Q4 2019 Earnings Call

October 24, 2019

My name is calandra and I will be your conference facilitator today.

This call is being recorded and will be available for replay on the company's website.

Now I will like to turn the call over to Chris <unk> head of Investor Relations at Raymond James Financial.

Thank you calandra good morning, and thank you all for joining us on the call today. We appreciate your time in interest in Raymond James Financial.

With us today, or Paul Reilly, Chairman and Chief Executive Officer, Inject Julien Chief Financial Officer following their prepared remarks, the operator, we'll open the lines for questions.

Please note certain statements made during this call may constitute forward looking statements forward looking statements include but are not limited to information concerning future strategic objective business prospects financial results anticipated results litigation and regulatory developments or general economic conditions.

In addition words, such as believes expects card and wood.

As well as any other statements that necessarily depends on feature then are intended to identify forward looking statements. Please note that there can be no assurance that did the actual results will not differ materially from those expressed in the forward looking statements. We urge you to consider the risks described in our most Form 10-K and subsequent Form 10-Q .

They are available on our website.

During today's call. We may also use certain non-GAAP financial measures to provide information pertinent to our management to you have ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures maybe found in the schedule accompanying our press release with that I would like to turn it over to Paul Reilly Chairman and.

CEO of Raymond James Financial Paul Great. Thanks, Christine Good morning, everyone.

No today marks the Ninetyth anniversary, a black Thursday, beginning of the great Depression.

That's amazing if we look back and looked at the commitment for the financial markets in the resiliency in the U.S. economy over that period of time.

Quarterly earnings call.

First I would remind everybody the backdrop going in to this fiscal year.

We came off a record year in 2018, and almost all measures under very very strong.

Rates rose and it was a very soft top corridor.

I'm encouraged by the solid performance in a number of key areas during the quarter, which included record quarterly not Robert <unk> 2.02 billion, we crossed the 2 billion Mark for the first time, which increased 7% over probably over prior years fiscal quarter and increased 5% over the preceding quarter.

Speaking of capital we were active in deploying capital to share repurchasing 9.83 million shares for 752 million at an average price was $76.50 per share. This represents just over 6.5% of the shares outstanding at the beginning in the year.

Combined with dividends, we returned approximately 945 million to shareholders during the fiscal year.

Even with these actions our capital ratios remain healthy with total capital ratio of 25.8% in tier one leverage ratio of 15.7% at the end of the year, giving us ample flexibility on the future.

Now let me briefly describe the segment results.

And the private client group, we generated record net revenue of 1.38 billion for the quarter and 5.36 billion for the fiscal year, we had another fantastic year of retaining and recruiting advisors on a net basis. We added nearly 200 advisors during the fiscal year, which includes those advisors recruit.

No the ones loss due to retirements.

Or regrettable or non regrettable basis.

On a gross recruited basis, our private client group domestic had its second best year, just behind 2018 with advisors, joining the fiscal year with nearly $300 million of trailing 12 production and 443.5 billion of assets under administration at that.

Prior firms.

This is an excellent result, especially given the slow start to the year and the increasing competitive environment.

While many firms increase their transition assistance and bet on cash balances at the beginning the year, we remain disciplined and still had an outstanding recruiting gear.

While higher short term that interest rates in cash spreads were tailwind during most of fiscal year.

Benefit was partially offset by a decline in total client domestic cash sweep balances during the fiscal year as clients increased their allocations to other investments.

As you know the two rate cuts in our fourth quarter will likely be a significant headwind as they work through during fiscal 2020, which Jeff will explain more in detail.

Capital markets finished this fiscal year with strong fourth quarter, given investment banking results in a strong quarter for fixed income capital markets and the tax credit business, which offset the continued weakness and equity brokerage revenue.

The segment finished the year with record net revenues of $1.8 billion up 12% from fiscal 2018.

As I said, we remain committed to the Canadian capital markets business and continue making long term investments to expand.

