certain non GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. With that, I'd like to turn the call over to Chair and CEO, Paul Reilly. Paul?

Speaker 1

Good afternoon,

Speaker 2

And thank you for joining us today. Although there was a lot of disappointment for us in the Bucks playoff game And even more disappointment for me is Paul Shuckre's Bulldogs won the national championship. Raymond James came through again with another good solid performance. During a volatile and challenging market environment, We generated strong quarterly results, including record net income available to common shareholders of $507,000,000 Annualized return on common equity of 21.3 percent and annualized adjusted return on tangible common equity of 26.1%. Once again, these results highlight the value of having diverse and complementary businesses.

Speaker 2

Record Private Client Group results driven by robust organic growth along with strong expansion of net interest margins in the bank segment and yields on the RJ VDP balances of 3rd party banks in the PCG segment offset market driven declines experienced through the Capital Markets businesses. As demonstrated this quarter, with the sharp increase We have been and remain well positioned for continued rise in short term interest rates With diverse and ample funding sources, a high concentration of floating rate assets and strong balance sheet flexibility given solid capital ratios. Turning now to the results starting on Slide 4. In the 1st fiscal quarter, The firm reported net revenues of $2,790,000,000 record pretax income of $652,000,000 and record net income available to common shareholders of $507,000,000 or $2.30 per diluted share. Excluding expenses related to acquisitions and the favorable impact of a $32,000,000 insurance Settlement received during the quarter, adjusted net income available to common shareholders was $505,000,000 or $2.29 per diluted share.

Speaker 2

Quarterly net revenues were flat compared to the prior year quarter and down 2% compared to the preceding quarter, largely driven by the benefit of higher short term interest rates on net interest income and RJDDP fees from 3rd party banks, offset by the market driven declines in Investment Banking Revenues and Asset Management and related administrative fees. Record quarterly net income available to common shareholders increased 14% over the prior year's fiscal Q1, largely due to higher net interest income and RJ BDCs from 3rd party banks. And as I mentioned earlier, we generated very strong returns with annualized return on common equity of 21.3 percent and annualized adjusted return on tangible common equity of 26.1 percent. Impressive results, especially given the challenging market conditions and our strong capital position. Moving on to Slide 5.

Speaker 2

We ended the quarter with total client assets under administration of $1,170,000,000,000 PCG assets and fee based accounts of $633,000,000,000 and financial assets under management of $186,000,000,000 With our unwavering focus on retaining, supporting and attracting high quality PCG consistently generates strong organic growth. We ended the quarter with nearly 8,700 Financial Advisors and generated domestic net new assets of $23,000,000,000 in the quarter, representing a 9.8% annualized growth rate on beginning of the period domestic PCG assets. Net new assets were strong this quarter and also helped by the seasonally high interest and dividends received in December. Over the trailing 12 month period, we generated net new asset growth of 7.3% of domestic PCG assets at the beginning of the period. During the same 12 month period, we recruited to our domestic Contractor and employee channels, financial advisors with nearly $300,000,000 of trailing 12 month production and approximately $40,000,000,000 of client absence at the previous firms.

Speaker 2

Total clients' domestic cash balances declined 10% to $60,000,000,000 representing 5.9% of domestic PCG assets under administration. The domestic suite balances represent our lowest cost deposits as we have yet to utilize enhanced yield savings accounts to attract cash deposits. Total bank loans grew 2% sequentially to a record $44,000,000,000 reflecting growth at both Raymond James bank and TriState Capital Bank. Moving to Slide 6. The Private Client Group generated record results With quarterly net revenues of $2,060,000,000 and pretax income of $434,000,000 Asset Based revenues declined.

Speaker 2

However, the segment's results were lifted by the benefit from higher short term interest rates, including increased yields on RJVDP fees from 3rd party banks and the bank segment. The Capital Markets segment generated quarterly net revenues of $295,000,000 and a pretax loss of $15,000,000 Capital Markets revenues declined 52% compared to the record setting results in the prior year in quarter, mostly driven by lower investment banking revenues, largely due to the volatile and uncertain markets. The Asset Management segment generated pretax income of $80,000,000 on net revenues of $207,000,000 The decreases in net revenue and pretax income were largely attributable to lower financial assets under management As net inflows to fee based accounts and the Private Client Group were offset by a year over year fixed income and equity markets declined. The bank segment generated record quarterly net revenues of $508,000,000 and pretax income of $136,000,000 Net revenue growth was primarily due to higher loan balances and significant expansion of the bank's net interest margin to 3.36 percent for the quarter, up 144 basis points over a year ago quarter and 45 basis points from the preceding quarter, reflecting the flexible and floating rate nature of our balance sheet.

Speaker 2

And now for more detailed review of our financial first quarter results,

Speaker 3

I'm going to turn the call over to Paul Shuebry. Paul? Thank you, Paul. Starting with consolidated revenues on Slide 8. Quarterly net revenues of $2,790,000,000 were flat year over year and declined 2% sequentially.

