Q1 2021 Raymond James Financial Inc Earnings Call
Good morning, and welcome to Raymond James Financial's first quarter fiscal 'twenty 'twenty one 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 Christine <unk>, Vice President of Investor Relations at Raymond James Financial.
Good morning, everyone and thank you for joining US we appreciate your time and interest in Raymond James financial with US on the call today on Paul Reilly, Chairman and Chief Executive Officer, and Paul <unk>, Chief Financial Officer.
The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Please note certain statements made during this call may constitute forward looking statements.
These statements include but are not limited to information concerning future strategic objectives business prospects financial results anticipated results of litigation and regulatory development index of the COVID-19 pandemic or general economic conditions. In addition words such as believe expects could.
In 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, which is.
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 for the most comparable GAAP measures maybe found on the schedules accompanying our press release and presentation with that I'm happy to turn it over to.
Chairman and CEO, Paul Reilly Paul.
Good morning, and thank you for joining us today.
It's hard to believe it's been almost a year since the COVID-19 pandemic started here in the U S.
And while there's no light at the end of the tunnel with a vaccine starting to be distributed across the globe. We are still very much in a period of uncertainty and volatility.
As painful as the pandemic has been for everyone I'm very proud of how Raymond James has performed well.
Who would have predicted when we lost 40% of our earnings for the rate cuts in March that would be talking about records today.
This is a testament not only to the resiliency of the U S economy, but also to Raymond James our advisers and their associates.
As you can see on slide three our unwavering focus on serving clients resulted in fantastic financial results during the quarter.
Starting off fiscal 'twenty 'twenty, one with record quarterly revenues and earnings driven by strength across our businesses.
In the fiscal first quarter the firm reported record net revenues of 2.22 billion, which were up 11% over the prior years fiscal first quarter and 7% over the prior record set in the preceding quarter.
Record net income of $312 million for $2.23 per diluted share increased 16% over the prior record of net income set a year ago quarter, and 49% over the preceding quarter, excluding expenses of $2 million associated.
With the completed acquisitions of N. W. P. S holdings and the pending acquisition of an Ensco adjusted quarterly net income was $314 million and adjusted earnings per diluted share was $2 20 for SUNS both records.
Annualized return on equity for the quarter was 17, 2% and return on tangible common equity was 19% unimpressive result.
Especially in this near zero rate environment, and given our very strong capital position.
Record quarterly results were primarily attributable to higher asset management and related administrative fees record investment banking revenues strong fixed income brokerage revenues and disciplined expense management, which were more than offset the negative impact of lower short term interest rates on the net interest in.
Income and RJ BD P fees.
The record results and broad based strength in our businesses and that's near zero rate interest environment, which included record results for capital markets and asset management segments during the quarter reinforce the value of our diverse and complementary businesses, sometimes something underappreciated and different market cycles.
Moving to slide four we ended the quarter with records for total client assets under administration of 1.02 trillion dollars P. C. G assets in fee based accounts of 533 billion in financial assets under management of 170 billion.
Client assets crossing the one trillion mark for the first time is a testament to the consistent growth that we've achieved by focusing on retaining our existing advisors, while also recruiting high quality financial advisers.
And when you step back this is quite an achievement.
In December of 'twenty 10, we had around 260 billion of client assets. So we have experienced around a 15% compounded annual growth and essentially quadrupled client assets over a 10 year period and the vast majority of that was organic growth.
We ended the quarter with 8233 financial advisors, a net increase of 173 over the prior year, but a slight net decrease of six sequentially.
Flight advisor count, it's not unusual for this quarter as we typically see an elevated number of retirements at the year end where assets are typically retained at Raymond James by their successor.
We are still optimistic about all of our recruiting pipelines across our affiliation options, but there are a few trends we are seeing in the industry on the independent side of the business. We continue to experience strong recruiting activity and we're seeing more interest from both external and internal advisors and they are a custody affiliation options, particularly.
For much larger teams, who have the scale on appetite to assume the regulatory and supervision responsibilities and risk.
We have been beneficiaries of this trend and our rebranded alright, and custody services division or Rcs and we believe we will continue to benefit from the trend given major consolidation and disruption in the U R E a custody industry.
However, it's important to note that went on our I E affiliates with Rcs, whether it would be an internal transfer from our other affiliation option or external additions, we do not count the advisors of the R E firms and our advisor count but their assets are still included in client assets under administration.
On the employee side, there has been a modest slowdown in recruiting due to the challenges brought on by Covid and also increased competition for experienced advisors for even our regional competitors have significantly increased their recruiting packages.
In response to what we are seeing we have also enhanced our recruiting packages to be more competitive while also ensuring attractive returns to our shareholders.
Also impacting advisor count this year, we temporarily decreased the size of our new advisor training class. This year by about 35 trainees, allowing us to dedicate more time and attention to newer advisors as they seek to overcome the challenges presented by the current virtual environment.
While this will negatively impact the growth in advisor count when compared to prior years.
When the training class with larger.
It really shouldn't have a significant impact on client assets.
We believe our recruiting will continue to thrive as advisers are attracted to our supportive culture and client first values.
Looking at recruiting results over the prior four quarters financial advisers with nearly 270 million of trailing 12 production and nearly 40 billion of assets at their prior firms affiliated with Raymond James domestically.
As for our net organic growth results from the private client group, we generated domestic P. C. G net new assets of 42 billion over the four quarters ending on December 31, 2020, representing more than 5% of domestic P. C. G client assets at the beginning of the period and remember this is net.
A client fees.
We are very pleased with our consistent organic growth, especially given the disruption associated with the COVID-19 pandemic during the year and as you know we did not benefit from the surge in self directed online business during the year.
Moving to segment results on slide five the private client group generated quarterly net revenues of one point for $7 billion and pretax income of $140 million.
