Q4 2021 Raymond James Financial Inc Earnings Call
Good morning, and welcome to Raymond James Financial's fourth quarter fiscal 2021 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 Kristy wall.
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 are Paul Reilly, Chairman and Chief Executive Officer, and Paul Shoukri, 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.
Calling your attention to slide two 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 timing and benefits of our acquisitions, including our proposed acquisition.
Charles Stanley plc in Tristate capital Holdings, and our level of success in integrating acquired businesses and anticipated results of litigation and regulatory developments impacts of the COVID-19 pandemic or general economic conditions. In addition words such as May will should could.
Scheduled plans intends anticipates expects believes estimate potential or continue or negatives of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward looking statements.
Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements. We urge you to consider the risks described in our most recent Form 10-K, and subsequent forms 10-Q and forms 8-K, which are available on our Investor Relations website during today's.
His call. We will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures maybe found in the schedules accompanying our press release and presentation.
That I'm happy to turn it over to chairman and CEO, Paul Reilly Paul.
Good morning, and thank you for joining us today.
One of the first by apologizing I'll sound like a broken record using the word record over and over again.
It really was an outstanding year and quarter.
I wish management could take credit, but it was really the work of our advisors associates that delivered these results.
Their dedication and perseverance during the fiscal year was amazing.
We have proven once again that focusing on our time tested client first strategy and providing outstanding service to our advisors and their clients will guide us through uncertain economic and global conditions.
This case and record setting fashion.
The record results, we generated would not have been possible without everyones contribution. So thanks again.
Starting on slide four with our quarterly results the fiscal fourth quarter capped off what was a record fiscal year on a number of fronts.
The firm reported record quarterly net revenues of $2.7 billion and record quarterly net income of $429 million or earnings per diluted share of $2 and two sets, which reflects the impact of the three for two stock split in September.
Excluding the $10 million of acquisition related expenses quarterly adjusted net income was $437 million and adjusted earnings per diluted share equaled $2 six sites.
The increase in quarterly net revenues was largely driven by record investment banking revenues and record assets under management and related administrative fees, primarily due to higher private client group assets and fee based accounts.
Annualized return on equity for the quarter was 21, 3% and adjusted annualized return on tangible common equity was 24.1% a very impressive result, especially in the near zero rate environment and given our strong capital position.
Moving to slide five we ended the quarter with record total client assets under administration of 1.18 trillion dollars up 27% on a year over year basis, and 1% sequentially.
We also achieved record P. C G assets in fee based accounts of $627 billion and record financial assets under management of $192 billion.
We continue to focus on supporting advisers and their clients through leading technology solutions and a client focused culture.
As a result, we had a fantastic year in terms of advisor retention as well as record results in recruiting new advisors to the Raymond James platform through our multiple affiliation options.
We entered the quarter with records of 8482 financial advisors net increases of 243 over the prior period and 69 over the preceding quarter.
Representing a new record during the fiscal year, we recruited financial advisors with approximately $330 million of trailing 12 month production at approximately $54 billion of client assets to our domestic independent contractor and employee channels.
Also in the private client group advisers generated domestic net new assets of approximately $83 billion in fiscal 2021 representing 10% of domestic P. C. G assets at the beginning of the fiscal year, a very strong result, reflecting our excellent retention and record recruiting.
Additionally, this year, new account openings and adviser productivity, we're very strong contributing to the excellent net new asset results.
Also worth noting on this slide is the impressive loan growth at Raymond James Bank during the quarter up 5% sequentially to a record $25 billion.
This growth was driven by securities based loans to the private client group clients as well as a strong corporate loan growth.
Moving to segment results on slide six the private client group generated record quarterly net revenues of $1.8 billion and pre tax income of $222 million, a 12.3% pre tax margin, reflecting significant operating leverage over the past year.
The capital markets segment generated record quarterly net revenues of $554 million and pre tax income of $183 million.
Presenting an extremely impressive 33% pre tax margin to net revenues.
These record results were driven by record investment banking revenues strong tax credit fund revenues and solid fixed income brokerage revenues.
The asset management segment generated record net revenues of $238 million and record pretax income of $114 million up 29% and 46% over the year ago period, respectively.
These results were primarily due to growth in financial assets under management, driven by net inflows to fee based accounts in the private client group, partially offset by market depreciation and net outflows for the carillon tower advisers during the quarter.