Speaker 3

Asset Management and related administrative fees declined 10% compared to the prior year quarter and 4% compared to the preceding quarter, in line with the guidance we provided on last quarter's call based on lower fee based assets at the end of the preceding quarter due to the equity market declines. This quarter, fee based assets grew 8%. This growth should provide a tailwind for asset management and related administrative fees, which we expect to increase 5% to 6% in the fiscal Q2, reflecting 2 fewer billable days. Brokerage revenues of $484,000,000 declined 13% compared to the prior year's fiscal Q1 and grew 1% over the preceding quarter. The year over year decline was largely due to lower fixed income and equity brokerage revenues the Capital Markets segment as well as lower asset based trail revenues and PCG.

Speaker 3

I'll discuss account and service fees and net interest income shortly. In a much more difficult market environment We anticipated on last quarter's call, Investment Banking revenues of $141,000,000 declined 67% compared to the record set in the prior year quarter and 35% compared to the preceding quarter. Despite a healthy pipeline and good engagement levels, there remains a lot of uncertainty in the pace and timing of deal closings given the heightened market volatility. At this point, it is too difficult to say when conditions will become conducive to increased activity. Other revenues of $44,000,000 declined 45% sequentially, primarily due to lower revenues in the affordable housing investments business, which was seasonally high in the preceding quarter.

Speaker 3

Looking forward, this business continues to have a strong pipeline. Moving to Slide 9. Clients' domestic cash sweep balances ended the quarter at $60,400,000,000 down 10% compared to the preceding quarter and representing 5.9 percent of domestic PCG client assets. The suite balance declines were experienced in the client interest program at the broker dealer as well as with 3rd party banks. As of last Friday, These balances have declined to just under $57,000,000,000 reflecting the quarterly fee payments of approximately $1,100,000,000 paid in January as well as additional cash sorting activity during the month.

Speaker 3

The Raymond James Bank Deposit Sweep program continues to be a relatively low cost source of funding and TriState Capital Bank adds an independent deposit franchise, providing a more diversified funding base. And as we've seen deposits decline significantly across the entire financial system, we realize even greater value in having multiple funding sources. To that end, we are also in the process of launching an enhanced yield savings program for our Private Client Group clients. Turning to Slide 10. Combined net interest income in RGBTP fees from 3rd party banks was $723,000,000 up 253% over the prior year's fiscal Q1 and 19% over the preceding quarter.

Speaker 3

This strong growth reflects the immediate impact from higher short term rates given the limited duration in high concentration of floating rate assets on our balance sheet. Our long standing approach has been to maintain a high concentration of floating rate assets, which is proving to be a significant tailwind in this rising rate environment. The bank's net interest margin shown on the bottom portion of the slide increased 45 basis points sequentially to 3.36 percent for the quarter. And the average yield on RJ BDP balances with 3rd party banks increased 87 basis points to 2.72%. Both the NIM and the average yield on RJBDP balances increased more than we expected on last quarter's call as the deposit beta on the last rate increase was closer to 15%.

Speaker 3

The spot NIM for the bank segment is currently close to 3.5% and the spot yield on RJBDP balances is approximately 3.2%. So we currently expect continued near term tailwinds for net interest income and related fees despite the ongoing cash shorting activity. The anticipated rate increases should also help, But remember, there are 2 fewer days in the 2nd fiscal quarter. While we still have suite balances with 3rd party banks that could be redeployed to the bank segment. Longer term, if rates stabilize at these levels, we expect the bank's NIM will be impacted by the mix deposits, anticipating a larger portion of higher cost deposits being utilized to fund the future balance sheet growth.

Speaker 3

While we are pleased to see a significant NIM expansion, as we have said in the past, We have always prioritized net interest income over net interest margin and our goal is to continue growing net interest income as we deliberately grow the balance sheet over time. Moving to consolidated expenses on Slide 11. Beginning with our largest expense, compensation. The total compensation ratio for the quarter was 62.3%, Nearly flat from the preceding quarter, the adjusted compensation ratio was 61.7% during the quarter. Despite lower capital markets revenues, the compensation ratio largely reflects a significant benefit from higher net interest income and RGBT fees from 3rd party banks.

Speaker 3

As a reminder, the impact of salary increases effective on January 1 and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal Q2. Non compensation expenses of $398,000,000 decreased 13% sequentially. Adjusting for acquisition related non compensation expenses of $11,000,000 and the favorable impact received of $32,000,000 both included in our non GAAP earnings adjustments, non compensation expenses were $419,000,000 during the quarter. The bank loan provision for credit losses of $14,000,000 in the quarter primarily reflects changes to macroeconomic assumptions used in the CECL models as well as modest loan growth. I'm proud of our continued disciplined management of expenses exhibited again this quarter, where we remain focused on investing in growth and ensuring high service levels for advisors and their clients.

Speaker 3

Given the benefits from higher short term interest rates, we expect to paying our compensation ratio well below 66% as it has been around 62% over the past two quarters, even with much lower revenues in the Capital Markets segment this quarter. Non compensation expenses, excluding provision for credit losses and the aforementioned non GAAP adjustments are still expected to be around $1,700,000,000

Speaker 2

for the fiscal year.

Speaker 3

Slide 12 shows the pretax margin trend over the past 5 quarters. In the fiscal Q1, we generated a pre tax margin of 23.4%, a very strong result, highlighting the benefit of our diversified business model, the upside we preserve to higher short term interest rates and our consistent focus on being disciplined on expenses. Similar to my comments on the compensation ratio, Given the interest rate tailwinds, we currently believe we are well positioned to continue delivering pre tax margins above the previously disclosed 19% to 20% target. However, given the cash sorting dynamics as well as interest rate and market uncertainty, we believe it is premature to formally update our targets in this volatile environment. On Slide 13, at quarter end, total assets were $77,000,000,000 a 5% sequential decrease, primarily reflecting the decline in client interest program cash balances.