And kings and sales and trading capabilities in Canada.

Last year, we operate in a very small portion of the Canadian life Sciences space and chose not to participate in the underwriting of candidates from.

Whereas the underwriter cannabis space was very strong and the most significant part of the market last year. The subsequent market performance has been weak as the associated market index is down close to 40% over the last six months. Once again, we kept a long term view.

Financial assets under management ended the fiscal year at 143.1 billion, an increase of 2% over September joining 18 and flat compared to June 2019.

Overall, the growth and financial assets under management continues to be largely driven by equity market appreciation and positive inflows associated with the increase utilization of fee based accounts in the private client group segment, which has more than offset the net outflows experienced by carillon towers if advisers.

And last but certainly not released Raymond James Bank generated record net revenues and pre tax income for the fiscal year record net loans of 20.9 billion grew 7% over last year's September .

Most importantly, the credit quality of the loan portfolio remains solid and we remain extremely digital diligent with any new loans, we add to our balance sheet.

The revenue side most of the trends this quarter were fairly self explanatory or have been covered by Paul. So my comments on on that side of the piano will be somewhat limited.

I will comment on asset management and related admin fees. However, they are up 5% sequentially, which happens to be.

Should be an indicator of this line item for the December quarter here as you know us as you are aware large percentage of these accounts are built in advance and have already been built.

Looking forward in the very short term like the at least about a quarter.

You know, we're really not going to change that target in the near term you have to remember that as revenues from client cash sweep balances declined at a higher proportion of our revenues are going to be compensable in nature, which is kind of put some pressure on the margin.

In addition, successful recruiting which we've had two years in a row of of near record levels.

It's going to create a drag on the short term through amortization of hiring dollars.

But that was really caused by.

US some downgrades during the quarter, we we did get the semi annual snick exam results at the end of September .

Some credits we had fairly sizeable hold positions in and that also as what caused primarily caused the 88 million dollar jump in criticized loans.

You can also see on the same page that no no.

Two.

So we stuck with that policy and.

It was caused some spread compression and you can see RJ banks, earning assets.

Al 19 per basis points in yield while the cost of funds fell only 13 basis points, so that an indicative of the spread compression that we saw there.

So going forward.

First of all I guess I should point out that the July rate cut by the fed.

The other chains that we made before that first fed rate cut where we switched and may from aggregate asset balances to aggregate cash balances.

Also was seven basis point.

Over the last six months there has been basically a 70% beta on the.

These first two.

Rate cuts.

But if.

Additional rate cuts next week and possibly in December as the forward curve would suggest and now it's certainly.

One one wildcard I should have pointed out on on the bank's net interest margin. The reason that's not as easy to correlate to fed movements is that a lot of most of their earning asset side that loan portfolios based on LIBOR, which doesnt always move in lock step with fed funds.

It's been going down ahead of the fed rate cuts and when the fed indicates that it's finished or skips a cut or whatever then maybe we'll see LIBOR rebound and we may actually seen NIM react much differently than.

Then you would think with with no fed movement. So.

Work, we've done would say for each of the next couple of rate cuts. It looks like the NIM at the bank could be impacted negatively by somewhere between eight and 10 basis points.

So it's going to be largely dependent on what what the competitive landscape has.

On page seven of the release I think.

It's we really do need to look at the annual results, which is obviously a compendium of all the quarterly explanations. We've given you over the year, but for the year, a 6% increase in net revenues.

Non comp expense growth of 9%, but remember that includes.

Hey, good apples to apples type comparison of operating results, where you can see pretax up 7% for the year on a non-GAAP basis.

Cut.

So thats, probably more indicative of our tax rate going forward.

Great. Thanks, Jeff.

Thanks for being such a valuable partner for so many years.

Jeff isn't really going anywhere.

CFO role, but we'll have as those services at least for another year.

So as just as explained we are in the middle of our budgeting process and looking at expenses I do want to just point out the magnitude Jeff talked about are non comp expenses up 9%.