Raymond James Bank generated quarterly net revenues of $176 million and pretax income of $81 million.
Quarterly net revenues increased 9% over the year ago quarter as higher levels of earning assets offset year over year compression in the bank's net interest margin sequentially net revenues grew 4% due to higher asset balances during the quarter.
The pretax income growth year over year was due to the April mentioned in revenue growth and lower bank loan provision for credit losses in the current quarter.
Impaired to the preceding quarter. The bank's pretax income declined largely due to a reserve release in the preceding quarter compared to a loan loss provision primarily associated with the strong loan growth during the fiscal fourth quarter.
Looking at the fiscal year 2021 results on slide seven we generated record net revenues of $9.76 billion up 22% over fiscal year 'twenty 'twenty.
And record net income of $1.4 billion up 72% over fiscal 'twenty 'twenty.
Excluding losses on the extinguishment of debt and acquisition related expenses during the year. Adjusted net income was $1.49 billion up 74% over adjusted net income in fiscal 'twenty 'twenty.
Moving to the fiscal year results on slide eight the private client group capital markets and asset management segments generated record net revenues and record pre tax income and all of our segments realized substantial operating leverage during the fiscal year.
Once again these results reinforced the value of our diverse and complementary businesses.
And now for a more detailed review of the fourth quarter financial results I'm going to turn the call over to Paul Shoukri Paul.
Thank you Paul I'll begin with consolidated revenues on slide 10.
Record quarterly net revenues of $2.7 billion grew 30% year over year and 9% sequentially.
Record asset management fees grew 8% sequentially commensurate with the sequential increase in the beginning of the quarter balance of fee based assets.
Private client group assets and fee based accounts were up 2% during the fiscal fourth quarter, providing a modest tailwind for this line item for the first quarter of fiscal 2022.
Consolidated brokerage revenues of $541 million grew 9% over the prior year, but declined 2% from the preceding quarter.
Institutional fixed income brokerage revenues remained solid.
We are down from the strong levels of the comparison periods.
Brokerage revenues and P. C. G were up 17% on a year over year basis, but flat sequentially due to lower trading volumes, which offset the benefit from higher asset balances and associated trailing commissions.
For the fiscal year brokerage revenues were up 13% to a record $2.2 billion, reflecting records for both P. C G and fixed income, which had a fantastic year that was a testament to their leading position in the depository segment.
Accountant service fees of $170 million increased 21% year over year, and 6% sequentially largely due to higher average mutual fund assets driving higher associated service fees.
Paul already discussed our record investment banking results. This quarter. So let me touch on other revenues.
Other revenues of $74 million were up 35% sequentially, primarily due to higher tax credit funds revenues.
We also had $18 million of private equity valuation gains during the quarter.
Of which approximately $5 million were attributable to noncontrolling interests reflected in other expenses.
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 R. J B D P fees.
Ended the quarter at a record $66 $7 billion.
Up 6% over the preceding quarter, and representing six 3% of domestic P. C G client assets.
As we continue to experience growing cash balances and less demand from third party banks during fiscal 2021 10.
$10.8 billion of client cash is being held in the client interest program at the broker dealer.
Over time that cash could be redeployed to our bank or third party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short term treasuries.
On slide 12, it was great to see an 8% sequential increase in the combined net interest income and BD P fees from third party banks to $198 million.
This growth was largely attributable to strong asset growth and a resilient net interest margin at Raymond James Bank, which remained right at 1.92% for the quarter.
We expect the bank's NIM to settle right around 1.9% over the next couple of quarters.
The average yield on our JBT P balances with third party banks remained flat at 29 basis points in the quarter.
If banks demand for deposits doesn't improve from current levels. We believe there will be downward pressure on the field in fiscal 2022.
Especially in the back half of the fiscal year.
Which is why we have been so focused on generating on balance sheet growth and assets that could deliver good risk adjusted returns.
Moving to consolidated expenses on slide 13.
First our largest expense compensation.
The compensation ratio decreased sequentially from 67.2% to 65, 8% largely due to record revenues in the capital markets segment, which had a very low 52% compensation ratio during the quarter.
Given our current revenue mix and disciplined management of expenses. We are confident we can maintain a compensation ratio of 70% or lower in this near zero short term interest rate environment.