Quarterly net revenues grew 5% over the preceding quarter predominantly driven by higher asset management and related administrative fees.
Afflicting higher assets and fee based accounts, which will continue to be a tailwind in the second quarter.
This strong revenue growth helped P. C. Gs pretax income grow 12% sequentially, although it's still down 8% on a year over year basis, primarily due to the negative impact of lower short term interest rates.
The capital markets segment generated record quarterly net revenues of $452 million and pretax income of $129 million on extraordinary result.
Strong quarter for this segment driven by broad based strength across global equities and investment banking as well as fixed income.
During the quarter record investment banking revenues were driven by record M&A revenues, along with continued strength in debt and equity underwriting.
Fixed income brokerage revenues were strong as client activity levels remained robust.
While we certainly would caution you against Annualizing the record results for capital markets segment. This quarter I do think the results reflect the significant investments we have made to strengthen our platform over the last 10 years and.
And we are continuing to make those investments as I will discuss shortly.
The asset management segment generated record net revenues of $195 million and pre tax income of $83 million.
Record results were driven by the growth of financial assets under management as equity market appreciation and the net inflows into P. C. G fee based accounts more than offset the modest net outflows for carillon tower advisers.
Lastly, Raymond James Bank generated quarterly net revenues of $167 million on pretax income of $71 million.
Compared to a year ago quarter net revenues declined primarily due to the impact of lower short term interest rates on net interest income sequentially.
Sequentially quarterly net revenues grew 4% as higher asset balances more than offset the seven basis point decline in the bank's net interest margin in the quarter, which was primarily attributable to the growth in the agency MBS portfolio.
The credit quality of the bank's portfolio remains healthy with most trends continuing to improve.
Nonperforming assets remained low at nine basis points of total assets and the amount of criticized loans declined 4% during the quarter.
The quarterly bank loan provision for credit losses of $14 million declined sequentially and was driven mostly by macroeconomic model inputs now under the seesaw methodology, which Paul Shoukri will cover in more detail.
Moving to slide six as you've heard me say many times, we remain focused on long term growth and are committed to deploying excess capital to generate attractive returns to our shareholders.
Good examples of that commitment are the two acquisitions, we announced during the quarter.
The first which closed in late December is N. W. P S.
N W. P S. As a provider of retirement plan administration consulting actuarial and administrative services based in Seattle, Washington.
The addition of N. W. P. S allows raymond James to expand our retirement services offerings, including retirement plan administration services to advisors and clients.
Many of our advisors serve clients with small businesses and offering. This retirement solution is another attractive way to help advisers develop deeper and stronger relationship with our clients.
The second pending acquisition Financo, it's a consumer focused M&A advisory firm, which allows us to strategically grow our capabilities and on attractive vertical with industry leading team.
We anticipate this transaction to close in the March or April timeframe.
Both of these firms represent great cultural and strategic fits and we're excited about welcoming them to the Raymond James family.
While we are not going to discuss the terms of these two transactions in total over time. These two acquisitions represent consideration retention and earn out potential for the sellers of approximately $320 million, so as a meaningful and attractive use of cash and capital.
We will continue to actively pursue additional acquisitions that are both good cultural and strategic fit.
And now for a more detailed review of the financial results I'm going to turn this over to Paul Shoukri Paul.
Thank you Paul.
I'll begin with consolidated revenues on slide eight record quarterly net revenues of $2.22 billion grew 11% year over year, and 7% sequentially asset management fees grew 12% on a year over year basis, and 6% sequentially commensurate with the growth of fee based assets.
Private client group assets and fee based accounts were up 12% during the fiscal first quarter, which will provide a tailwind for this line item for the second quarter of fiscal 2021, However, given fewer billable days in the March quarter, I would expect asset management fees and P. C G to increase about 10%.
Sequentially.
Consolidated brokerage revenues of $528 million grew 15% over the prior year and represented a record.
These revenues are inherently difficult to predict but our clients are still engaged in both the private client group and capital markets segments, given the current market and interest rate environment.
Accounts service fees of $145 million declined 19% year over year almost entirely due to the decrease in our J B D. P fees from third party banks due to lower short term interest rates, which I will discuss along with net interest income in more detail on the next two slides.
As holiday that investment banking revenues of $261 million grew 85% year over year, and 18% sequentially achieving a record result, driven by record M&A advisory revenues and strong debt and equity underwriting.
Based on the pipeline and activity levels, we anticipate second quarter to be healthy, but not as strong as a remarkable result achieved in the first quarter.
As you all know these revenues are very difficult to predict but for the rest of the fiscal year, we would be very pleased to achieve the pace of the average quarterly investment banking revenues from the annual record we set in fiscal 2020, which would be roughly $160 million to $165 million per quarter on average.
Turning to other revenues, which were $56 million for the quarter. This line included $24 million of private equity valuation gains during the quarter of which approximately $10 million were attributable to noncontrolling interest reflected in other expenses.
Moving to slide nine client domestic cash sweep balances ended the quarter at a record $61.6 billion, increasing 11% sequentially and representing six 7% of domestic P. C G client assets.
As we continue to experience growing cash balances and less demand from third party banks more client cash is being held in the client interest program at the broker dealer you can see those balances grew to $8 $8 billion and most of that growth has been used to purchase short term treasuries to meet the associated reserve.
Requirement.
Over time that cash can be redeployed to our bank or third party banks as capacity becomes available, which would hopefully earn a higher spread than we currently arent on short term treasuries on slide 10, the top chart displays our firm wide net interest income in our J B D. P fees from third party banks on a combined basis.
[noise] related based on your feedback we have updated our net interest table in the earnings release to incorporate all of the firm's interest earning assets and liabilities instead of those balances for just Raymond James Bank. We hope you find this update helpful and as always we thank you for your suggestions to continue enhancing our disclosure.