But if you look at the two non-GAAP items that we talked about in the impact of the accounting change that grossed up expenses that accounted for 65 million of the 110 million dollar increase over half of the increase was really accounting related.

So I think that people kind of maybe of miss that in the markets. They talk about our expense growth. If you do the math.

Going forward, we still are focused as a growth company, we still with recruiting we historically have done very well in down markets are recruiting as that comes we continue to.

To recruit for long term growth and there's just more expense associated with that but we're certainly looking at the non controllable expenses.

But what we see is even more impactful to 25 point.

Rate basis cut at the end of our fiscal fourth quarter as Jeff talked about isn't really fully reflected.

Yet because it was at the end of the quarter and that will impact 2020.

On a positive note our financial advisor recruiting activity remains very active across our affiliation options.

Not a numeric metric, but I can't remember seeing some of the $510 million teams in the pipeline and again I think it shows the strengthening of our platform and even with our disciplined transition assistance approach.

M&A pipeline is robust I know the market forecast has been down but we have several large key deals that we hope will close.

And I think bode well for M&A at lease that we can see it today you never know in that market.

Raymond James Banks enters the quarter was fiscal year with record loan balances and solid credit metrics.

The premium for FDIC sweep balances should close enough that I think bodes well for cash balances. So that we may give it up at rate or return to more normal some states long term.

And more rational pricing I think that's going to be long term positive for the market and hopefully also more rational pricing in the market and transition assistance another packages, but we're always seems to be some but somewhat in the market being extremely aggressive.

Around six and $7 million of annual transaction fees to the firmed.

Value in strength to their client relationships and investments to make us more efficient on the cost side, which is exactly what we've been focused on.

We're kind of overhead here they really generate.

The revenue and the great client relationships, we have we're a people business and our success simply would not be possible without our client focus advisors and associates that support them every day.

With that Calandro going to turn it over to you and open up the line for questions.

At this time, if you will like to ask a question quickly press star and the number one on your telephone keypad.

Maybe.

Start were I left off Paul just on the kind of competitive dynamic and pricing changes we've recently seen here.

I guess first maybe I just missed it at the end of year, but did you actually quantify the impact.

Financial advice part of the business, if you will that potentially could come under pressure or are you seeing any areas of pressure you know we've recently seen.

Yes, you are cut.

Fees on that's amazing I'm curious if theres any other areas as.

Yes, I did say, obviously not clear enough, but it was $7 million to $8 million the array revenue impact of the firm on those transaction.

For equities Anita.

We always see competitive pressure, Devon, whether it's been moving too.

Well, there's pressure on advisory fees.

Yes as announcement wasn't clear a few years ago, they unbundled between what the revised surcharge and the firm I don't know if it's a rebundling.

So we're going to have to see more but there's always people.

That are pushing that dynamic and we've been going through that for years, it's not new.

And I think it's the advantages scale as we've gotten larger that we can deal with some of that but certainly if that continues long term.

And Reg B. I will be out in June and we'll see the impacts of that but I.

I think over the longer term if that dynamic continues to people have to remember there are three people that are impacted by changes the client the advisor to us.

And have to be fair the client fair. The advisor and then we have to be in business to operate and I think you always have to look at that dynamics. So right now we feel pretty good and industry dynamics change, we're going to have to change with them. So I don't think thats, a new dynamic thats just.

Interesting during these periods of time could also be interesting as firms who have been dependent on.

That reaction. So we've certainly benefited from them, but I think we're a little more diversified and so.

We watch we think through them, but I don't see any short term call to action, but we're watching closely.

Obviously, good to see and heard the commentary around.

With this pent up demand that you're kind of came through in the quarter or was there something else that changed where maybe there is a reacceleration of trying to dig into that little bit more and then also you guys had been opening a lot of new offices with.

Yes, some of this expansion and that's led to at least some of the expense growth and also just curious at what point.