And as we experienced in fiscal 2021, we can do meaningfully better than 70% with capital markets revenues at or near these record levels.
Which is our expectation for at least the next quarter or two.
Non compensation expenses of $361 million decreased 15% sequentially, primarily driven by the $98 million loss on extinguishment of debt in the fiscal third quarter.
Somewhat offsetting this favorable variance we had a modest provision for credit losses during the quarter compared with a bank loan loss reserve release in the fiscal third quarter.
Overall, our results in fiscal 2021 show, we have remained focused on managing controllable expenses, while still investing in growth and ensuring high service levels for advisors and their clients.
While we are still finalizing our fiscal 2022 budget.
We do expect expenses to increase meaningfully in fiscal 2022 for a variety of reasons.
First and foremost we are going to continue investing in people and technology to support the phenomenal growth of our business over the past year.
Ensuring we maintain very high service levels, and leading technology solutions for advisors and their clients.
We also expect business development expenses to pick up as travel recognition trips and conferences have already started resuming in the fiscal first quarter, which our advisors and associates are really excited about.
Just as a reminder, business development expenses totaled about $200 million in fiscal 2019 before the start of the pandemic.
Additionally, whereas we had a $32 million net benefit for credit losses in fiscal 2021, we.
We would expect bank loan loss provisions for credit losses associated with net loan growth in fiscal 2022.
Slide 14 shows the pretax margin trend over the past five quarters.
Pre tax margin was 28% in the fiscal fourth quarter of 2021, and adjusted pretax margin was 21, 2%, which was boosted by record revenues and still relatively subdued business development expenses.
At our analyst and Investor Day in June we outlined our pre tax margin target of 15% to 16% and this near zero interest rate environment in.
And right now we believe the top end of that range is an appropriate target given the aforementioned expense growth. We currently expect in fiscal 2022.
But as we experienced during the fiscal year, there's a meaningful upside to our margins when capital markets revenues are strong as they had been in fiscal 2021.
On slide 15 at the end of the quarter total assets were approximately $61.9 billion, an 8% sequential increase reflecting solid growth of loans at Raymond James Bank as well as a substantial increase in client cash balances being held on the balance sheet.
Liquidity and capital remain very strong the total capital ratio of 26, 2% at a tier one leverage ratio of 12.6% are both over double the regulatory requirements to be well capitalized, giving us significant flexibility to continue being opportunistic.
And grow the business.
You can see that our J F corporate cash at the parent ended the quarter at $1.15 billion decreasing 26% during the quarter as we have restricted the cash that we plan on using to close on the Charles Stanley acquisition, which we currently expect to close in the first or second quarter.
Our fiscal 2022 for as soon as we receive the requisite regulatory approvals.
Slide 16 provides a summary of our capital actions over the past five quarters.
During the fiscal year, we repurchased nearly 1.5 million shares split adjusted for $118 million.
As of October 27th.
$632 million remained under the current share repurchase authorization.
Due to the restrictions following our announced acquisition of Tristate Capital Holdings, we do not expect to repurchase common shares until after closing.
Lastly on slide 17, we provide key credit metrics for Raymond James Bank.
The credit quality of the bank's loan portfolio remains healthy with most trends continuing to improve.
Criticized loans declined and nonperforming assets remained low at just 20 basis points.
The bank loan loss provision of $5 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percent of loans held for investment declined from 1.34% in the preceding quarter, two one point to 7% at <unk>.
And.
For the corporate portfolios. These allowances are higher at around 2.25%.
With that I'll turn the call back over to Paul Reilly to discuss our outlook.
Paul.
Thank you Paul.
Overall, I'm very pleased with our fantastic results for this quarter and the fiscal year, which exceeded many records as for our outlook. We are well positioned entering fiscal 2022 with strong capital ratios quarter and records for all of our key business metrics and strong activity levels for financial adviser.
Cruising in investment banking.
In the private client group segment results will benefit modestly by starting the fiscal first quarter with a 2% sequential increase of assets in fee based accounts.
Additionally, based on our robust recruiting pipeline, we hope to continue our current recruiting trend as prospective advisers are attracted to our client focused values and leading technology platforms.