<unk>.
As you can see on slide 10, while lower rates have put significant pressure on these revenue since the fed rate cuts in March 2020, we did experience a slight uptick in these revenues sequentially helped by the aforementioned growth in client cash balances and higher asset balances at Raymond James Bank, which.
More than offset the sequential NIM compression you see on the bottom left portion of this slide.
Given prepayment speeds of higher yielding securities on mortgages, we would expect the bank's NIM to decline another 10 basis points or so throughout the year. However, we are hoping that growth in the bank's earning assets will more than offset the NIM compression and result in continued growth of the firm's net interest income.
I will provide a bed more color on the bank's balance sheet growth in a few slides.
Moving to consolidated expenses on slide 11, first compensation expense, which is by far our largest expense the compensation ratio decreased sequentially from 68.1% to 67.5% during the quarter, primarily due to record revenues in the capital market segment, which had a 56%.
Asian ratio during the quarter and the benefit from the private equity valuation gain which doesn't have direct compensation associated with it.
As we said last quarter, given the near zero short term interest rates and the successful implementation of the expense initiative, we announced last quarter. We are confident we can maintain a compensation ratio of 70% or better which we still believe is an appropriate target.
And as we experienced this quarter very strong capital market results in any particular quarter could result in a compensation ratio below 70%.
Non compensation expenses of $323 million increased $24 million or 8% compared to last year's first quarter and almost all of that increase could be explained by the $14 million bank loan provision for credit losses compared to the $2 million benefit in the year ago period and 13.
Millions of dollars of Noncontrolling interest and other expenses, most of which offsets a portion of the 24 million dollar private equity valuation gain reflected in other revenues.
As we explained and as you can see on these results we have been very focused on the disciplined management of all compensation and non compensation related expenses, while still investing in growth and ensuring high service levels for advisors and their clients.
Slide 12 shows the pretax margin trend over the past five quarters pre tax margin was 18% in the fiscal first quarter of 2021, which was boosted by the record capital markets results as that segment generated a record 29% pretax margin.
Last quarter, we talked about generating a 14% to 15% pretax margin on a consolidated basis from this near zero interest rate environment, which again, we believe is still a reasonable target, but as we experienced this quarter. There is upside to the margins when the capital markets results are so strong.
On slide 13 at the end of fiscal first quarter total assets were approximately $53 $7 billion, a 13% sequential increase reflecting the dynamic I explained earlier with growth in client cash balances and associated reserves at the broker dealer this growth of client cash balances on the balance sheet cause our tier one leverage ray.
Showed a decrease to 12, 9%, which is still well above the regulatory requirement.
Liquidity remains very strong with $1.8 billion of cash at the parent, leaving us with plenty of flexibility to be both defensive and opportunistic.
Slide 14 provides a summary of our capital actions over the past five quarters.
In December in addition to increasing the quarterly dividend, 5% to 39 cents per share the board of directors authorized share repurchases of up to $750 million, which replaced the previous authorization and $740 million remains available under the new authorization in the first quarter.
<unk>, we repurchased approximately 108000 shares for $10 million, an average price of approximately $92 80 per share. This fell short of our $50 million quarterly target, which we plan on making up for in the subsequent quarters as we are committed to repurchasing at least $200 million.
To offset share based compensation dilution during the fiscal year.
One thing many of you have asked us to be more explicit on is our plans for deploying capital, which is something we hope to discuss with you in much more detail at our analyst Investor day tentatively planned to be held virtually in may.
But at a high level, what I would share with you now is that our goal is to manage down the firm's tier one leverage ratio closer to 10% over time through a combination of balance sheet growth primarily at the bank as well as more deliberate deployment of capital through a combination of organic growth acquisitions and share repurchases, we are not ready to share.
A specific timeline to achieve this objective and doing so in the middle of a pandemic is probably not the best time to do so but I wanted to be clear that we are fully committed to managing our capital levels balancing our objectives of optimizing returns to shareholders, while ensuring a significant balance sheet flexibility and conservatism.
On the next two slides, we provide additional detail on the bank's loan portfolio starting on slide 15, with some detail on Raymond James Bank's asset composition in the Pie chart. You can see we broke out CRE and REIT loans into separate categories with the implementation of C sold this quarter.
The only other thing I would point out on this slide is we have a very well diversified balance sheet at the bank.
The bank's total assets grew 3% sequentially led by 4% growth in the bank's loan portfolio.
About 60% of which was attributable to securities based loans to private client group clients.
We have decelerated the growth of the securities portfolio at the bank and will likely continue to do so over the near term as spreads for agency mortgage backed securities have gotten extremely tight.
Meanwhile, we have resumed growth in certain sectors in the corporate loan portfolio that we believe are less directly exposed to the COVID-19 pandemic.
Lastly on slide 16, we provide key credit metrics for Raymond James Bank for.
First let me briefly discuss Cecil.
He implemented Cecil on October 1st, which increase our allowances by approximately $45 million with the majority of that increase attributable to recruiting and retention related loans to financial advisers in the private client group segment, which now acquire a larger allowance under cecil than under the incurred loss method.
$10 million of that day, one impact was related to outstanding bank loans, and remember all $45 million hit the balance sheet directly and did not go through the P&L.
We had no charge offs in the quarter the quarterly bank loan provision for credit losses was $14 million largely attributable to the macroeconomic model inputs. We use from a third party vendor, which assumed a greater decline in commercial real estate prices in the near term with a longer recovery period for zelle.
<unk> and higher allowances for the CRE portfolio from 3.25% to for 0.2% at the end of the quarter.
The bank loan allowance for credit losses, as a percent of total loans ended the quarter at 1.71%. So we believe we are adequately reserved but that could change rapidly if economic conditions deteriorate, but currently we're pleased with the credit quality and the positive trends, we are seeing with the loan.