Maybe see that's slowing and ultimately I think there would be good for operating margin potential. So just trying to think about that piece as well, yes. So I think of the shorter term me two dynamics or as we grow and opened offices.

That is costs than at least.

Leases renew especially in the big markets right now may be significantly at a peak and maybe they continue but was those renew that adds cost pressure to those would grow in major markets. Indeed more space. That's certainly has moved against us but that comes and goes in the cycle.

So I don't see any relief in that part.

The cycle again, we believe that the franchise value.

Recruit and great advisors.

Key to what we do so that part I don't see sign of a lot of relief to.

We just have to be more efficient at the back office side and that's what we're managing.

And a lot of our expense growth again, if you look at half the expense growth over half was accounting related I'll call. It.

Between our investments in technology beefing up our compliance supervision and service I mean, I think the expense growth is pretty reasonable given.

The growth we've had so we'll continue to monitor.

In terms of just the recruiting kind of the pretty material acceleration any other color you could provide their if something else is happening I think that.

Last year, you saw the recruiting was kind of flattish from the first quarter, which I think if you go back historically a lot of people stayed for their bonuses and things through the year end and we just got used for a couple of years. We just people came anyway right. So I think that that.

The pipeline has been strong and I'll tell you a lot of people, we thought would even joined in the fourth quarter just for transition timing for their businesses, which is what they should do what's best for their business.

Moved into the next quarter so.

We've.

I can't tell you.

Very very strong so I can't.

Side, it's anything.

The push pull business people don't leave for fund their leaving something to join something and we just have to be that great platform that people want to come to and if they are unsatisfied where they are we've been the recipient.

Great. Thank you very much.

And your next question comes from the line of Bill Cat.

Hi, Good morning. This is Brian we won for Delcaths. Thank you for taking the question.

Can you give a sense of the client cash mix between purchase money market funds versus holding cash since you guys. This is continuing to mining markets sweep option and how has that trended, particularly in this declining rate backdrop.

Well, we haven't reported on what's the money markets is certainly a lot of the cash movement, what we reported suites as cash cash.

Your cash in our system.

But a lot of the movement out has been into money markets and positioning money.

Got it.

And then it looks like client cash after declined quarter over quarter has picked up in September you mentioned it stabilize and any update you can provide on current cash trends in October .

Only as Paul reported that we have the fee billings come out at the beginning of each quarter, which causes.

Pickup in the bound direction and on it generally rebuilds over the course of the quarter to be in a position to accommodate those that fee building in the next quarter. So.

That was the same dynamic that we reported last quarter that we saw in July that we obviously, we saw it again for the billings in October and so it's down now versus where it wasn't the end of year because of those billings, which are a little over $800 million now.

For us as a firm.

So it's down now because of that and we.

Generally if it follows history, it'll build back up over the course in the quarter through recruiting and through repositioning in those accounts to be in a position to accommodate the going next quarter.

Our our feeling as though that we're into a stabilized kind of platform and as money market rates, which tend to come down a little slower.

Because as they buy securities it takes away well for them to mature and invest in the new rates, which are lower rates as those rates continue to come down we think that pressure is going to leave.

Spread nooros.

Got it. Thank you for taking my question Okay.

Your next question comes from the line of Craig Siegenthaler of Credit Suisse.

Thanks, Good morning, everyone Craig Craig.

And Jeff just wanted to congratulate you again for the 30 plus years and wish you the best for the next step.

Thank you Sir.

Have you seen any changes in the composition of the incoming advisors in terms of where they're coming from and their size is a book of business.

And I am, especially looking on a near term basis, where we saw this reacceleration.

Yes, again, I think to re acceleration steady through the pipeline is just when they hit but the.

Say that the average advisor continues to be higher we're seeing much larger teams.

Through the pipeline.

So doesn't mean, they're all join us but.

The pipeline is very very strong in the size very very big we just announced the big team that joined Us last.