And the capital market segment, the investment banking pipeline remains very strong and we expect a solid fixed income brokerage results driven by demand from the depository clients segment and the asset management segment, if equity markets remain resilient and we expect results will be positively impacted by higher financial.
Assets under management.
And Raymond James Bank should continue to grow as we have ample funding and capital to grow the balance sheet. We will continue to focus on lending to P. C. G clients through our securities based loans and mortgages and we will continue to be selective and deliberate in growing our corporate loan and agency backed securities portfolio.
As we look ahead, we remain focused on the long term and our long term growth and as we've outlined at our recent analyst and Investor day. Those key growth initiatives include driving organic growth across our core businesses.
Continuing to expand our investments in technology and sharpening our focus on strategic M&A.
Our recent announcements to acquire Tristate capital and Charles Stanley Group demonstrate our focus on these initiatives and our commitment to deploy excess capital over time.
We believe these acquisitions stay true to our long standing criteria, which is a good cultural fit a strategic purpose and makes sense for our shareholders.
Finally, thank you again to our advisors and associates for providing excellent service to their clients. During these uncertain times. These results are a testament to the dedication of everyone in the Raymond James family.
With that I'm going to turn it back over to the operator for questions.
Thank you to register your question. Please press the one followed by the four on your telephone you will hear a three town prompt to acknowledge your request. If your question has been answered or you would like to withdraw a registration. Please press one.
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Our first question comes from the line of Devin Ryan of JMP Securities. Please proceed with your question.
Good morning, Paul and Paul how are you.
Hey, Devin.
Got it.
So Paul a lot of records.
As you are as you mentioned, so clearly momentum really across the business heading into 2022.
I appreciate that the capital market segment can drive some variability in margins and so that that's tough to predict and so that kind of all gets wrapped up in the firm wide kind of margin commentary.
But if we set that aside and we think about the business I mean, you're sitting in a much better place.
Adding into 2022 than you were in 2021 and I appreciate that Youre also going be ramping investments into the business as well.
Which makes sense. So as we think about the individual segments, whether its PPG or asset management or the bank can.
Can you just talk about where operating leverage may exist and then were.
It's more challenged just because of the investments I think that would be helpful to unpack.
You know away from some of the maybe the difficulty in predicting capital markets because it does feel like there should still be some operating leverage on some of those areas, but love to just dig into that in a moment.
Yes.
The business Thats probably.
You know, it's our best business, but probably most margin challenged private client group because it has a high comp ratio with our independent contractors in nature.
To deliver 20% margins in the business when you have a 70% comp ratio or less in these times right as shows the balance we have on really managing expenses and making sure we invest so.
We've had we had a good margin this year based on the growth, but the real Delta and our margins come from the capital markets from the facts as they grow and asset management, they have much higher margins and to the extent they grow they drive our comp ratio down and our and our margins up. So those are the ones that are.
Half the Delta now the good news is the backlog and capital markets is fantastic.
That said historic paces.
The problem with that business as you know it could stop on a dime and it could increase but our visibility is really good into this first quarter, which is very strong in the second quarter should be very good to after that you never really know because of the M&A and underwriting part depends on the environment.
The bank, we expect good growth you saw very good growth this quarter.
Got it and given the markets right now and I think a reasonable economy going forward. The best we can tell.
Should have growth there and the asset management business continues to grow, especially with our you know record recruiting and we're still on that same pace. If you look at commits and people coming through the office. We are still on a very very we're still at that record pace. You just took a snapshot today so short.
<unk> term, we see these kind of very good margins, but.
If you know capital markets slow down or the economy turns and M&A deal stop and stuff, that's where we're going to get the margin compression again without interest rates.
It wasn't that long ago that half of our pre tax income was interest spreads. So we lost about overnight one march over two two fed meetings.
So it's kind of amazing.
These kind of margins without that help so that's the other factor and that's what we can't predict.
If that comes back even if the market has cooled down that's certainly going to continue to expand margins. So I wish I could tell you I can tell you where we sit today it looks good for the next quarter, but between the economy and.
Congress.
Regulators.
Interest rates could change because those aren't in our control.
Yes.
Really appreciate that Paul.
Helpful context across the businesses here.
Just a quick follow up on the fixed income brokerage business and maybe the outlook you were talking about how well the firm has done here I mean revenues were up 8%.
From 2019.