Portfolio and the broader economy.
Now I'll turn the call back over to Paul Reilly to discuss our outlook Paul.
Thanks, Paul.
As for our outlook, we remain well positioned entering the second fiscal quarter with a strong capital ratios and record client assets. However, we will continue to face headwinds from a full year of lower short term interest rates and there is still a high degree of uncertainty given the COVID-19 pandemic and the rollout of the vaccine.
And a new administration.
In the private client group segment, while recruiting environment is extremely competitive and we faced some challenges on a largely virtual environment. Our advisor recruiting pipeline is strong across all of our affiliation options. In this segment is going to benefit by starting the fiscal second quarter with strong sequential growth in fee based.
Accounts.
Private client group fee based assets were up 12%, which would be a good tailwind and result in a 10% increase and the associated revenues.
And the capital market segment, there is still a significant amount of economic uncertainty due to the ongoing COVID-19 pandemic. However, the investment banking pipeline is currently strong and we expect fixed income brokerage results to remain elevated given the current interest rate and economic conditions.
And the asset management segment results will be positively impacted by the 11% increase in assets under management, but those assets are billed throughout the quarter.
That Raymond James Bank, we should continue to benefit from the attractive growth for securities based loans and mortgages. The P. C G clients.
And as we decelerated the growth as securities portfolio, we are cautiously, adding to corporate loans and the less COVID-19 impacted sectors.
We continue to focus on long term growth and our priorities remain unchanged. Our top priority is serving clients and we're focused on organic growth, which is primarily driven by retaining and recruiting advisers in the private client group. Additionally.
Additionally, we're continuing to add senior talent in our other businesses such as investment banking.
As you observed this quarter, we will continue to actively pursue acquisitions, but we are still focused on being deliberate and only pursuing transactions that have a great cultural and strategic fit and at prices that can deliver attractive returns to our shareholders.
We started fiscal 'twenty 'twenty, one with very strong results and I believe we are well positioned to drive profitable growth in the coming quarters across all of our businesses.
But we are also fully aware that we're still on the middle of a global health pandemic and we should all be prepared for much more economic turbulence and market volatility over the next several months with that operator could you. Please open the line for questions.
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Thank you for the first question comes from Manav Gupta.
Of Morgan Stanley. Please go ahead.
Hi, good morning.
Maybe a question on the PC segment.
Shall we think about the compensation ratio on that segment.
I mean, I know, they're there if last quarter was about 100 basis points positive for the pretax margin, but I guess when we look on the comp ratio on that segment. It was pretty flat for us just last quarter or so are there any factors that it may be masking that 100 basis point improvement here.
Yes, I mean, the biggest driver of mining and good morning to you as well the biggest driver is really just the growth in the production to advisors, that's going to have roughly a 75% payout associated associated with it.
So that's going to be your biggest driver of compensation and the PCB segment, that's for the admin comp in the PCB segment.
As we said on the call last quarter, we expect that to be.
We were expecting it to be relatively flat when we were on the call last quarter, but the one driver there would be some of the benefits that grow with profitability.
Cross the firm so.
But again, we think that.
That's what we're really focusing on managing is the admin comp in the <unk> segment, and that's what would be reflect that would reflect the benefit from the expense initiatives, we announced last quarter.
Got it.
And then on the.
On the capital return front, you know I appreciate it.
On you know, how you're thinking about capital return and I realize you can't give a timeline but.
In the past you've mentioned, a 1.8 times book value per threshold as a level that youre looking at for doing more buybacks can you give us an update on how you're thinking about that now in may.
Maybe you consider buying back at a higher level, if that if the stock stays above that level in the absence of any acquisition opportunities.
Yeah, we're going to later rollout a more definitive capital plan, but are managing tier one back to 10 percentage over time, we've committed for the $200 million buybacks a year.
Just to manage equity based dilution at any price any price.
And then the other will be more opportunistic. So we'll just have to see that out now the only caution on the opportunistic part as we'd like to say, we're feeling much better about the economy.
The pandemic.
The virus being under control as the.
People get the shots, but we don't know right. So it will be a little cautious on that part but.
It will be a little more opportunistic outside of that $200 million kind of more programmatic buyback.
Got it thank you.
Thank you.
The next question comes from Devin Ryan JMP Securities. Please go ahead.
Thanks, Good morning, everyone.
Hey, Devin.
First question here just on the recruiting commentary and outlook. Obviously, you guys have been alluding to some increased competition in recent months. So I just want to dig in a little bit because it seems like over time.
Recruiting competition kind of ebbs and flows and so I'm kind of curious what.
Do you think is driving that.
Right now and.
I guess I just want to make sure that I understand the whole message here I guess my takeaway is that.
Independent.
Advisor recruiting is still very strong and that's the expectation on the employee side.
Pricing has become more competitive but it sounds like Raymond James will be there or already is increasing kind of pricing competitiveness. So.
Should we expect that the.
Recruiting on the employee side will remain accurate, but just a.
It may cost a bit more or I, just want to make sure we're taking the right takeaway here.
We've had a very robust recruiting history as you know and certainly on the employee side as people are up to.
Transition assistance to be.
More.
Trying to grow their private client group business as we did and that GAAP, just got bigger and bigger and bigger where I think that people even wanting to join just said the economic GAAP was to begin as we really analyze that if we can get.
We don't have to match.
We've proven that over our history, but being more competitive.
Because of the environment, but we offer advisors.
Can get a good return now and net of interest rate spreads gap out again in the future.
Those recruiting deals from our standpoint will even be better. So so we've got more aggressive yeah, theres a little bit of lag, but we think we can get it going we did cut the advisor class going into non a cost cut and then during the pandemic as we ramp back up the training, which we expect to once we get out of.
