Q1 2020 Earnings Call
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Good morning, and welcome to even jeans financials fiscal first quarter 2020 earnings call.
My name is my right now being kind of French facilitator today.
This call is being recorded and will be available for you play and the company's Investor Relations subside.
Now I will tell you don't read too pricy wall.
Head of Investor Relations at Raymond James Financial.
Thank you Myra.
Good morning, everyone and thank you for joining us on this call. We appreciate your time in interest and Raymond James Financial.
With us on the call today, our Paul Reilly, Chairman and Chief Executive Officer Impulse, you agree Chief Financial Officer. The presentation. They will review. This morning is available on Raymond James is Investor Relations website.
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 [laughter] forward looking statements include but are not limited to information concerning future strategic objective business prospects financial results anticipated results of litigation and regulatory developments or general economic conditions.
In addition words such as believes expects could Ed wood 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. We urge you to consider the risks described in our most recent Form 10-K and subsequent form forms 10-Q, which are also available on our IR website.
During today's call. We 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 would like to turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial Paul.
Christine Good morning, everyone. Thanks for joining us.
During this call. If you hear me refer to Paul I'm, not referring to myself in the third person [laughter] 'cause Paul Shoukry has now taken over the CFO rains and we'll be going over that part of the call.
As usual I'll give an overview and I'm a turn it over to Paul who are cardboard cover more the detail.
An update our guidance as we indicated on our last call before the interest rate changes, we were going to hold off on guidance until those rate cuts. So were announced the we knew how steep they would be.
To that Paul will then turn it over to me to discuss the outlook.
So overall I'm really pleased with our results for the first quarter, especially given the significant headwinds from the three recent interest rate cuts, which will have an estimated negative impact on our pretax earnings of approximately $140 million annually.
As outlined on slide three we generated quarterly net revenues of $2 billion, which were up 4% from the prior years fiscal first quarter down 1% from their records set the preceding quarter.
We generated record quarterly net income of 268 million or $1.89 per diluted share.
On an annualized basis, our return on equity for the quarter was 16%.
And while as you know we've been reluctant to disclose this metric because we believe return on total equity is the most relevant.
And we do not have any preferred equity.
We are now disclosing return on tangible common equity or ROTC as that has become a common metric in our industry.
On an annualized basis, we generated a 17.5% return on tangible common equity during the quarter, which we believe is very attractive, especially given our strong capital position.
On slide four you can see that in addition.
In addition to the strong financial results. This quarter. We also achieved records for most of our key business metrics, including client assets under administration of 896 billion PCG asset some fee based accounts, a 444.2 billion financial assets under managed.
151.7 billion.
Total PCG financial advisors of 8060, and that loans and RJ bank of to 21.3 billion.
Well equity market appreciation certainly contributed to the growth of client asset metrics. We also believe that the substantial growth for example, 31% year over year at 9% sequential increases in PCG assets and fee based accounts reflect significant increases in market share that had been.
Driven by our consistent industry, leading strong retention and recruiting private client group financial Advisors. For example for the firms that have already reported.
The year over year increases in fee based assets of range, 18% to 23% well below our year over year growth.
[noise] clients domestic cash balance balances, which ended the quarter at 39.5 billion were down 16%.
Year over year from the high watermark reached in the following a than the quarter a year ago, because the surge in market volatility in December of 2018.
But were up 5% sequentially, partially due to year end tax planning positioning.
Client cash balances appeared to stabilize over the last several months, but remember at the beginning of each quarter, we have the impact of quarterly fee billings and in the first calendar quarter, we typically see seasonal declines and cash balances due to income tax payments.
Now, let's turn to the segment results starting on slide five.
The private client group generated record quarterly net revenues of 1.4 billion, primarily driven by the April venture growth of assets. Some fee based accounts, which was partially offset by the negative impact of lower short term interest rates and net interest income.
And our Jay BDP fees from third party backs.
Quarterly net income for the segment was 153 million down 7% on a year over year basis, but up 7% sequentially.
The year over year declines and pre tax income was largely due to the decrease in net interest income and RJ BDP fees from third party bags, which was due to the lower short term interest rates as Paul Shukri will discuss in much more detail.
The sequential improvement in the segment's pretax income was driven by higher revenues and lower Noncomp expenses and again, Paul will discuss these after I finish this part.
Most importantly on the bottom of the slide you can see very positive trends for client assets in a number of advisors, which grew to 8060. Despite the elevated number of planned retirements that are typical each December quarter.
For example, and that quarter alone there were 69 advisors, who retired or left the business during the quarter, where in most cases, we've retained substantially all of the client assets.
Our net additions of financial advisors during the quarter was particularly impressive compared to other firms in our industry, who have reported so far as most all have reported decreases and that advisors year over year and sequentially.
But even more impressive the net addition of advisors as the quality of the advisors joining Raymond James we're attracting very large high quality practices, including some in the $5 million to $10 million range.
Over the past for four quarters financial advisors with over 300 million of trailing 12 production in over 40 billion of assets or prior firms of affiliated with Raymond James which is a spectacular results and our recruiting pipeline continues to be robust across all of our affiliation options.