Can you just help us a little bit around that both maybe the near term outlook for that business and then how to think about intermediate term because it's had such a step function in growth in contribution.
Is the size of the platform or personnel are that much greater or is it just been an environment I know the environment has been incredibly favorable but how you guys are thinking about that business and how maybe far were above average for the business or whether it's just been kind of some underlying growth there that maybe we haven't foreseen in the plan.
Before.
That's a little of both there are some new product focus in products. They brought to the market to their clients are the biggest factors really been if you look at the.
The sweet spot in the business, it's the depository franchise on the depository franchise like all banks and us up a ton of cash.
And in order to put that cash to work. So they can make loans and if they can't make loans fast enough. They buy securities and that's where they really utilize us as you know actually for US a lot of banks almost as a treasury manager, we help them look at where they should invest in the spreads and yields we provide a lot of tools for them and that business as you know.
Been very very good because of the cash in the system. So as long as that cash in the system stays there those brokerage revenues should be very very good and again the fixed income business by far had its best record.
The equity capital markets business, So combined the capital markets segment was.
Extremely good and again short term to midterm everything we see today, we don't see that really slowing down off its pace its been a little slower in the last quarter than it had been earlier in the year, but I'd still call the numbers robust.
Okay. Thank you very much.
Alright.
Of Manhattan Ghazaliyah of Morgan Stanley. Please proceed with your question.
Hi, good morning.
Yes, just to follow up on the pre tax margin questions. Maybe a two part question on the.
On the comp ratio.
I know you've guided to a ratio of less than 70%, but at 66% youre coming in well below and I shouted wanted to SaaS how much of this is the benefit of scale in the platform.
Rather that has strengthened the capital market. So firstly.
Firstly on the BCG side, a lot of the call basically the client has to do with the actions that you've taken to hold our administrative costs down.
Even as the assay head count and revenues have grown.
So how should we think about the administrative and incentive comp and.
In that segment going forward, given the recruiting momentum that youre seeing right now.
And then second on the investment banking side.
If capital market to normalize to pre pandemic levels, how should we think about the comp ratio there.
Yeah, So first thing.
I think you've got to take the capital market's you asked if it was scale for the market certainly it's been a very constructive market separately once done well on capital markets, but we've really increased our scale to in our equities business. If you look at the addition of Financo in Serbia during this quarter, which again, they only have a full year run rate.
And those numbers are.
<unk> being the most recent to join the platform.
And the hiring we've done across the platform.
The leadership there has done a really good job of building scale, where we're probably under scaled given our size competitors. So there is a scale play there.
But the markets are very very constructive so it's a little bit of both in that business.
And then the private client group.
A lot of business development expenses were low we didn't have conferences, we didn't have award trips.
We didn't have the regional meetings because of the pandemic and now those are opening up we have our first major conference really in November and we've had smaller conferences and our first award trip.
Although they are smaller than traditional.
They're still there and there are some make up a word trips, where we cancel them and moved them into this year.
And so we'll have some double trips in fact in our employee group will have a double conference because we moved this year. So the fall of next years will come in the summer so.
So certainly those expenses or backup so.
That's just business as normal and those.
Those are highly valued by advisors are a great cultural tool.
To reinforce the value of Raymond James or Great training.
Aren't just fun trips that people, they're fun, because we get together, but it's work I mean, there are classes training teaching so they're very important to the long term business, both teaching practice management and sharing best practices as well as exploiting new regulations or new technology tools, they need to learn so theyre very very valuable so it's it's.
Work I mean funnel work, but its work so there are essential and those will return.
Because they are important to the business model.
Maybe the only thing I would add to that.
Is that comp ratio does fluctuate from quarter to quarter due to a lot of variables.
So I kind of prefer to look at it on up.
Annual basis, it was 67, 4%.
For the fiscal year, which was still much better than our 70%.
Target largely due to the capital markets results there.
<unk> comp ratio. This year was 56% it was 60% last year and last year was a pretty good year. Once you put it all together just to show you the sensitivity there.
And then the private client group by you mentioned some of the initiatives frankly.
With the non FAA comp up 5% year over year against a 19% revenue growth rate, while we always strive to achieve operating leverage frankly that gap is not sustainable and we wanted to make sure that we're.