Speaker 3

The reduction of balance sheet assets helped increase the Tier 1 leverage ratio during the quarter. Liquidity and capital remained very strong. RJF corporate cash at the parent ended the quarter at $2,000,000,000 well above our $1,200,000,000 target. The Tier 1 leverage ratio of 11.3%, The total capital ratio of 21.5 percent are both more than double the regulatory requirements to be well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.

Speaker 3

The effective tax rate for the quarter was 21.9%, reflecting a tax benefit recognized for share based compensation that vested during the period. Going forward, we still believe 24% to 25% is an appropriate estimate to use in your models. Slide 14 provides a summary of our capital actions over the past 5 quarters. In December, The Board of Directors increased the quarterly cash dividend on common shares 24% to $0.42 per share and authorized share repurchases of up to $1,500,000,000 replacing the previous authorization of $1,000,000,000 During the fiscal Q1, the firm repurchased 1,290,000 shares of common stock for $138,000,000 at an average price of $106 per share. As of January 25, 2023, dollars 1,400,000,000 remained available under the Board's approved common stock repurchase authorization.

Speaker 3

Since the closing of the TriState acquisition, on June 1 through January 25, We have repurchased approximately 3,000,000 common shares for $300,000,000 or approximately $100 per share under the Board authorization. We remain committed to offset the share issuance associated with the acquisition of TriState as well as share based compensation dilution and still expect to achieve our objective of repurchasing $1,000,000,000 of shares and fiscal 2023. But of course, we will continue to closely monitor market conditions and other capital needs as we plan for these repurchases over the coming quarters. Lastly, on Slide 15, 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 remains healthy.

Speaker 3

Criticized loans as a percentage of total loans held for investment ended the quarter at 1.01%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 0.92%, down from 1.18 percent at December 2021, nearly flat sequentially. The year over year decline in the bank loan allowance for credit losses as a percentage of total loans held for investment reflects the higher proportion of securities based loans largely due to the acquisition of TriState Capital Bank. Securities based loans, which account for approximately 34% of our bank loan portfolio, are generally collateralized by marketable securities and typically do not require an allowance for credit losses. The bank allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 1.64% atquarterend.

Speaker 3

We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints and a potential recession on our corporate loan portfolio. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Speaker 2

Thank you, Paul. As I said in the start of the call, I'm pleased with our results and our ability to generate record earnings during what continues to be a very volatile market. And while there are many uncertainties, we believe we're well positioned to drive growth over the long term across all of our businesses. In the Private Client Group, next quarter results will favorably impacted by the expected 5% to 6% sequential increase in asset management and related administrative fees. Additionally, the segment will continue to benefit from higher short term interest rates as described by Paul.

Speaker 2

Focusing more on the long term, I am optimistic we will continue delivering industry leading growth as current and prospective advisors are attracted to our client focused values and leading technology and production solutions. In the Capital Markets segment, while M and A pipelines remain healthy, the pace and timing of the closings will be heavily influenced by market conditions. And in the fixed income space, depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. However, Sunridge, with its rapidly evolving fixed income and trading technology marketplace, enhances our position as this business typically benefits from elevated rate volatility. Over the long term, We are well positioned across capital markets for growth given the investments we have made over the past 5 years, which have significantly increased our productive capacity and market share.

Speaker 2

In the Asset Management segment, Financial assets under management are starting the fiscal 2nd quarter up 7% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive. We remain confident that the strong growth of assets and fee based accounts in the Private Client Group segment will drive long term growth of financial assets under management. In addition, we expect Raymond James Investment Management, which generated modest net inflows this quarter to help drive further growth through increased scale, distribution, operational and marketing synergies. And the bank segment is well positioned for rising short term interest rates and has ample capital to grow the balance sheet prudently. However, In an increasing rate environment, loan growth will face headwinds until rates stabilize and borrowers adjust to a new normal in the cost of borrowings.

Speaker 2

Additionally, as cash sorting has continued in the Suite program, We expect to increase the focus on funding the growth of the bank's balance sheet with higher costs, diversified sources over the long term. Currently, we have sweep balances at 3rd party banks that could be redeployed to the bank segment. However, the past has also taught us that cash sweep balances can decrease or increase rapidly depending on market conditions. Importantly, the credit quality of the bank segment's loan portfolio remains strong, and we are closely watching economic conditions related to the lending portfolio. In just a short period since the closing of the acquisition TriState Capital, I am very pleased with their performance.

Speaker 2

Staying true to TriState's independent operating model, including remaining a separately chartered bank with its own client relationships. This model, coupled with our strong capital, should foster its ongoing growth. It's no accident that our businesses are positioned well for future growth. It is a result of our steady focus on making decisions for the long term, especially in volatile and uncertain market conditions. We are well positioned for the continued rise in short term interest rates with diverse funding sources, solid loan growth, High concentration of floating rate assets and ample balance sheet flexibility given the solid capital ratios, which are all well in excess of regulatory requirements.