Moving to slide six the capital market segment had mixed results during the quarter as revenue and pre tax income were up year over year basis, but down sequentially compared to the fiscal fourth quarter.
Fixed income brokerage revenue and both equity and debt underwriting revenues were strong during the quarter on the other hand, M&A revenues and equity brokerage revenues were down from the year ago quarter.
The next slide asset management segment generated record quarterly net revenues and pre tax income and financial assets under management reached a record of 151.7 billion increases of 20% on a year over year basis and 6% sequentially.
These record results were driven by equity market appreciation. The net addition of financial advisors, and PCG and increased utilization of fee based accounts.
Which more than offset the modest net outflows for Caroline tower advisors during the quarter.
On slide eight Raymond James Bank Eked out.
Record quarterly net revenues of 216 million.
A slightly higher than the preceding quarter as loan growth help offset the seven basis points sequential decline in the bank's net interest income margin cost again by lower short term interest rates.
Pre tax income was up 23% on a year over year basis, and 3% sequentially.
By the loan loss benefit of 2 million for the quarter.
[laughter].
Despite loan growth in an uptick in criticized loans during the quarter.
Higher concentration of residential mortgage which carries lower allowance then see an eye loans on average and pay offs of certain lower rated corporate loans resulted in the loan loss benefit.
Net loans ended the quarter at a record 21.3 billion, which was up 7% over December of 2018, and 2% over September 2019.
Now I'll turn over to the call to Paul Paul Shukri Who'll provide more detail on the financial results Bob. Thanks.
Before jumping into the numbers I just want to thank Jeff Julian Who's sitting in the room with us This morning.
Jeff has been a fantastic mentor and friend over the past several years.
And certainly have big shoes to fill but Fortunately, Jeff has agreed to stick around for a year to help me with the transition. So thank you Jeff.
Want to point out that in addition to the presentation. We're using for this call. We also provided a financial supplement for the first time this quarter, which provide similar metrics as earnings release, but over five rolling quarters.
Ill also point out some other requested additions to our disclosures throughout my prepared remarks as always thanks to all of you for your feedback and suggestions to help us continuously enhance our disclosures.
Starting with revenues on slide 10.
As Paul stated, we generated quarterly net revenues of $2 billion, which were up 4% on a year over year basis, and down 1% compared to the record achieved in the preceding quarter, notably about 75% of our net revenues our asset base, providing relatively good predictability.
Asset management fees were up 10% on a year over year basis, and 3% sequentially consistent with a 3% sequential increase of assets and fee based accounts in the preceding quarter.
Assets and fee based accounts were up a substantial 9% during the fiscal first quarter, which will be reflected in the private client group segment in the second quarter as most of those these assets are billed at the beginning of each quarter based on balances at the end of the preceding quarter also remember about 13% of this line item is driven by financial assets under.
Management, primarily in the asset management segment, which are built based on a combination of beginning ending and average assets throughout the quarter.
Given one fewer billing day in the second quarter compared to the first quarter and the 6% sequential increase in financial assets under management, we would expect asset management fees to grow somewhere around 7% to 8% next quarter on a sequential basis.
Brokerage revenues during the quarter 460 million were pretty healthy as fixed income brokerage revenues was strong again this quarter, while brokerage revenues and PCG and institutional equity brokerage brokerage revenues improved on a sequential basis. They were both pretty they're both still pretty subdued as PCG brokerage commissions are negative.
Really impacted by the shift to fee based accounts and there are cyclical and structural headwinds impacting equity brokerage revenues across the industry, particularly for firms like ours that did not take as much balance sheet risk.
Account service fees of 178 million were down 4% on a year over year basis, and 1% sequentially the decline compared to the fiscal first quarter of 2019 was largely attributable to the removal of the money market sweep option last June which is reflected in the asset management segment as well.
Well as lower RJ BDP fees from third party banks due to lower short term interest rates and lower average cash balances, which I will discuss in more detail next two slides.
Partially offsetting those items was an increase in mutual fund an annuity service fees attributable to more mutual fund positions and higher in mutual fund balances.
Investment banking revenues of 141 million were up 3% compared to last year's first quarter, but down 10% compared to the preceding quarter.
Debt underwriting and equity underwriting revenues for both strong, but M&A revenues declined on both a year over year in sequential basis.
As you may recall in fiscal year 2019, we generated approximately 600 million of investment banking revenues, which was a record that was up 19% from the prior years record given how strong our investment banking revenues were last year, we wouldn't be pleased to match that result, this year assumed.
Additions remain conducive, which would result in an average of about 150 million of investment banking revenues per quarter. So we have some catching up to do after the first quarter.
I'll discuss net interest income in the next two slides, but quickly on other revenues, which were down substantially this quarter. The two primary drivers for the decline in other revenues were lower tax credit fund revenues, which had a very strong fourth quarter and a modest ballot valuation loss on private equity investments and the other segment compared to gain.
Gains in both the fiscal first quarter in fourth quarter of 2019.
Moving to slide 11.