Last quarter, it was almost $6 million.

And so we are.

We have a number of those teams in the pipeline in $5 million to $10 million range. So.

Hopefully, though we'll be able to recruit them and.

Still there's very very good advisors that are in half a million dollars.

They are very profitable and very good with their clients, but so we are.

We are looking to.

Recruit across the platform, but we are getting much bigger teams I think in general.

Right now anyway.

Thanks, Paul and just as my follow up here with the.

Rgs stock now well above the average levels of where you purchased over the last year I just wanted to see if we get an update on that your appetite for buybacks, but also M&A in a few chair and can you remind us roughly how much excess capital you currently hall.

Well.

The excess capital as always.

A subjective question, but I do think first that we.

We were going to hold true to our.

I don't think Thats changed as you would see we kind of.

Raised our threshold given the tax act and our excess liquidity. So we were probably more aggressive than we've been historically.

So I, but I think that the guidance we've given is still.

We will buy dilution and be aggressive when we think theres, an opportunity and on the M&A front.

The second phase we've been very active it's a very interesting cycle right now there's.

As last year's environment as if it's going to continue for the next 10 years and so.

Discount interest rates, if you discount price what you think market may be in volatility and all that the pricing.

Has led to a number of places where those things didnt transacts to anybody not just us and.

So we're going to stay very active very connected and.

Be very disciplined so we are very active in the M&A side, but again.

We're not going to do something just to be bigger has to make us better. So it has to be strategic.

It has to fit our culture and then we have to be able to have a good return for shareholders. So with all that I'd say, it's been a frustrating years weve.

I had some very good opportunities that fit and transact anywhere because the pricing the us I think the market agreed at least so far that the pricing just wasn't realistic so, but we will stay active and I think thats. The advantage. If there is a downturn certainly.

Downward interest rates will put pressure with its been a great tailwind for the whole industry.

That's that's tightening so.

And with this type of market.

When we can do something but we're very active.

Thanks, Paul.

Assets and our advisory accounts, so both internal management third parties sub advisors. So.

Again, I think you vs as announcements is very clear.

It's hard for me to comment on that.

If you look over time, there has always been pressure on.

Those advisory accounts in the fees that we in third party managers charge and it's been very competitive so.

Been a pressure, but with size has been store growth area for us so again that you'd be us announcement.

Back to how has that changed going to be passed with advisors and clients not wasn't announced at all.

If it's a rebundling, but have no impact if its charged the advisor.

Pfizer client been shared as a more significant impact, but I have no idea.

What that is right now.

I wish I could be more clear I just.

But we are looking at it and it's just a couple of old announcement.

Recognizing that the legislative hurdles for the deal while it could potentially be much lower I was hoping you can just give some perspective on what do you think it's reasonable for to be repurposed, especially given the implementation right B. I and how you're thinking about that potential threat or have you made sufficient chain.

Formal.

To be big I think the rig VI.

In a lot of ways is.

And so as you do that.

So certainly I think all firms will be better positioned if a deal well type of administration came back we'd all be closer.

Would have been.

Already kind of programmed in especially on.

Disclosure, which is hard to argue against US Suntrust hard to argue with documenting why you made decisions argue with the deal well, we're just going one more stop.

Would have been hard to do much harder to do commission accounts.

Other things, but so I think the industry would be better off I think the challenge right now it's been a little quiet lately as proposed state rules that we paid to how.

Deferred certainly a complexity to the business.

Many thanks in our industry that that surpassing the states authority to do those kind of rules. So my guess is that would go to core too.

The industry certainly.

The whoever president and whether they like financial services companies or don't are going to have an impact on regulation. Many of the people in the regulatory seats terms do go for a few years. After the next elections, so we'll be pressure, but will be harder to do it by appointments it'll have to go through regulation and my guess is we'll have a.

Divide in Congress no matter what so.

So who knows right, but we'll react to it I can't.

Can't predict.