Speaker 2

Finally, in these uncertain times is when clients need trusted advice the most. And I want to thank our advisors and associates for their unwavering dedication to providing service to their clients each and every day. Our strong results are a direct reflection of your contributions. So thank you very much to all of you. With that operator, will you please open it up for questions?

Speaker 4

Thank

Speaker 5

And the first question comes from the line of Devin Ryan with JMP Securities.

Speaker 6

Nice to speak with you after The press release in the evening, which is great. I guess just a couple of quick ones on my end. First, on the buyback. So you repurchased $138,000,000 It's a bit below the implied $250,000,000 average target. And so I guess the There's going to be some catch up.

Speaker 6

So I'm just trying to understand the factors that impacted the cadence, whether it was being price conscious or were you in blackout the quarter that we didn't see or maybe any other reasons just trying to think about, again, kind of the cadence there.

Speaker 3

We're still targeting the $1,000,000,000 of repurchases for fiscal 2023, as we've said several times now. And So that obviously means we would have to wrap it up on an average basis going forward to get to that $1,000,000,000 mark. There was a lot of volatility this particular quarter. And then as you point out, there's always a blackout period. So we were Please take $136,000,000 in, but understand that to hit our target going forward, we're going to have to kind of increase that average.

Speaker 3

But with that being said, we're still going to a lot can change between now and the end of the fiscal year. So we do monitor market conditions and all the sources and uses that we have for cash and capital at the firm.

Speaker 6

Got it. Okay. And then just a follow-up You're on net interest income in private client. So, yes, that's been obviously very strong and that came in better than we were looking for. And we see the Decline in the kind of the client interest program.

Speaker 6

And so if you're trying to think about the other drivers there, was the Kind of continued shrink there driven by margin and just higher margin rates or some of your peers had some sec lending that helped Well, so I'm curious if there's any kind of lumpy sec lending in there. Just trying to think about some of the moving parts that's keeping that really strong.

Speaker 3

SEC lending was not a driver. It really was just the higher yields on both the segregated assets pursuant to the broker dealer regulations as well as the higher yields on the margin balances. But I will point out going forward, sort of the last in first out Type of cash is really the client interest program cash and that has declined the most dramatically during this Cash sorting cycle. And so we're probably at around $3,000,000,000 to $4,000,000,000 of those balances today versus sort of the average balance for the quarter of $6,000,000,000 So that would be something you would need to consider, which would partially be offset By the higher rates going forward as well, factoring in a full quarter of last quarter's rate hikes and potential rate hikes this quarter, but something that you would need to factor into your modeling.

Speaker 5

And the next question comes from the line of Jerry O'Hara from Jefferies. Please proceed with your question.

Speaker 7

Great. Thanks and good evening. Hoping you might be able to just give a little incremental color on the enhanced yield product, Where you see the sort of demand coming for that and what the potential kind of rates might be that could be offered to clients?

Speaker 2

Yes. If you look at, I think almost everyone has offered enhanced yield programs today. They're not new. We just haven't had a need for them because of the amount of client cash we've had. As that dwindles more and just even as a defensive mechanism, We will offer them.

Speaker 2

And that's the account whether people have people in money markets and want an insured product, which we have or if People are thinking of moving their money. They have a competitive yield without moving their money into sweeps I mean into money markets or Fixed income products are things. So that's really a number of firms in the industry have primarily been relying on that. We haven't because of the cost of funds. But As we've had we're reaching an area where we've always said that if we get to this area, we'll offer some of those products.

Speaker 2

The Competitive rates in today's market are probably between 3.75%, 4%, some outliers on either side, but that's The cost and what our competitors have been doing and to the point that we're going to make sure we're always on the positive side of cash. Good news is Even at those much higher rates, we can still earn a spread. And also since we really have all low yield deposits and almost virtually High cost deposits adding some will just be it won't be as big of an impact on our cost of funds as most places have significant deposits today.

Speaker 7

Great. And then maybe one just on the recruiting environment. Is there anything Seasonal kind of about turning the calendar that would be sort of advantageous as it relates to Attracting and recruiting advisers. And perhaps if

Speaker 3

you could also just kind

Speaker 7

of touch on just any of the dynamics around

Speaker 2

I mean, for years, everyone said, well, we hear it's competitive. It's been competitive a long time. It continues to be competitive. I would say that the competitive environment is about the same. I'd say

Speaker 3

the only thing new in

Speaker 2

the last year is there are some 3rd party RIA aggregators that have paid more than the other firms competing for people In the advisor space, but we are at a very strong backlog. Last year, our employee division Led the way and set its own record and our independent division was a little slower in this Q1. The independents recruiting faster, the employee a little slower, I mean through 1 quarter, but what we see is the backlog very, very strong in both division, very large teams. So we still feel good about the recruiting and it's if you would just look at the last few years, I think we've been Right up at the top of the charts on net new assets and recruiting.

Speaker 5

And the next question comes from the line of Manan Ghazalia with Morgan Stanley. Please proceed with your question.

Speaker 8

I wanted to ask a question On cash sorting, can you comment on the broader trends in cash sorting? We're sort of getting closer to that 5 And as client asked, that has been a lower end of the range in the past. So is that 5% still a good base for where cash should settle. And how quickly do you think you get that? Yes.