Clients domestic cash sweep balances, which are the primary source of funding for our interest earning assets and the balances with third party banks that generate our GBP fees ended the quarter at 39.5 billion, representing 4.9% of domestic PCG client assets, which is a record low as far back as we have the data.
These balances have stabilized since the fiscal third quarter of 2019 and increased 5% during the first quarter, partially due to tax positioning that is typical at the end of the calendar year, unless we encountered elevated market volatility we expect pressure on these balances in the fiscal second quarter due to the quarterly fee billings and income tax.
Payments.
On slide 12, the top charts displays our firm wide net interest income and RJ BDP Pete fees from third party banks on a combined basis. As these two items are directly impacted by changes in short term rates.
As you can see the three rate cuts totaling 75 basis points. Since August has put pressure on these revenue streams, which on a combined basis are down 25 million from the high watermark in the fiscal second quarter of 2019, and that's despite loan growth at Raymond James Bank.
On the bottom right portion the slide we provide to the new disclosure that many of you have been requesting during the quarter. The average yield on our JBT p. fees from third party banks was 1.64%.
Prior to the three rate cuts the average yield reached 2% in the fiscal second quarter of 2019, which means that deposit beta averaged approximately 50% for those last three rate cuts.
Given the current level of clients domestic cash sweep balances the reduction of our spread of 36 basis points, 2% down to 1.64% roughly equates to an annual pre tax earnings impact of approximately $140 million. Now. This is based on no oversimplified math, because obviously a good portion of these balance are used to fund the bank's balance.
Where loan spreads very and there's some duration those dynamics are reflected on the NIM graph on the bottom left portion of the slide but based on the oversimplified math $140 million would represent approximately 10% of our adjusted pre tax income in fiscal year 2019, and reflect a negative impact of approximately.
100 to 150 basis points to the comp ratio and pre tax margin, which will discuss more on the next slide.
Raymond James Banks, net interest margin declined seven basis points from the pursuit ceding quarter to 3.23%.
If short term rates remain constant we would expect the banks NIM to remain at around the same level in the second quarter, assuming a similar asset mix as the negative impact from the higher mix of lower risk and lower yielding residential mortgages should largely be offset by a reduction and the cash sweep rates, we are making this week, which will average around.
Five basis points and leave us near the top end of the competitive rates.
So we would accelerate we would expect the average yield on RG BDP fees from third party banks to remain around 1.6% to 1.65%.
Now I'll discuss expenses on slide 13.
First let me spend a few minutes on compensation expense, which is by far largest expense the compensation ratio increasing sequentially from 65.2% to 67.2%.
This increase was largely driven by revenue mix as Cub compensable revenues and PCG, those which have an associated advisor payout have grown to be a higher portion of net revenues, while non compensable revenues have declined as a portion of net revenues as I covered on the prior slide the decrease in short term interest rates has.
Pressured a significant portion of the non compensable revenues. Meanwhile, compensable revenues in the private client group, which include asset management fees brokerage revenues in investment banking revenues in the segment were up 3% sequentially. These revenues have been an average pay out between our affiliation options of approximately 75%.
So when PCGS compensable revenues increased faster than other revenue sources, you should expect the compensation ratio to increase just as a decrease substantially when rates increased from 2015 through 2018.
To help you better understand this dynamic we started breaking out PCG financial advisor compensation and benefits in the earnings release and supplement which represented 25 million of the 31 million sequential increase in the firm's total compensation during the quarter or roughly 80% of the overall increase.
This dynamic is expected to continue into the fiscal second quarter as assets and fee based accounts were up 9% during the fiscal first quarter given the growth the financial advisor compensation and the reset of payroll taxes at the beginning of each calendar year, we would expect the compensation ratio to be somewhere around 67.5% for the fiscal.
Year.
This represents a 100 basis point increase over our prior target, but again. This adjustment is primarily a function of lower short term interest rates and the change in revenue mix to a larger portion of compensable revenues and PCG.
Onto Noncompensation expenses Noncompensation expenses during the quarter with 299 million, which declined 14% from the preceding quarter and included that that preceding quarter included a $19 million goodwill impairment and 10% from the year ago quarter, which included $15 million loss associated with.
One of our European Equities research business.
Given the loan loss benefit and the fact that there were no major recognition to venture conferences during the quarter, we would expect noncompensation expenses to increase throughout the year.
More specifically, while there are lot of variables. We are currently estimating that noncompensation expenses in fiscal 2020, well total around $1.3 billion or an average of about 325 million per quarter, but as we experienced in the first quarter. We also expect a wide range.
Around this target from quarter to quarter, and if revenue growth is higher than expected that could drive noncompensation expenses higher as well as certain line items such as sub advisory fee expense are directly tied to revenue growth.
1.3 billion of Noncompensation expenses in fiscal 2020 would represent approximately 2% growth over fiscal 2019, which included a two effort mentioned non-GAAP items. We believe this would be a good result, particularly given the amount of growth we are experiencing experiencing as we are extreme.
Only focus on containing expense growth as much as possible, while still investing for the future.
Slide 14 shows a pre tax margin trend over the past five quarters. The pre tax margin was 17.9% in the fiscal first quarter of 2020, given the expense guidance I. Just provided we would expect a pre tax margin to be around 17% for fiscal 2020, reflecting 100 basis point decline from the target.