I certainly think certain candidates if there look like they have an opportunity to do the next president would be a lot more disruptive other ones.

But.

Yes.

Fair enough, although it is a vote in Florida.

The thing hedged.

Just one more for me, Jeff just to clean up question on the and I geography.

Certainly good momentum this quarter it looks like the beat was in the corporate other catch all segment I was hoping you can discuss what contributed to some of this strength there I'm just trying to gauge the sustainability of that and I momentum.

Yes that kind of jumped off the page it us too.

Treasurer, who we are asked to look into that.

But the remaining portion was due to higher cash balances sequentially. They are up at the parent company around $300 million on average quarter to quarter.

And we really didnt see the negative impact of the interest rates just given the timing of the cuts so that will that will be reflected on those balances next quarter.

Okay.

And your next question comes from the line of Chris Harris with Wells Fargo.

Thanks, guys.

Weve.

Is there a point.

How we funded the bank.

The the cash drop has not impacted our operations again at some point it would.

And we have kind of like a formal equity market for your fiscal year 20, you think that outlook is still achievable.

We're paying 65 or 6% whatever the number this quarter next quarter on that so that.

I don't want to.

Handover the business someday to a successor.

We're going to continue to grow and that will drive expenses as probably last two years has probably been 50 basis points as in just in the comp ratio just from amortization, so and the more we recruit.

In downturns, we recruit now.

It may not look good on the numbers on the downturn, but it's certainly look good in when we came out and drove really the decade of.

Great performance so.

Ben within a range there, they're very difficult to pinpoint anytime over a year. So it's.

Those can go either direction from from this year's next I'll, just say as a CEO , there and our control, but their long term.

Good good people will have a lot less of those but I think we're in good shape.

Maybe just talk a little bit about fee based asset flows.

Not that you disclose them, we can take a stab.

Back now market impacted if I look at flows this year or 19.

The strong a year ago, maybe cut in half in terms of the annualized growth.

In a pretty big way that that has definitely slowed down to some extent, but having said that.

We are still recruiting advisers that.

That use our fee based platforms to a large extent.

And we and we still do CA migration from our existing advisors to fee base just at a slower rate. So that's that's why you see the growth of fee based assets outstripping the growth of the market.

Okay. So.

And we think about the new new recruits it looks like it was more in the employee channel.

Versus the independent contractor channel.

Where I guess geographically is that coming from and does that help the margin a little bit because it's in the employee channel instead of.

Independent contractor.

So the employer channel had a very good last few quarters, where the independent.

Who's been really leading recruiting the last couple of years had a little bit of slowed down but not much so I would call it.

I think it's up a sadik both channels are recruiting very very well and so.

So.

I think economically we've had a big bull run so independents look really good.

And if you get a little tougher market environments. The employed channel looks lot safer. So some advisers just like.

I don't think I wouldn't call it one versus the other I think that or both.

They are both robust and their pipelines and.

I couldn't explain why the independent had been a little higher and then.

Geographically it fits all over.

Doing better in the northeast.

In California as long as we have electricity on the offices.

Our ferndown.

So we are.

People ask large market share in Michigan, yet as a strong recruiting market, even though we have great presence. So.

Whether so a lot of opportunities so.

I wish I could give you more of a definitive answer that's the color, but I'd say, it's too short to say that people switch to employ a cycle.

Alright, thanks for the color and Jeff Good luck in retirement.

Golf game improves.

Thanks, Jim.

Maybe a little more freedom, but we'll we'll have the services both bank and as an advisor in helping Paul through that transition.

So I want to thank you all for the call I do think that a lot of people.

In production the trailing 12.

Alex Brown acquisition, just on organic recruiting.

So we believe that's a great way of growth, we get to pick advisor by advisor and.

I still think.

The biggest testament to the underlying platform does that and the fact that theyre generally joining us for less checks.

This does conclude today's conference call you may now disconnect.

Yeah.

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