We've kind of exiting a total virtual environment.
That will help also so again last year, we had good recruiting stats this quarter, but it isn't unusual if you go back for the year before that it was flattish I think we're up to and a record recruiting year. So.
We will get it back on track and maybe were a little slow to act but.
Recruiting overall has been good and then we're going to have to figure out how to give you better numbers because.
People are in the RA channel, we don't count them at all and so youre not really seeing overall recruiting although they are in the asset number so.
Work on how to give you a better metric on that too. So you can compare it more apples to apples as channels may shift overtime.
Okay. That's really good color. Thank you Paul and then just a follow up here on capital as well appreciate.
The update there.
Is there any way you can just help refresh us how to think about the capacity.
The bank growth or the size of the bank within.
Raymond James I appreciate that.
Going to be opportunistic and can't really give a timeline of expanding the.
For the bank balance sheet, but how should we think about based on whether it's.
The third party bank deposits and client interest program for capacity to fund growth or the size of the bank because the overall firm yeah. How are you guys thinking about maybe the upper band of.
On capacity.
Giving us a timeline of exactly how you'll get there.
Hey, Devin.
Yeah, we would love to continue growing the bank and we have as you can see with the cash.
Cash at third party banks and now in CIP at the broker dealer, we have a lot of funding capacity.
We have capital capacity to grow the bank. So the biggest constraint now is just finding assets with good risk adjusted returns over a long period of time.
We are thinking about balance sheet growth overall as a firm which includes primarily most of the growth in the balance sheet would come from the bank going forward is that tier one leverage ratio that Paul mentioned, which we hope to.
Target about around 10% take that ratio down to somewhere around 10% overtime now it could go under 10%. If we're just accommodating client cash balances.
And investing it in parking.
Parking at the fed or investing it in treasuries, but on a more normalized basis. So I think 10% is a conservative place to be at as a holding company overall.
So that's how we're thinking about the bank growth some of the metrics in the past that we shared with you around the percentage of equity and percentage of cash balances that those were metrics that were established.
When we're primarily a corporate loan.
Bank.
Bank essentially and so we were those metrics for our intended to.
<unk> the size of the corporate credit exposure to our overall balance sheet.
Now that we have agency mortgage backed securities and we have securities based loans and mortgages to private client group clients.
Some of those metrics arent on.
As relevant as they were five years ago. So that is going to be a part of the discussion that we hope to share more details with you on at our upcoming analyst Investor Day.
Okay, great. Thanks, Paul that was what I was getting at so I appreciate it.
Thank you.
The next question comes from Craig Siegenthaler from Credit Suisse. Please go ahead.
Good morning. This is Gotham so on filling in for Craig.
I just wanted to follow up on the balance sheet commentary and we want to know what kind of macroeconomic green shoots you're seeing and how are those getting you more comfortable growing RJ bank over the near term.
I think it's certainly on sectors as you know we were pretty aggressive on selling COVID-19 exposed.
Yeah.
So that kind of shrunk the balance sheet, a little bit those sales I mean at least relative to what it could grow.
We track other kind of the non COVID-19 related areas.
Now the economy has performed even a near Lockdowns in places, we're pretty comfortable for a lot of other sectors, but.
So those are the sectors, we're looking at growing.
We've also looked at the spread on MBS Securities and Theyre just not.
There just isn't a lot. So we're looking at higher grade corporate also to get a better spread and with shorter duration, what's your bias three.
Three year.
A corporate loan.
Well run company on a non Covid segment versus treasury stock yielding anything so we're looking we're comfortable with the bank the lending team and we have a lot of capacity so were as.
As we've gone through this part of the pandemic, even though there is uncertainty we're getting more comfortable with.
With lending in areas and that's what kind of open that back up.
Thank you.
Thank you.
The next question comes from Steven Tobacco from Wolfe Research. Please go ahead.
Yes.
Hi, good morning.
Hey, Steve Hey.
Hey, guys. So I wanted to start up for the question on the capital markets outlook, you are coming off a record year for fixed brokerage well, what's informing your view that activity should remain elevated as it appears both you and peers are over earning in that particular area relative to history.
And maybe just a question for Mr. Shoukri since you alluded to the 160 day $165 million run rate, which we be a good outcome for the quarterly run rate for IV should we infer from your remarks, there that this base level is.
With your view of what normalized activity looks like and what you believe is readily achievable within the IV segment in particular.
Yes I'll.
I'll answer the second part of the question first I wish it was that scientific with.
Projecting the investment banking revenues I think it was more of just a hypothetical that on a going forward basis.
Kind of average $165 million of investment banking revenues, a quarter, then that would sort of match.
Matched the record we set last fiscal year so.
Is there upside to that as we saw this quarter there is upside to that and we are growing the platform that Paul mentioned, the finance <unk> acquisition, which we hope will close and we're also hiring a lot of other.
Senior MD. So we have a pretty powerful investment banking platform. I think you saw the potential of that this quarter, but we just want to caution the street against Annualizing against it I think it's Steve.
One of the difficult things that you've talked to us or you talked appears on the industry everyone was surprised at how robust. This quarter was I mean, it's not that we didn't have good backlog. So when it come off a quarter like this of activity you go well, but for next quarter looks like the backlogs are very good the activity is very high.
But I hate to keep predicting a repeat of this quarter. When it's an all time record and I think industry wide. It was very strong so could that continue yes.
But that would be a guess too so.
We kind of give you numbers, we're comfortable with it doesn't mean, we can't beat them. It just means you know us.
It's very hard to predict these revenues on this in this business and we certainly have <unk>.
Last quarter's call didn't predict this number for this quarter.
No I empathize, where we're dealing with the same struggles.
And we're.