We provided at our analyst and Investor day before the three recent short term rate cuts.
Again this was our best estimate given what we know right now and we all know things can change rapidly in our business.
Slide 15 provides a summary of our capital actions over the past five quarters, where we returned a one over $1 billion back to shareholders through dividends and repurchases under the board's authorization.
We only repurchased 11 million of shares in the fiscal first quarter, but we remain committed to at least offsetting stock based compensation dilution, which is approximately 150 million to 200 million per year. Furthermore, as we exhibited last year, given our strong capital and liquidity position. We will also cover.
That are significantly increasing our repurchases if the stock price dips to opportunistic levels, which we have stated starts at around 1.8 times book value.
We currently have 739 million of remaining share repurchase authorization.
In summary, given the growth of our capital, which is already very strong we're going to increase our focus on utilizing indoor deploying our capital whether it be through higher dividends being more aggressive with our buybacks pursuing corporate development opportunities or accelerating the growth of our balance sheet for example by growing.
The bank securities portfolio much more rapidly.
With that I'll turn the call back over to Paul Reilly to discuss our outlook Paul Thanks, Paul and thanks for lot of guidance update there, but again as you recall from our last call. We said given the upcoming interest rate changes, we couldn't predict we would hold off till this quarter and you can see most of these changes were just caused by the interest.
Great changes.
So.
We provided as much detail typically we would do it at an investor and analyst day.
So we could explain things and person, but given the cuts since our last call. We felt it was time to updated.
Sooner than later.
In summary, we had three rate cuts since our last analyst and Investor Day in June which has an impact on our pre tax income about a 140 million. So we needed to adjust our comp ratio in pre tax margin targets by 100 basis points.
Unlike many of the other firms were and growth mode, and almost all of our businesses and their expenses associated with growth. For example, we've been consistently adding financial advisors on that basis, whereas most larger firms have consistently been losing advisors on that basis that creates a very different dynamic.
Quick for our expense trajectory as we are adding to our transition assistance and retention amortization reflected in the compensation that alone is about $265 million in 2019, representing 3.5% revenues and $100 million larger than just four years prior.
We're also adding supported the branches and at the home office expanding the size of our branch footprint paying internal and external recruiters paying for a cat fees to transfer and accounts and so on.
Growth as expensive, but we believe it represents a very good.
Long term result for our shareholders and given this growth I think a 2% growth and non comp expenses.
As a good expense management.
With the benefit of hindsight, we probably could have done a better job explaining our expense growth over the past three years.
As we've been investing heavily not just in our technology, but in our compliance super and supervision infrastructure.
Originally to get ready for the Dol rule, which has since been.
Indicated.
But also to support the future growth and responsible manner by improving our solutions for advisors and their clients.
And now I'm really glad we did make those investments as the Fccs best interest standard is out and other fiduciary require become effective this year.
If we have not made those significant investments over the past few years, such as implementing Mantas Enac demised and other technologies for AML compliance and supervision. We would've had been we would have struggled more in our implementation efforts for regulation VI.
But I believe we're in the late stages of that infrastructure impersonal build out which is why we are confident we'll be able to decelerate our expense growth going forward. Despite the significant growth we're experiencing across our businesses.
Importantly, once we complete the build out we will be able to support a much larger number of financial advisors and clients on our infrastructure, which should result in scale economies over time.
And that growth really starts with the private client group, which is obviously our largest business. We're consistently producing best in class growth in this business as I said earlier over the past four quarters financial advisors with 300 plus million dollars or production in 40 billion of assets there.
Prior firms of affiliated with Raymond James and our recruiting pipeline remains very strong across all of our affiliation options.
This quarter represents a better start than last year's first quarter, where were flattish in the number of advisors.
The first quarter of every year has significant number of retirements.
Which is typical at year end, we're off to a good start with this quarter, averaging above last year's quarterly average.
The strong recruiting and most importantly, our strong retention of existing advisors has helped PCG assets and fee based accounts grew 31% on a year over year basis, and 9% on a sequential basis, which is among the very best result, if not the best result, we've seen in our industry on organic basis.
The 9% sequential growth is expected to provide a nice tailwind to our revenues in the fiscal second quarter.
And capital markets, we've become accustomed M&A, achieving new records each year as we've been investing heavily in that business activity levels in our banking business are still healthy, but we'd be very happy if we can match last year 600 million in fiscal 2020.
On the sales and trading side, we're still seeing positive trends on fixed income side of the business, but we expect the equity side of the business to remain challenged.
As business continues to shift to low touch trading and balance sheet providers.
The asset management business could continue to benefit from the growth of assets in fee based accounts in the private client group segment.
Which is offset the challenging flow environment for carillon towers advisors due to the shift from actively managed products to passively managed products.
We are entering the second quarter with fiscal assets under management up 20% year over year and 6% sequentially.
And Raymond James Bank, we are continuing to experience very strong loan growth in the private client group.
Particularly residential mortgages, given the low rate environment.