Providing adequate support levels for our advisers and their clients and so we need to make sure we have sufficient capacity and bandwidth and our service and product areas.
To continue delivering excellent service to our advisors and their clients. So when you kind of put all those things together, that's why we're sort of reaffirming the 70% target.
But with that being said, we can continue to do better than that if capital markets results are strong as they have been and we expect them to be at least over the next quarter or two.
I think one thing I haven't heard in the industry calls, but we certainly here and all the industry trade because theres pressure on comp I mean.
Pes going up we.
We can tell by the offers that come into our people phone we're glad.
People value our folks.
At 80 or 90% comp increases.
Taking longer to fill jobs right now in this market and everyone's growing so that's not just us industry wide, there's comp pressure and.
And I think that's going to impact the comp in the comp ratio coming this year I can't tell you what it will be.
But we.
We need people, who are running the business and to support our advisers.
Great I appreciate all the color.
And then maybe on the on the Tri State acquisition.
Can you talk about how much operating leverages embedded in their model.
So they've had a pretty steady comp ratio in their bank for the last three to four years, but with 94% percent of an asset SKU to short end rates. It feels like there should be room to drop some of that to the bottom line when rates rise.
So I was wondering if you can comment on that and.
What does that bake into your accretion estimates that you announced last week.
Yeah, they they have their.
There are technology enabled modeled and so their technology does give them the ability to.
Particularly on the private banking side to really scale up that business, but as you pointed out I think where the operating leverage is really going to come from is rising short term rates.
We talked about a relatively conservative net interest margin.
Type estimates that we baked into our projections that they would go up to 2%.
From where they are now with a 100 basis point increase in rates and they were actually doing much better than that before the pandemic. So we try to be conservative there and that doesn't even give them the benefit of where we expect most of the synergy to come from which is really replacement of their higher cost deposits a portion of their higher cost deposits with our.
Lower cost deposits that are sitting on our balance sheet now, earning very little and short term treasuries at the broker dealer.
The regulation so.
Between short term rate increases deposit replacement and the scalability of their technology enabled model. We think there is significant upside to their results over time, and we get a lot of questions. Just why don't you replace all their deposits with our lower cost deposits and its that they support deposits from their client.
<unk> ships or asset and liabilities, that's how you build relationships and theyre going to run an independent business that way.
They have their own clients are going to manage their clients and so part of that is taking their cash.
Reasonable rates to their clients for the for the loans. They book too. So we put it I think we said $3 billion of replacement, but that leaves the rest of their deposits and placement as they grow we expect to use more and more of our deposits are at a lower cost but certainly.
They'll tell us when they need them and we're not going to interfere with their long term client relationships.
Got it thanks, so much.
Sure.
Our next question comes from the line of Jim Mitchell of Seaport Research. Please proceed with your question.
Hey, good morning, guys.
Maybe just on getting back to the non comp side I get the fact that business development it should be a lot higher.
As we reopen and recruiting picks up but you mentioned kind of 2019 levels.
Other firms have kind of talked about you know some percentage lower you know theres some.
Permanent changes in terms of business practices do you expect to really get back to $200 million in 2019 or is there some <unk>.
70% to 80% of those kind of levels.
I think $200 million was sort of just a benchmark I think it would be a stretch to assume that we would get there that quickly.
We are a bigger business now and have more people now than we had in 2019 and more advisers, but.
To your point I think just in terms of ramping back up to what that business as usual it looks like well we have started.
The conferences and recognition trips in the first quarter travel business travel certainly certainly not what it was pre pandemic yet so I think it will ramp up over time.
Right Okay.
And then maybe just on the balance sheet.
Your client cash balances up 4 billion quarter over quarter that was a pretty big.
Big step up.
Any thoughts on what drove that increase do you expect it to continue into Q4 and does that given that balance sheet growth does it change the way you think about your leverage ratio with the two deals coming up.
I think that you know what drives client cash is first recruiting certainly as we bring more advisers and their clients have a portion in cash and we also see you know you'd say in up markets. You don't expect to see as high a percentage in cash but people are using it.
Often in lower fixed income, they're just saying.
They're worried about rates going up.
Uh huh.
Many clients through the market as a proxy.
It's continued to grow and they're using their cash balances to hedge that a little bit so.
Even in an up market, you've got a pretty good percentage of cash and again as assets grow and our recruiting grow.