Speaker 3

I think the true answer is no one really knows. We That 5% number was based on that 2016 through 2019 period. So we don't have a lot of, as an industry, A lot of great historical benchmarking because of course even in that 2016 to 2019 period, the Fed funds target topped out at 2.5%. And so arguably, client sensitivity around rate is heightened when you're at Today's Fed fund target rate and the yields that you can earn on your investable cash balances. So 5% is Good example, Zanipa, we're certainly not hanging our hat on that potentially being a floor, which is why, as Paul says, we are looking at all the diversified sources of funding that we can offer our clients that would be attractive to our clients And also gives us additional appreciation of the TriState Capital franchise because they have an independent and Diversified funding source as well.

Speaker 2

I don't think we try to figure out where the bottoms are. We when we acquired when TriState joined us and we talked about diversified funding. I think a lot of people said, well, why are you even bringing that up? I mean, you got record cash deposits. Well, We always anticipate these time frames.

Speaker 2

And just in 2019, where we started ready to roll out some higher yielding Products because no one wanted cash all of a sudden. We got flooded with cash again overnight. So we know these dynamics can change and change rapidly. And so Cash sorting as reported has continued whether 5% is the bottom or it goes a little lower. Don't know.

Speaker 2

A lot of the lower balance deposits, which are significant, have been very, very steady. So at some point, the higher deposits probably find a home where It's material enough at today's rates to make a difference on the lower of just like bank accounts. It's not enough to make a change. So we're just We always prepare and fear the worst, but generally because you just don't know. So I wish I hope 5% is the bottom, but we'll see.

Speaker 2

We'll be prepared if it wasn't.

Speaker 8

Got it. Okay. Great. And then in terms of deposits, you noted you're allocating more deposits to the bank rather than the 3rd party bank program. So is there a specific Loan to deposit ratio or liquidity levels that you're thinking about maintaining at the bank?

Speaker 8

And how should we think about going forward if cash loading continues at the same rate?

Speaker 3

Yes. The biggest constraint on that is just sort of Percentage of BDP sweep deposits that we want in our own bank because we always wanted there to be a cushion of balances that are swept to 3rd party banks in case balances, as Paul said, do decline more rapidly than we expect. So That's really kind of the governing factor. It's roughly at 75% today in terms of the amount of this BDP sweep cash that is going to our own banks. Maybe it was a little bit higher than that.

Speaker 3

I mean of the 14 The $15,000,000,000 of cash with 3rd party banks today, a good portion of that could be swept over to our own bank, while still preserving clients' FDIC insurance that we offer them, which is best in class in the industry, by the way, as far as we can tell. But we also want to make sure we're being prudent and not exposing ourselves to funding risk by shifting too much over.

Speaker 2

We have plenty of capital and liquidity. So our first source is to fund the banks. That's our business. And then to the extent The sweep is really a cash overflow in a lot of ways, but a good part of our business model. So right now, We're not alarmed.

Speaker 2

We still have flexibility. But at some point, we've known people that have gone up to 90% of cash or something. We just That's a little too leveraged for us.

Speaker 5

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

Speaker 9

Hey, guys. Good evening. Thanks for the question. Apologies for a 2 parter, but it is related. So I'm hoping to just better understand So on the one hand, Paul, you talked about slowing loan growth in this environment.

Speaker 9

And then at the same time, you're talking about launching an enhanced yield product on the deposit side despite the fact that you have lots of liquidity and third party bank Deposit sweep still. So maybe help me understand how much of that $18,000,000,000 third party bank is ultimately sweepable to your bank? How big the enhanced yield program you think ultimately will be for you guys over the next 12 months? And how are you thinking about the overall Growth at the bank in terms of the growth in assets?

Speaker 3

Yes. So the growth ultimately, the growth in the bank is driven by client demand, right? And so As Paul said in his prepared remarks, that client demand is experiencing headwinds now that interest rates are on the move, As you would expect, until they get used to the new normal of interest rates, we expect those headwinds to continue. But One thing we will not do is when client demand does slow down naturally given the rate environment today, we're not going to stretch for growth or Get into asset classes that are not really client oriented. With that being said, in terms of the funding, We always want to prepare for the future.

Speaker 3

1 quarter is certainly not a trend. And so we want to be there for our clients, Whether it's a year to 2 to 5 years out from now and so we want to make sure that we're diversifying and strengthening our funding sources so that We have ample funding for when client demand does come back because we know it will eventually come back. We just don't know when Or how quickly it will be. So that's sort of how we think about the strategy. So long term strategy versus trying to manage it quarter to quarter.

Speaker 2

I think in terms of the amount is we don't know. So what you do is you turn on the program, start raising money and you can always accelerate it by Letting more clients know, pushing it more, changing the rate in the competitive market, I mean, you have lots of levers to speed it up. You certainly can slow it down or you can stop it. So but you can't do any of those unless you start it. So we have the technology up and running.

Speaker 2

We've got it Tested, and now we're going to go out and open it up to a degree and we need it more. We'll spread To a broader base of the advisor segments and if it ends up being more than we need and we see cash goes the other way, we Slow it down or turn it off. So it's about being prepared. It's the same in TriState, has third party sources too and We said just prepare to turn them on, make sure they're there, get interest. And then if we need them, we could be more aggressive.

Speaker 2

If we don't, we can just Stop. So it's just the balance. If we know how much cash we need, we tell you and we know how much we have to raise. We always assume we can run models and speculate, but the truth is we really don't know. So we just need to be able to react to it.