While residential mortgages have lower yields on our corporate loans. They have the dual benefit of having very attractive risk adjusted returns while also strengthening our client relationships given where we are in the market cycle. We will continue to be extremely selective with loan growth, particularly in the corporate loan categories.
On capital as Paul Shukri explained we are fully committed deploying our excess capital we've been extremely engaged on evaluating corporate development opportunities, but pricing and many of these has continued to be a challenge at this point in the market cycle.
And we'll continue pursuing those opportunities in a deliberate manner, but also be more aggressive and our other capital levers, including repurchases are growing the balance sheet.
So overall I am cautiously optimistic entering the second quarter.
As we have had record client assets a record number of financial advisors, a record net loans at RJ bank the activity levels for financial advisor recruiting has remained strong.
Summit Bank.
Investment banking pipelines remain healthy, but given lower short term interest rates and how far we are on to the bull market the longest ever.
We are still being focused on managing expenses.
So with that I'm going to open up the questions and turn it over to Myra Mara.
Thank you at this time, we would like to take any questions Jamie conference today.
To answer your question. Please please press Star then the number one on your telephone Keybanc. Please note that analysts.
One question and one follow up question Tony.
Our first question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open. Please go ahead.
Okay, great. Thanks, good morning, everyone.
Good morning.
Had a question on recruiting having you grew year advisors, a healthy 3% clip over the last year and you did have some retirements in the fourth quarter, but.
But can you provide a little more color on where those advised that are coming from and if you're seeing increasing competition for advisors from the different groups like the wire houses and other independent brokers.
And also wire lot of those big banks, failing and the competition for advice Alto.
Well I think it's.
Just a shift in philosophy that Raymond James has the platform.
Where are we still have the advisors as our clients.
We give them.
An environment that allows them to do what's best for their clients and with no product push we have no quotas on any product managers don't have any incentives I mean, we really want advisors to do what's best for them. So we've had an attractive platform.
For a long time, and I think today, leading technology.
And I think the banks as they've.
Tighten some of the both their payouts are structures and a lot of advisors feel like there is less flexibility they've been leaving not just for us.
But for other places so I think the regional firms and us have been the beneficiary of the cost of the of a larger wirehouse firms and that trajectory that trajectory has continued so thats, where most of the recruiting as comments from the wirehouse firms.
We don't see any slowdown in backlog.
Last year was a near record from the year before and we're kind of on the same pace. So whether it's a record or shorter record I don't know, but as of today.
We still see the same interest in backlog.
And growth so that's been our strategy for number of years, and we don't see a changing in the short term to midterm.
Thanks, Paul and I had I think two or three questions in there so I'll get back into queue.
Hello next question.
We have another question can.
So having next question comes the line of Madden desire from Morgan Stanley .
You May ask your question your grandchildren.
Hi, good morning.
Morning.
Hi, I was I was wondering.
If you could talk about the puts and takes in the non comp line.
I know you mentioned.
For the full year non compliance should be around 1.3 billion, but I was wondering.
How much room, you have in the longer.
Maybe over the next couple of years to bring that line down a little bit.
And.
Maybe you can talk to some of the puts and takes byline.
I'll give you an overview Paul talked about the puts and takes you know you've seen that line really taken away. The accounting change last year really decelerating over the last couple of years. So last year was a deceleration in this year as a further deceleration.
But again, sometimes with the accounting change or we had a gross up expenses on revenue recognition. Some people lose on that so we continue to manage it down.
And we think we've become better and more efficient with the systems and actually the systems investing actually healthy advisors.
Also with their client management, so that's been the relationship.
The large buildup started really a few years ago and it's been decelerating now Paul you want to talk about any particular line item.
Yes, right and to add more color to what Paul stated last year. The Noncomp expenses grew 9% as reported but over half of that was due to the two non-GAAP items in the prior year as well as the gross up on expenses due to revenue recognition. So.
If you look at kind of the apples to apples that represented a significant deceleration and we're looking to kind of maintaining non comp expense growth around the same level. This year.
To get to the $1.3 billion.
Obviously started off low in the first quarter, just given the loan loss credit and and other items. There was business development was relatively low given no conferences or recognition trips size.
And we expect that sort of build up throughout the year.
But the last thing I would say on this is a lot of these lines investment sub advisory fees professional fees associated with banking deals et cetera are directly tied to revenue growth. So as much as we want to contain the growth that we can contain we also want to fully appreciate the expense growth that is directly tied to revenue growth.
Got it.
And then separately on the NIM side I know you mentioned that.
The NIM should be relatively flat going into the fiscal second quarter bed.
I was wondering if you could speak to the outlook more for the full here is that a little more room to bring down.
Yes caution the deposit side.
With with data as it around 50% is that still more will meet maybe as you go into that.
The second half of next quarter or even into the fiscal third quarter is there room to bank deposit costs down.
No I think.
NIM staying stable in the second quarter is referred reflects a cut that were making this week of about five basis points I don't know assuming rates same stay stable I do not believe that there's much more room to take deposit cost down from our current average cost. After this five basis point cut.
And the only other item I would mention on NIM is if we do accelerate the growth of our securities portfolio at the bank, which is on the table.
That would.