I think the one thing we are comfortable with and it can change overnight, but I think as for fixed income market given given the dynamics, it's been a pretty good run in the debt dynamics look pretty much in place and that usually well shut off unless there's a major event.
But M&A is still strong so it's.
That number I don't know its just hard for us to predict so again, we don't try to.
Don't try to give you the optimistic numbers, we try to be realistic and hope, we do better but I certainly know the bankers are hoping to do better, but so it's a lot of business day.
Close and then maybe a little smaller in its absolute size, but the debt underwriting business I think it was a record this quarter as well. So they finished the calendar year, but our public finance business debt and the top 10 in the country and the pipelines there. It look good as well so we have a very strong public France up fine.
Net franchise, which will also contribute to the results.
That's great and for my for my follow up I, just wanted to ask a follow up relating to the organic growth outlook the risk.
That took place earlier I appreciate the nuance commentary around the recruiting backdrop and some of the color around the different channels and what you're seeing and you quoted in M&A figure, which implied about 5% organic growth from the quarter slightly below the six to seven you've recorded over the last two and as you look ahead, just given the heightened.
On petition within the employee channel what pace of M&A growth.
Are you comfortable underwriting or we should be contemplating that at least in the near to intermediate term given some of the competitive.
<unk> decided.
Hey, Steve.
I'll, let Paul talk about the competitive dynamics, but just as far as M&A metric goes.
That 5% was for the year actually the fourth quarter for almost all of the firms in our industry us included.
It's seasonally high because of the dividend and interest reinvestment, so yes quarter to quarter that number can change because as you know the baseline at the beginning of the period assets.
For the quarter as well so.
Yes, we're still pleased with the 5% organic growth and remember that is net of the commission and fees in the private client group the way we account for it.
And I would say on the recruiting look we've been I've been here now a decade, we've had quarters for this has happened we are recruiting trail.
Trailed off in different channels.
We've adjusted and we've been right back as kind of.
The benchmark for recruiting across our channels and I believe we will continue that advisors want to be here.
We have great tools, great technology, and a great culture that supports from so we just maybe got a little uncompetitive and thought during the pandemic didn't makes sense, but as we really dug into the economics.
We added a lot of room to go up so we did go up modestly and I still think Paul would be very good returns and we just it's on.
Hard choice for advisers, when they come down to two places when someone's going to pay on 50% more so we're just going to have to close that gap.
And it still will be a good economic return for the firm so theres always a lag between when you do this on.
On the account comes up but.
Net recruiting isn't bad.
On the employee channel at all it's just down from kind of a series of records and we just need to get it back up where it can be I mean, where it shouldn't be.
Given what we think we offer on our platform. So I'm still very optimistic about it as it's been it's been robust in all the other channels.
Had channels go up and down before for a quarter or two and we've always rebounded well just focus on it and get it back to where we think it should be.
Thanks, and I know I didn't ask on capital, but I appreciate the commitment to the 10% tier one leverage target and look forward to seeing the pathway to getting there in a few months.
Alright, Thanks, Steve.
Thank you. The next question comes from Alex <unk> of Goldman Sachs. Please go ahead.
Yeah.
Hey, good morning, everybody. Thanks for the question.
Hey, Paul I was hoping you could dig into the RNA and the custody platform a little bit more.
I guess, one can you give us a sense for the assets on that platform now and how much that's been contributing to your guys as M&A over the last year.
And slightly bigger picture.
What is sort of the key competitive advantages that you think differentiates you guys versus peers in this part of the market and from an economics perspective, I guess, how should we be thinking about the revenue yield or the operating income yield on those assets sort of aside from the calculated revenues I havent see that's one but are there other fees and things like that that we should contemplate as that part of the business growth.
So there is.
Complex and multiple asset multiple faceted answer.
We plan on again on Investor day to try to get better metrics, because we arent disclosing all of that correct, but.
You are.
In general in that custody type of platform. The return on assets may be a little lower on the.
Our margins are higher but youre calculating that on the different revenue streams. So it's a little bit complex there.
And.
Traditionally in that.
That business a lot of it was trading fees, which have gone away in interest spreads, which are hopefully temporary gone away. So the economics on that business with interest spreads are a little more challenge, but I think theyre fairly compelling when you get it back.
Our platform the competitive part of our platform is that isn't.
A.
Custodian.
Do we have.
Firm with an investment grade background, which makes us a great.
Competitor.
But we also can offer kind of full systems platforms and others that other firms use third party platform, so and our goal would be not to allow our platform to be used for people want the turnkey as well as integrating third party platforms and also access to our other.
Services, such as lending and other things that we do through our bank and access to the other.
Help that we give in.
Through our support centers, which I think are much more robust than most already platform. So I think it's a strong alternative.
We've shown growth we've been hit on a while we just talked about it less.
And we've seen both with the market is.
Trading fees have gone away as regulation best interest for some of the larger advisors. It felt it was just easier to be under the kind of the SEC versus FINRA on some of the all the rules and they can take on the compliance and risk of chosen to do that and so I think it's a long term trend it's been a long term trend.
And that's just picking up in for certain advisors and I think it will be competitive in that platform to it. We just we got a lot of growth that we got a lot of growth ahead of us to get us on scale there but.
So far so good.
Great and then my follow up is around expenses and Paul you gave kind of updated thoughts around the comp rate and again, hopefully it could be better than 70 with a robust capital markets backdrop, but can you talk a little bit about the non comp outlook.
Maybe excluding provision expense as you guys have been running at a little bit of a $300 million this quarter and last quarter on those kind of combination of those lines again, excluding credit provisions.
How do you guys envision that evolving through the rest of the fiscal year.
And I guess to what extent are the higher recruiting tier packages.
Well, we'll push that number higher just trying to get some sort of framework to think about it for the rest of the year.
Yes, I don't think the higher tier packages would really move the needle throughout the year.