Speaker 5

And the next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question. Okay. Thank you very much for taking the questions and also appreciate you moving back the conference call tonight. Just following up on sort of last line of questioning.

Speaker 5

As you think about earning asset growth, A, can you grow that in an environment where there's sorting and mixed loan demand? And b, if it does grow, could you talk a little bit about the sort of decision making between loan growth and the investment securities portfolio?

Speaker 3

Again, right now, in a tighter funding environment and more uncertain funding environment, we are certainly prioritizing Client demand and client funding needs over the securities portfolio. Just like we prioritized the Security portfolio when we needed to accommodate surplus client cash balances. Again, our balance sheet is primarily there for clients, And that's how we that's kind of the difference between how we think about our balance sheet and many of our peers is that we really I think about the client demand both on the asset and on the funding side. So yes, in terms of the loan Going forward, as Paul says, we really don't know what it's going to be. What we're not going to do is force or stretch for growth, But we will continue to provide have our advisers provide excellent advice to their clients.

Speaker 3

And to the extent that they Need mortgages or securities based loans or our corporate clients reengage in M and A and they need financing, then we want to be there for them.

Speaker 5

Okay. And then just a follow-up, maybe switch back to capital for a moment. Obviously, you said in a pretty strong capital position as you both have mentioned. Can you update us on what your latest thinking is of where you'd like to have that Tier 1 leverage ratio settle out? And I think you mentioned a couple of times of opportunities to deploy your capital.

Speaker 5

Will you be able to buy back would you buy back the $4,000,000,000 Or is it a function of potential M and A?

Speaker 4

And if you're interested in

Speaker 5

M and A, where might you be looking?

Speaker 2

So yes, Let me go backwards into the question. At first, we like organic growth the best. It's been our focus because it's sustained this large Consistent net new assets even when we're not doing acquisitions in the PCG space, we're still growing. And But we like acquisitions for the right targets, and we can't tell if and when those would happen. I think the last few years, people doubted if we were serious, then we closed Three deals pretty quickly.

Speaker 2

So our goals right now on our balance sheet, we gave a Tier 1 target of We're still at that target. It's gone up faster. Good news as part of that's earnings. But the other reason is just really the shrinking of the corporate balance sheet too. This cash has come off the balance sheet.

Speaker 2

That ratio went up without really a lot of We're still committed to it. We're committed to the $1,000,000,000 target, as Paul mentioned in his remarks, that We wanted to do $1,000,000,000 this year. We got partially there this quarter. And we know we have to get more aggressive to hit that, but we're that's our plans. In terms of other capital, we'll always say the great acquisition showed up tomorrow Yes.

Speaker 2

I think it required a lot of capital. Would we use it instead of buybacks possibly? Is this accretive, advantage? Don't have one, so I think it's theoretical question. But if it did, we'll always balance what's the best use of capital.

Speaker 2

But our plans right now Is to focus on our commitment to hit that $1,000,000,000 target.

Speaker 5

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

Speaker 3

Hey, good afternoon, guys. Paul, maybe on just the NII thoughts, if you think about Average Fed funds could be up if you look at the forward curve, could be up close to 90 basis points in the Q1 versus the 4th. But then you have sort of this mix shift in deposits. You have the higher spot NIM going into the Q1. So how do we think about NIM and NII in the Q1 and how you're thinking about the trajectory.

Speaker 3

You kind of mentioned you want to grow NII. Can Can you do that consistently? Or do we should we expect the negative mix shift starts to hurt NII growth after 1Q? Just trying to think there whether it's or full year, whatever you want to give us? Yes.

Speaker 3

Obviously, there's, Jim, a lot of variables that kind of go into that. But as we look into our Fiscal. 2nd quarter, I mean, we're entering in with a spot rate of 3.5% for the bank's NIM for the bank segment. And so that's before any additional benefit from further rate hikes Potentially. And so and we have grown the bank's portfolio 2%.

Speaker 3

Their assets have grown 2% sequentially. So Net net, when you sort of think about the fact that there's 2 fewer days in the second quarter than the first quarter, We still believe we will be able to grow net interest income overall in the second quarter. And that It will likely be offset by a decline partially offset by a decline in the BDP fees just because the balances are Probably the average balances sequentially are probably down 20% to 25% as we Put up greater proportion of the funds to the bank segment. But again, we'll have a higher Spread on those balances, we're entering in with a spot rate of 3.2% versus the average yield that we earned During the quarter of Q1 of 2.7%.

Speaker 2

I think also is we'd have to really hustle on raising high cost deposits, which It does to be significant enough to have a huge impact on that number in the shorter term. But obviously, The cash dynamic assorty continues and will start impacting as we raise. So we'll just have to see how that goes.

Speaker 3

Right. Okay. And maybe just as a follow-up. On admin comp and PCG was up, I think, 21% year over year, 7% Is that a new run rate or is there some intersegment? Because I did notice that the comp and benefits line in corporate other was down 20 Was there some kind of shifting of those kind of costs among segments?

Speaker 3

Or is that just a higher upward pressure in that line? Yes, Jim, I would tell you that the Q1 comparisons to the Q4 are always a little bit noisy just because In the Q4, we're always trying to adjust bonus and benefit accruals to reflect the actual results for the fiscal year and then we sort of reset those accruals In the Q1. So I think last year at this time, it was like an 11% increase in BCG admin comp as an example. So So there's a lot of noise comparing the sequential. Year over year, of course, we have the acquisitions.