All else being equal bring down down the banks NIM as we're taking the cash off balance sheet at what's earning today, 1.64% bring it on balance sheet would get a pick up for the from overall, but that would be.
Create pressure for the banks overall net because the securities portfolio, which doesn't have credit risk would have a lower yield than the credit portfolio.
Yes, Thats one thing that as we move assets, if we grow the bank's balance sheet, that's better off with a consolidated from but it will show lower now because it.
It's higher interest spread than we would earn.
Off balance off balance sheet.
But it's a the NIM in the bank would be impacted so.
Sure so neutral to slightly better to pre tax margins and it would be slightly detrimental to NIM is that right up slightly better to pretax and but slightly detrimental to them in the bank.
Got it thank you.
Thank you.
Our next question comes from the light as Devin Ryan from JMP Securities. Your line is open you may ask your question.
Okay, Great good morning, Paul and Paul.
Hey, Dan.
So I guess first question here just to follow up on the organic growth.
Question in PCG. So you're clearly you guys are making a lot of investments to ramp the infrastructure in recent years and I think that's.
Driving are helping to support kind of the industry, leading organic growth.
But but I just wanted to dig in a little more on kind of the commentary being kind of in the late stages of this infrastructure expansion and I get that also has some expense implications. So really the question is you have you guys been at all capacity constrained on how fast you can recruit just not having the full infrastructure in place and as you kind of ramp the infrastructure.
The second allow you potentially it at the close more advisors faster so some potential theres, a scenario where organic growth could accelerate and so that's kind of one piece and then I'm also trying to get little flavor for from a.
Geographic perspective.
Where you're seeing the most momentum and just an update on kind of the northeast Midwest and how you feel about market shares there.
So on the first question I think that.
The how fast we ramp advisers has to do with first.
Can we find quality advisors that want to come and we except where you have an off we have people that we don't accept too so.
So pipelines one issue.
Secondly is we're still below the market.
Competition increased significantly last year, but we're able to match still the same recruiting.
Results without increasing our transition assistance like many of our competitors have.
So the question really for US is how fast can we grow and assimilate advisors without hurting the service levels of existing advisors, because I think with really is driving our numbers as retentions. So thats focused number one most of the investment hasn't been on what I call pure recruiting.
I think we do have the platform if it went up and we could find more advisors, we could onboard them.
A lot of the investment has been on the.
The supervision and compliance side and that was in reference to both just are growing to be larger firm.
Certainly our.
Our ml issue a few years ago. If you remember we decided that we're going to ramp up all of our systems, both AML compliance and supervision invested heavily in Madison.
And Actimize another systems, which are very expensive.
But we have mats is fully up and running and actimize almost there and a large head count growth and supervision and compliance so that will help us ramp people.
That.
Part of the infrastructure is very scalable.
And I don't think we'll have to increase.
Or increase much lower than we can ramp and support advisors. So that part has been the biggest builds really starting a couple of years ago and.
And then maybe in a way we invested some of the interest rate spreads to build pillar infrastructure only had that opportunity. So we're in good shape. There. So I think you'll see us more in the non comp.
I think the.
Transition assistance, we don't see going down we're already amongst probably the lowest in the industry or the competitors and what we pay.
Competitive, but it is lower and the eight cats as an industry expense that when people came over we pay for the accounts to move that's industry kind of standard.
Those kind of fees won't go away purely for recruiting but again.
We believe those have good are always and exceptional long term mid to long term benefits of the business.
Yes.
On geography.
We continue to increase I think certainly the northeast we're seeing a much more activity.
Given our investments there.
And the west has growing them and we're growing I would say, but our percent share is still very low so.
What I like is that our flags are being expanded I think we've done better in the northeast in the west, but we're growing percentage wise the highest in those markets, but again we have.
We could get our market share and the rest of the country in the west in northeast, we have a lot of growth for a lot of years, we can just achieved that over the next.
Three to five years, we've got plenty of recruiting opportunity, so we're making progress.
Recruiting is interesting because it's a long process very rarely do you get someone who is just going to leave if they do leave quickly. Sometimes there is an issue so you're cautious and we have recruits that so well I was here and own nine and I should have come in and they join us.
I'm a bit here for two years before they make the moves so it takes a while to build the momentum and pipeline I think we're doing a good job both of those markets, making progress than I still think we have acceleration opportunity there.
Great. Thanks for all the color and just a quick follow up.
So on the comp ratio in margin.
Targets that you put out there I understand that business mix is going to be big input and was this quarter as well.
Do those targets the comp ratio and just kind of overall margin.
In the outlook.
That assume any additional fed cuts or.
Market appreciation from here.
Now I think it's kind of.
Static analysis that today's interest rate environments in this market.
This is what we would expect the only way to really impact that is to substantially change our mix or change our payouts and I think we like the mix and it'll come and go depending on the quarter and.
Payouts, we we always we do those sparingly, but when we need to do them, we do them.
So as we look through B. I and other things, we'll we'll look at that as we always do.
Okay. Thank you guys.
Makes sense.
Our next question comes from the line of Steven Chubak from Wolfe Research. Your line is open. Please go ahead.