And that shows up in compensation when it starts amortizing not the non comp line item. So yeah. We were at around 323, this quarter, which is sort of what we were guiding around and that included some NCI expense as well.
The only thing that is harder to project is what business development expenses are going to do throughout the year theyre down 50% year over year.
$20 million for the quarter.
So we will see how business travel recovers as we progress throughout the calendar year, but overall, we're really focused as you can tell on managing all of the non comp line items.
Some of them grow naturally with business growth sub advisory fees grow with fee based assets in PCB for example on those were up.
12% sequentially, so youre going to see some natural growth.
But the ones that are controllable ones that we're really focused on managing.
On the shorter term there'll be well managed the question becomes when.
The environment opens up for conferences and others youre going to get some rise, but short term. This quarter. We certainly don't have any conferences scheduled in.
Don't know when that opens up some people would say late summer.
My guess is it'll take a while before people are comfortable with traveling and gathering so it might be next calendar year before you really see anything there. So theres still a well managed we're managing it very closely.
As part of it.
And plan to do that but we will add people with growth I mean, you recruited advisors you got a higher net system.
Got you recruit advisers, you've got Red <unk> got Theres, just things if you open a branch so but the kind of discretionary stuff for holding pretty tightly.
Maybe one other comment that Paul just reminded me of is this first calendar quarter.
It has some seasonal factors to it it's a shorter number of days so that impacts for your interest billings, we already talked about the impact of asset management billings.
There's a payroll tax reset in the first calendar quarter across the board you usually have higher mailings, which for US shows up in the communication information processing. So there is some short term seasonal things from quarter to quarter, but kind of echoing Paul's comments on the management of the ones we can control.
Great. Thanks very much.
Thank you.
The next question comes from Chris Harris Wells Fargo. Please go ahead.
Great. Thanks, guys.
Another one on.
The competitive environment for advisors.
Yeah, how does what youre seeing.
On the marketplace today compare to compare to history.
I mean is this about as competitive as you've seen it or not necessarily more like middle of the road I guess, that's the first part of the question and the second part of the question is are you a little surprised.
About how competitive it is getting given where interest rates are.
So the first question is.
It's always been competitive it's always been very competitive we've always had.
Well, we always said outliers, one or two people offering.
Larger pack kind of outsized packages, we viewed the economics, so it's gotten a little more broad based on some of the regional firms have joined into the Fray. So it's a little more competitive.
On that area.
I do think when we really dug into the economics.
Even though it.
It was like.
Packages, we thought with this interest rate environment made no sense, if you structure them right.
We believe you can get a good return and if spreads do come back there'll be very very good.
Estimates from those recruiting packages so.
We always kind of modeled.
Our returns to current environment or we are conservative when we had high spreads assuming theyre going back to normal.
Our historical averages.
And our packages we were assuming they just state.
More like where they are now, which I think was probably over a punitive so.
We're a little behind we had room to increase it.
We will do fine on a competitive it's always been competitive we've always recruited people that had better higher offers at other firms and we've been very successful. So we lose some people because of it yes.
We just felt that we got a little out of the market in the last couple of quarters. So we will correct. It.
So it'd be a good return for the firm and the other channels have been doing fine we've had it in one channel, but we've had this happen in other channels.
To make adjustments and rebounded so.
This whole business is always competitive we've never had we've never had an easy road right. So.
When you guys make it look easy so we sometimes forget about that.
Quick quick follow up for Paul Shoukri.
You highlighted a bit more downside to the NIM as we progress through the fiscal year I'm guessing yeah, that's all coming from the <unk> portfolio. Once we get sort of towards the end of the fiscal year is it fair to say that we're probably close to bottoming on the NIM based on where our interest.
Rates are today.
Yeah, and you're right Chris It is really mostly almost all of its agency mortgage backed securities portfolio.
We had 2% paper.
Paper paying off in <unk>.
People are refinancing their mortgages youre seeing prepayment speeds accelerated right now with the fed buying I think $40 billion a month is what they committed recommitted to yesterday.
On the spreads now are really tight I mean, we're talking about 50 basis points or so for three years of duration.
You see that.
Getting really paid a lot to take that three years of duration. So.
But you just do the math on that.
That's what if rates don't change for the next year or two that's weighted.
The yield on that portfolio would bottom out assuming things don't improve in terms of the yield for the securities portfolio.
This is why we decelerated the growth of that this quarter in play.
Playing on the near term sort of running in place with that portfolio until we see maybe some improvement in those spreads.
Okay. Thanks, guys.
Yeah.
Thank you the net.
Question comes from Jim Mitchell Seaport Global Please go ahead.
Hey, Hey, good morning, guys.
Maybe we could dig into a little bit the M&A business. That's been obviously, it's been an area of focus and investment.
And obviously, a big surprise strength this quarter.
Can you give us some metrics that we can kind of think about you know number of Mds.
The growth rate in M. DS how to think about what what is driving the growth and how we can at least model it a little bit better.
We have historically tried all sorts of things.
Sales and underwriting number of Mds, I think theres a number of factors that.
Jim <unk>, our current head has just done a fantastic job of.
Of recruiting and developing mds that or even existing ones are producing are doing deals that levels.
We never thought that they could do three years ago now.
We have teams in segments that are just key players income.
Pete against anybody of any size and their verticals. So.
We hope Financo, which was an industry leading.
And there are consumer.
Area will do the same and so he has been building out vertical by vertical and globally certain sectors. So it's not just <unk>, it's really the production of those empties and the size of deals on everything thats driving that so.
Every time, we give a metric.
Over time, it hasnt really tracked so.
We'd be open and maybe we ought to look at what other disclosures are to see if there is.
Any information that would give you, but we can't find a metric, especially over quarters, because it's a cyclical business to some expense.