Speaker 3

We have the Charles Stanley acquisition for the full quarter this year in PCG as well as just kind of overall growth of the business in the PZG business. With that being said, In the Q2, we do have the impact of the payroll tax As we enter the beginning of the calendar year and then we also will see the impact of the salary increases that have become effective on January 1. And those salary increases this year were significant as we always have done. We always want to share in the success of the firm with our associates who make that success possible. And Particularly in this inflationary environment, given our record results in the fiscal year, we did we were Generous in passing on salary increases to our associates and that will be reflected fully in the Q2.

Speaker 5

And the next question comes from the line of Kyle Voigt with KBW. Please proceed with your question. Hi, good evening.

Speaker 4

Maybe a question just given the forward curve and market expectations now for the Fed to begin cutting by Year end 2023 and into 2024, I was wondering if you could help us think about deposit betas through a declining Fed funds environment. And I think during the last rate cycle, The adjustments on yields are the betas on the way down for the first few cuts in 2019 relatively high and help support the bank NIM. I guess, is it fair to look back towards that last cycle as a good guide for how you would kind of manage your deposit rates this cycle as well?

Speaker 3

Yes. We're still having a hard time being exactly right on what the deposit betas are in this upcycle. So Certainly, trying to predict what it will be in a different cycle is very difficult to do. It would be based on the competitive environment and a lot of other dynamics that apply at the time. For example, in the last rate cycle, we had surges in cash balances because it was due to the pandemic.

Speaker 3

And so when rates were cut, we obviously had a did not have My funding need per se, we actually had cash flow we have to figure out how to place. That may not be the case next time rates decrease. I don't think you can Compare different cycles just because each one is so unique. So most people are sort of guessing that the Deposit betas on the way down will be symmetrical to what they've been on the way up. I guess that's a good guess, but we really don't know.

Speaker 4

Okay. And then just maybe a follow-up just on the net loan growth in the quarter. Just wondering if you could help us understand some of the dynamics by loan bucket. And I know we'll see some more info in the queue. So it looks like demand for SBL has been a bit weaker.

Speaker 4

It looks like you're seeing decent demand for mortgages even with the tough backdrop. So just given the rest of this year, this fiscal year, I guess where should we expect more of the loan growth to really come from? And should we of expect that slower SBL demand to persist near term?

Speaker 3

Yes. We actually do provide the line by line end Period. Loans into supplement, so it's kind of buried in there. I know we provide a lot of materials, but there is some more detail there. But you are right.

Speaker 3

The SBL balances declined sequentially. And that was due to frankly a lot of repayments as the interest rates went up dramatically over the last 3 to 6 months on those lines. And so residential mortgages went up, but A lot of that was due to mortgages that were in process even before the quarter. As you know, mortgages take a while to go through the underwriting and closing process. So as we said earlier, we don't know really what the dynamic is going to look like going forward.

Speaker 3

It's going to be based on client demand. We do expect until the rates settle out and clients get used to whatever the new norm is, We do expect headwinds for growth across all loan categories, but floating and fixed really because the fixed coupons are up as well, Although we don't do much in the way of fixed, but certainly mortgages is a category that borrowers are still getting used to. 5.5% to 6.5% across the industry when it was just 3% to 3.5% a year and a half ago. So it is a pretty dramatic change in a

Speaker 5

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

Speaker 9

Good afternoon. Thank you for taking my questions. I know you've touched on this a couple of times, but I'm still a little confused, and so I'd love to ask a follow-up. Paul Shuckray, You speak about the liquidity in the balance sheet often, and we can certainly see liquidity on the asset side. And so I guess I'm not 100% clear as to why what the impulse is to raise higher cost funding through this enhanced yield program, I.

Speaker 9

E. When you could simply allow for some of the assets to run off, especially the stuff that these were replaceable like securities. So could you maybe clarify that for me? And then also we've seen some competitors launch similar products in the last few quarters and That has led to a pretty strong mix shift in favor of the higher cost funding. Do you have any estimates or any a rough idea about how much mix shift of that type you'll see in your own deposit base?

Speaker 3

Yes. So to your point, Brendan, we are kind of continuing to let the securities portfolio run off. A lot of that Growth over the last 2 years is really accommodating client cash balances on the balance sheet. And so we really built that up well beyond Our liquidity targets at Raymond James Bank. So the answer is really kind of all of the above when it comes to funding.

Speaker 3

We're doing That we're also, as Paul said, making sure that we're prepared on many other fronts when it comes to funding. The enhanced yield savings, we're starting with a relatively small amount relative to our overall funding needs. But The point that Paul was bringing up is that we just want to make sure that we have all of these sources turned on and make sure that they're working. So we Understand what the ability and capabilities are, the demand is, etcetera, we learn from it. And then to the extent that we need Drive more balances through various levers and we have the ability to do that, but it's hard to do that if

Speaker 2

you don't have it even turned on. I don't know about institutions that don't have CDs, enhanced wealth, and they've been aggressively raising money Because of our floating rate balance sheet and our unusually high liquidity in both on our balance sheet and client cash, We haven't had to, and that's been part of what's driven a lot of the earnings. So but we can Assume that we'll have enough and they'll last forever or we can start the programs in case they continue to run off more than the industry expects and We'll still be well funded. So the reason we're starting it is just in case. And if we need more, we'll accelerate it.