Hi, good morning.
Good morning.
So Paul welcome to first official call as CFO appreciate the detailed update on expenses and capital I was really hoping you could speak to maybe now you're in the new seed what some of your priorities are and specifically wanted unpack your comments and just a couple of areas.
Appetite to maybe reduce gearing to the short end of the curve and how you might look to grow the securities book, which I think you alluded to.
Capital return appetite if your stock is trading a little bit above that 1.8 times book value thresholds and maybe just some enhanced disclosure on organic growth. So securities book capital return and organic growth disclosure.
That's a dentist question there see on but thank you.
I am still going to take my follow up.
Yes.
Yes turns or the securities portfolio I mean, we have actually grown at substantially over the last few years here.
And we're just looking at the amount of cash we have off balance sheet. What the forward curve is telling us in the amount of capital we have to end the capacity to grow assets on our balance sheet and it's something that we're considering doing and be modest maybe 3 billion to $5 billion is sort of.
Over a period of time in terms of accelerating the growth of.
Of incremental securities and again, we're not looking to take credit risk in that portfolio. This this would be mostly agency mortgage backed securities with.
Duration of three to four years.
And with that you would get somewhere around today. It changes every day, but today around 30 basis points of incremental pickup over what we earn off balance sheet.
In terms of repurchases I mean, we're going to stay consistent with what we've been doing.
So.
For a very long time, we're going to we said, we're going to offset dilution and then as we've shown last year, where we have plenty of capital liquidity and authorization to.
Increase our repurchases if the price drops to what we consider opportunistic levels and thats something that we're going to remain committed to doing as well.
And then obviously the other priorities expenses, which we discussed in pretty good detail already.
And just the enhanced disclosure on organic growth.
Well I mean.
We are working I think is referring specifically to the net new asset metric that is something we are working on.
I think over the last two or three quarters. The number of inbound requests for that has subsided somewhat because when you look at the 31% year over year growth and assets and fee based accounts I think everyone as acknowledged that that's among the highest if not the highest in the industry. So I think we're getting credit for the organic growth but.
Same time, we appreciate the sort of desire to have it easier sort of metric to track in that regard. So it's something we are looking at but kind of tying back to your first question on an expense growth.
Nothing is free and so we're doing in the context of our other priorities that we have across the firm I.
I think one of the challenges right now to for the industry is that our focus is Reg VI is effective June thirtyth. So as we look at.
I see an opt to time, it's all focus to being making sure right now that were compliant.
And have our systems up there our process and a disclosure another document changes that are required so any excess capacity.
Or it's really first priority, but any excess capacity we've had to do these other things have been focused on VI till we get them done to two of effectively we have to start rolling things out we're starting to roll things out already because we have to have them up and running in place and done by June 30, not start doing them at June Thirtyth.
Hi, and just one follow up for me on expense as you guys cited some progress in slowing the pace of core non comps that certainly evident but the elevated comp pressure is continuing to weigh disproportionately on the margin as we look ahead with NIM stabilizing into Q revenue growth coming from more compensable activities.
Then PCG I'm, just trying to think about longer term, how should we view that incremental margin as those dollars come on and most of the growth comes from fee generating activities just trying to think about the earnings growth algorithm beyond 2020.
Yes, I mean I think.
Given the current rate environment and market environment, which obviously are the two two big factors that would impact your margin.
As along with revenue mix, but I think.
67.5% as of right now the best as best as we can tell 67.5% for the comp ratio and 17% for the pre tax margin is.
The best visibility we have.
Given our current revenue mix so.
To the extent that we did the market environment changes interest rate environment changes or of revenue mix changes then we would adjust those targets.
So this quarter was impacted by lower M&A and tax credit fund, which are court I mean, they are cyclical their number.
Versus the PCG business.
So that that impacted us, but the interest rate is the big change and that's just that's just math I mean I'm.
Kind of amazed that we could lose 10% of our pretax than that much revenue from those three changes and make it up almost make it up in one quarter. So.
But I don't so again, the only way to really change that is looking at payouts across our system.
What we pay folks.
For production that that's where it's all going but.
At least that expenses good growth as production and profit growth. So we'll take the growth in that ratio, we can grow revenues, even faster and add to the margins. So.
Want to make sure theyre competitive and fair.
And as things shift in change overtime, we will look at that.
Great. Thanks very much.
Thanks, Steve.
Our next question comes from the line of Bill Katz from Citi. Your line is open. Please go ahead.
Okay. Thank you very much for taking the questions going thanks for enhanced disclosure.
Coming back to margin discussion a little bit more.
Look at the segment level for private client is sort of wondering what's your long term outlook beyond fiscal 20 is sort of where that margin might be get get your was the drivers there.
And then related to that 70 types and pay out that you had you mentioned early in your prepared comments, how is that relative to market levels.
Yes, I would tell you in terms of the private client group margin.
A lot of it really depends on geography, so to the extent that we have movement to fee based accounts continue which we've had obviously a lot of the benefit gets reflected in our asset management segment to the extent that we suite more cash to Raymond James Bank, which we are considering doing.
Even more.
More so with the growth in the securities portfolio that would.