That would give you good indications so we've tried in the past.
Think about it and try again, because if we could find the metric we'd give it to you.
Well, what I would say M D head count growth does have a pretty high correlation with long term growth in advisory fees, so that that could be helpful.
But I appreciate it maybe.
Maybe two.
Turning to the comp ratio.
Now Paul when you talk about 70 per cent or lower is that sort of assuming that kind of average quarterly run rate in investment banking, how do we think about that target for the year versus the 67, 5% in the first quarter.
Are you assuming that in your numbers or are you just sort of assuming on a average basis at 160 to $1 65.
Yes, I think Thats. The primary driver is just the capital markets revenue mix. If you think about it our asset management fees.
Growing 10% next quarter and the private client group business that we'll have somewhere around a 75% payout associated with it so even if even if the capital markets segment generated the same revenues next quarter as a debt this quarter, which were not expecting at this juncture.
Then our comp ratio would go up so it's just based on the revenue growth in the private client group business. So.
This is based on revenue mix on the biggest driver of the upside or I guess in this case the downside in terms of being below 70% would be very very strong capital markets revenues.
Okay alright. Thanks.
Yeah.
Thank you.
Our next question comes from Kyle Voigt K B W. Please go ahead.
Hi, Good morning. Thank you most of my questions have been asked and answered I guess, maybe a follow up for Paul.
The agency book and agency yields just wondering if there's any color you can provide on how much more pressure, we should expect on the on the resi loan yields for the remainder of the year.
Just given that its been drifting lower as well.
Yes, we've seen a lot of refi activity, there, which frankly is good for our clients. They are taken advantage of the lower rate environment. So I think youll see a little bit more continued pressure there, but certainly not to the same extent as the agency mortgage backed securities and with this the NIM compression in those two categories as Paul said earlier.
We're also focused on delivering on opportunistically growing the corporate loan portfolio. So I think our focus is.
Growing net interest income.
Through asset growth to offset the NIM compression going forward, that's kind of the way we're thinking about that.
<unk> balance sheet.
The good news right now is that.
Sure.
With our capital position on our liquidity position, we've got a lot of flexibility so where are we.
We're looking.
For a growth company, we're looking out we certainly.
Came through what we hope is for horse to the pandemic in great shape.
We're feeling more comfortable looking forward.
We plan to grow in the bank almost all of the segments I mean, the SPL segment, certainly has a great assets for clients on a good asset for us.
On the mortgage market I think looks like it's kind of bottomed out so hopefully that will continue to grow and get good spreads and we're feeling more comfortable with the corporate side again so.
We are.
We're feeling a lot better than we were.
This time last year for I guess from March of last year.
And we're feeling really good this time last year.
[laughter].
Thank you.
Thank you.
And our final question comes from Bill Katz of Citigroup. Please go ahead.
Okay. Thank you very much for taking the question this morning.
So just going back to maybe M&A broadly a you'd mentioned that over time, you would sort of put out 300 million plus of earn outs related to two deals I was wondering if you could help us understand how to think through maybe some of the earnings accretion or an ROE type of construct against that payout. That's the first question.
Yes. So the first thing is you've been around us long enough to knows that we don't do things for short term accretion right where you do.
Got aggressive and even how we account for any of it. So we do these projects really because of long term growth and we think they'll come in.
Remember, even getting back into Morgan Keegan and others that.
We've been similar we've done things that we think restructured while their long term growth all of these kind of acquisitions have some intangibles that go against P&L some of they all have.
Usually transitional comp they have things.
Debt in the short term don't have.
<unk>, but longer term credit impacts and I think that's how you would look at those two deals right.
Right now, but we're very very high on both of them, but I wouldn't say, they're short term kind of have for that.
Any kind of major accretion of debt.
Okay. That's helpful. And then just within that second question here just in charge of M&A Big picture and I appreciate the discussion on capital management and tier one leverage et cetera.
How are you thinking about like priorities from here.
There's been some interesting M&A.
Some of your peers and just sort of wondering how you're thinking about what areas of focus for.
From here on whether it be asset management or scaling further in our private client business. Thank you.
Yeah, I don't think our priorities have changed so we are looking at both.
No.
Private client groups, our biggest business we've looked at acquisitions as we've said both on.
Private client, but there arent a lot that really fit so organic recruiting has been.
The engine, that's driven and if you look back even to 2010 on the engine that's driven it's been organic recruiting not some other really good acquisitions that we've done on that area.
We are in the M&A area, we continue to talk to folks on.
Without the cultural fit or some of the deal prices. We've walked from some things I mean these aren't the only two deals we've looked at.
The third area that I think we are spending more focused on are things like.
Our our plan administrator, who is taking businesses, we do today and helping to monetize on them and give great service to our clients and advisors and we've done that in the insurance area with People's choice. We've done that now within WPS and we plan to keep looking at areas like that.
Use technology and services practices.
Both create a service on a value to clients on the value to us. So there's a lot of things. We're looking at also on the technology area now today.
But.
Very deliberate, but we're very very active and so.
We plan to hopefully we would like to do more than we've done but they have to fit and they have to work. So we're going to continue on the course, we've been on hopefully deploy some more capital.
Thank you.
I don't think we have any more questions.
Well I appreciate you all joining.
Joining us on the call and certainly a strong quarter for us.
Again for.
We're very optimistic in terms of the fundamentals I don't know what will happen with the market but.
Hopefully this pandemic.
It gets behind us.
We feel like we say for Raymond James So and just remember that.
We've Oh I should remind you that our area is the home of not just the Stanley Cup champions The baseball runner ups almost world series champions, but hopefully the football champions to at Raymond James Stadium.
We are planning for the.
NFL championships so thank you.
Thank you that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your lines. Thank you and have a good day.
Yeah.
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