Speaker 2

So It wouldn't be prudent to wait until all of a sudden we really need it. We don't have any of the programs in place. Most of there's many other firms that have needed it. It's been very aggressive because they didn't have that flexibility. We've had the flexibility.

Speaker 2

But we're certainly going to as we always, we look to the long term and have it in place and ready to go. And the only way you know you have it in place is when you're executing it and actually collecting deposits and Everything is working well, and then you dial it up or you dial it back if you need it.

Speaker 3

The only thing the only other thing I would add is there's so much concern around mix shift, as Understandably so. But it's not like the cash isn't moving. We have the best purchase money market fund platform in the industry as far as I can tell. It's institutional shared classes offered to any size client. And so it's not like the cash is moving to other higher yielding Destinations as it should and the financial advisers help their clients with those type of decisions.

Speaker 3

So to the extent that we can offer An attractive product on balance sheet that meets clients' needs. Some are still concerned about money market funds, frankly, because they didn't performed very well in the last couple of cycles. So we offer an FDIC insured product, which Keeps the funding on the balance sheet and actually earns a better spread than if it goes into some of those other products, could be a win win. So that's kind of how we're looking at it as well.

Speaker 9

Yes, sure. Totally get you on the substitutes being broadly available. And any sense of your expectations for magnitude of how big this program would be?

Speaker 3

No, because it really frankly depends on The levers that we pull, right? We have levers around the rate we offer, the size of account that we limited to, the size of deposit, etcetera. So as Paul said, most of our competitors have already come out with it, have to be aggressive because in the last couple of years, They deployed almost all of their deposits to fund balance sheet growth. We always said and we took a lot of criticism for it a year or so ago We wanted to keep that cash very flexible. And so we don't have the same acute pressures on funding that they have had over the past 6 months.

Speaker 3

And so we're able to be more deliberate in sort of figuring out the right balance for clients and for the firm.

Speaker 5

And the final question comes from the line of Steven Chubak with Wolfe Research. Please proceed with your question.

Speaker 10

Hi. Thanks so much for squeezing me in here. I just had one final question on capital markets And more specifically, the profitability or I guess, like thereof in the quarter. I recognize 1 quarter the guide trend mix. You did incur the pretax loss in the segment.

Speaker 10

What I wanted to better understand is given The lack of complex that we saw within the segment itself, how you're thinking about managing expenses and comp if we remain in a challenging investment banking backdrop? It's a question Investment Banking backdrop, it's a question we're getting quite a lot because the pretax margin was strong for the firm, The comp ratio was certainly well managed for the firm overall. And at the same time, You didn't get the positive comp leverage this quarter and much of that was obscured by Cat Markets. So any insight you can provide there would be really helpful.

Speaker 2

So I mean, the capital markets have been difficult for everyone. And the part of there's couple of factors. 1, it didn't have a good quarter. But secondly, compared to a lot of other firms, we don't have any unallocated overhead. So There are other firms that certainly had lower results, but every penny of overhead is allocated to a segment.

Speaker 2

So you see a fully loaded P and L. It's not the case in a lot of other firms who, if they had, might have a little bit of different answer or closer answer. It was an off quarter due to First, both M and A and we all know what's happening with that slowdown and with underwriting. And the fixed income business, again, we talked about the cash dynamic at 3rd party banks. So it was challenging.

Speaker 2

So we'll do what we always do. 1st, We have a very variable comp structure that our bonuses, our basis although we raised are still lower than a lot of places. And we as we did 2 years ago, right, we took big pay cuts. You could see them even through the executives The year before this year. So we have a variable comp structure.

Speaker 2

We'll take care of that and then we'll have to just look at The business and make whatever adjustments in those businesses we have to. The good news is corporately, we're actually We've been very conservative, although we've hired a lot of people. We have a lot of open positions and we're just being less aggressive in hiring and making sure we keep The people we need through these cycles. So we don't go in like tech companies way overloaded. And I think in capital markets, they're just going to have to look at what businesses are there and what support they need to make those decisions.

Speaker 2

So I don't but certainly, we don't plan any Sizable layoff programs that you've read in other firms.

Speaker 10

That's it for me. Thanks so much for taking my question.

Speaker 9

Thank you.

Speaker 3

All right.

Speaker 10

There are no further questions.

Speaker 2

Great. Well, thank you very much. Thanks for joining us. And again, just overall, I don't think too many people are showing record net income To shareholders this quarter, but I think it's a testament to the model and but there's a lot of uncertainties going forward. We all know it.

Speaker 2

We all knew the questions you'd ask and we're committed on the capital repurchases. It's the only contingency if something comes up that we think can drive More shareholder value and on the cash and cash floating, good questions. We could run models and give you Answers based on them, but our experiences, they all vary from that. So we're just we're going to raise as much cash as we need to support the business and not raise it if we don't need it. And so far that served us well.

Speaker 2

So appreciate you joining the call and talk soon.

Speaker 5

That does conclude today's conference.

Speaker 9

We thank you for your participation and ask

Speaker 5

that you please disconnect your line.

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Earnings Conference Call
Raymond James Q1 2023
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