<unk> increased the margin at Raymond James Bank relative to private client group. So really we kind of look at the margins on a consolidated basis, we think thats, the most meaningful, especially when comparing across firms because a lot of firms have their bank and their asset management fee based platform in their wealth management segment.
So we expect it again on a consolidated basis, our best guess right now is 17% or better for the pre tax margins.
And then a payout the payoffs just a function of the mix between our employee channel and on the independent contractor channel, where independent contractors are paid on the 80% range.
So when you blend the two is where you get the 75% type payout on the production not the overall revenues to the firm, but the revenues that are compensable to the advisors on average generate.
Okay. That's helpful.
And then just.
Well I'm sorry.
Just as my follow up you mentioned that corporate development, it's bit of a priority, but pricing so heavy.
So sort of wondering where you could maybe you could sort of help policemen backdrop or call perspective, where you most focus whether it be and sort of bolstering the private client side or other segments had a business.
Then Conversely, as you look at your business and think about the mix a year or two years from now are there any business is that you're in today that you could maybe deemphasize a little bit overall, both balsara away.
We'd like.
If you look at whereas most of our OE is generator capitals deployed.
First from the bank, which is our biggest capital deployment and we like we'd like where that is in private client group, where it's really transition assistance.
You know and investment in that business, including technology. So we kind of like the businesses were in the mix.
We are honestly open.
Private client group is our anchor business. So we we always look to that first but we're actually opened two things that will grow any of those any of our segments. We like the businesses, we think they're performing relatively well now to the market and.
Theres opportunity because we're not capital bound right now.
We would do something that first as economic sense to shareholders, but it has the first make the business better and I'm just bigger we we avoid things just to be bigger that don't really have good ROI to the shareholders. So we're focused on all four we continue to be in dialogue, but.
I would say over the last year, we've had more dialogues that.
Ended without anyone trading because we just felt the market was to the ask was too high and I think the market agreed on a lot of those assets.
So.
We're not going to do something just to do something.
Thank you.
Yes.
We have our next question comes the line of Jim Mitchell from backing him Research. Your line is open. Please go ahead.
Hey, good morning.
Yes.
Maybe we could just just follow up on the comp and PCG, a little bit if I look at for the year over year sequentially. If I look total comp not just sort of the compensation for.
The advisors, but it look at total comp relative to compensable revenues sequentially and year over year.
Total comps growing faster than revenue and so you're getting negative.
Leverage or negative incremental margins out of the total comp line.
Can you just kind of help us understand what's driving.
Comp is it just is that the the other comp is that just recruiting that's maybe at some point going to slow because it would take at some point you need to get.
Positive incremental margins off revenue.
Jeff.
Hey advisors.
The biggest driver of that as I talked about earlier as the buildup of support.
Both AML compliance and supervision all three of those functions, we've made starting three years ago almost.
Significant investments really accelerated that growth over the last couple of years and now its decelerating so.
That's the leverage we think we'll get out so.
Maybe in some areas that apply will catch up we've really build it for the future and I think thats, where our noncomp leverage is going to come from so.
Thats, an awful lot of it I think the other thing you have to do going back to our whole dialogue around compensable versus non compensable revenues on a year over year basis private client group is showing 4% growth and total revenues, but it's really 6% growth and non compensable revenues and the compensable revenues is the production the number that.
Visors, a number of accounts et cetera, and that's really what's going to drive both the payout and the support and infrastructure needs.
So the 6% still is lower than the 8%.
And the 8% being the administrative non fey comp in the private client group business.
And that the reason its hires for the reasons that Paul mentioned, but if you kind of look back three years to support the fact that were sort of in the later stages of this infrastructure build out.
Three years ago that line grew 17% in fiscal 18, the admin common PCG grew 17% last year grew 12% year over year.
For the quarter grew 8% and that sort of what we're budgeting for the year. So it's come down substantially as weve.
In the later stages of this build out in private client group business.
So that should continue to sort of further slow and not be so tied to revenue.
Yep.
Okay, and then maybe just.
A follow up when you just talking more about the balance sheet potential balance sheet growth.
Would that be sort of slow more impact fall in 2021, if you decide to do that or if you do decide to go ahead with it how quickly could you.
Put assets on the balance sheet.
And grow the securities portfolio.
2 billion $3 billion pretty rapidly Jim So if it's something that we decide to move forward with which is something that we're still having to discuss internally.
I would expect the first couple billion, if we do decide to move forward with it to occur pretty quickly.
But again, we're still it's still we're still in discussions on that.
Okay, great. Thanks.
Jim.
That completes my question answer session.
Okay, so back to Paul Reilly.
Okay, great. Thank you for a for joining us and again.
We normally like to do this on Investor and Analyst day, but again holding off last year. We said, we wanted to wait to see what happened how many rate cuts or a to provide you. The data can you can see why now because had there been one market or one less cut it was significantly impacted our comp ratios our earnings mix. So.
Which we could have gotten to you a little bit sooner, but we got to you as fast as we could and thank you for joining us this morning.
Right My right. Thank you.
That does conclude or conference for today. Thank you also participating you may now disconnect have a great.