Recruiting is driving it and I think some investors are taking a little off the table and keeping some cash as you know just the balancing our diversification hedge.
And on the leverage question any does it change the way you think about it.
Yeah.
Yes, I mean I think.
Bringing the cash on the balance sheet, certainly does impact our tier one leverage ratio and stress periods. We do have sort of different type of metrics that we think about to absorb a surge in cash balances, but a question we get a lot from investors and analysts is how do we think about that 10% ratio and potentially.
<unk> that ratio over time that target that we.
Which is double the regulatory requirements right.
Hopefully they will do but not optimistic then we need that cushion.
Also think there could be an opportunity as a thug.
Cuts back on purchasing securities that those become more attractive the rates would become in the spreads more attractive.
Actually a shortage of those securities in the market believe it or not because of the third but once they get out.
They are.
We're hopeful there is a more of an opportunity to use those securities on the balance sheet move cash over to the bank.
Right, Okay, great. Thank you.
Our next question comes from the line of Stephen Toback of Wolf Research. Please proceed with your question.
Hi, good morning.
Paul and Paul just wanted to ask a follow up on the discussion relating to Noncom. So your messaging on expenses came through loud and clear calm guidance quite explicit maybe then noncomp guidance, a little bit more vague or.
Or leaving more to interpretation you know recognizing you're still going through the budgeting process. I was hoping you could help us handicapped the level of Noncomp growth X provision verses that exit rate of 1.4 billion I know Paul you've already spoken about business development expense normalizing, some but what level of expense inflation should we be under.
Writing for some of those other categories and if you could provide some more context, they're that'd be really helpful.
Yeah, I mean again, there's there's a lot of growth in there that is driven by business volume. So best investment Subadvisory fees. For example, they were up almost 30% with fee based assets this year and so.
And that's true with the FDIC insurance expense at the bank, that's going to grow with the bank's growth and so there's a lot of growth driven variables. There, but you know even when you look at technology, that's something we're going to continue to invest heavily in to again continue providing a competitive platform for our advisers and their clients and to drive efficiency.
<unk> overtime and scalability over time that was up 9% this year I could see it being up 10% plus next year, just with our technology initiatives that we have on the docket. So I don't want to go line by line, but.
I think when you when you look at the various line items. So you can see that.
There's sort of room for growth I mean, just again stepping back the Noncomp expenses grew 5% and P. C. G. This year versus a fifth 19% growth rate. So.
I would say in hindsight, if we had known revenues were gonna grow 19%, we probably would have grown those noncomp expenses are higher than the 5% now some of that was helped by the business development with everything shut down but.
That's not a sustainable relationship over time, we want to make sure that we.
Continue supporting the business and the infrastructure of the support levels of the business over time.
Alright, Okay, and just for my follow up on organic growth, Paul you dispose pretty impressive stat about 10% organic growth imply some acceleration into fiscal year and just given the strong advisor backlogs across your affiliation options and the additional scale that you've added on the <unk>.
Side now just curious if you can provide some contacts around what you believe is a sustainable organic growth rates as flows begin to settle out around some sort of new normal.
Yeah Golly, that's such a hard your estimated predict the future. Both is recruiting will it continue at this level, we could tell you our visibility as it is and you know and it's I think I remember I forget how many quarters ago, we talked about a slowdown for one quarter, but it would pick up and certainly a dead again and so we've been on this.
Kind of ramp up for a couple of years, we still see.
Very strong demand, whether there'll be a record this coming year or just very strong I don't know, but what we can see today is.
That ramp up should be very good and you know and part of that.
That new asset growth as the market's when people bring accounts over or bring in new clients in the markets up all the assets are up so it helps drive that number two so it's it's.
It is very complex I think all we can tell you right now is it's all the factors are in place.
Show it should be very strong again this year, but to give you a number I would have to know what the market appreciation is what recruiting is what.
So many factors that aren't predictable I can just tell you that.
The things that drove it last year look still in place coming into this next quarter.
And how long it continues I don't know, we all know that this kind of growth in the market isn't forever.
Is going to be cycles.
There could be shocks to the system.
But I think we're well positioned on both sides both to continue our growth and if there's a shock to the system or.
Capital and liquidity will put us in good stead. So.
Okay. Thanks for that context, Paul if I could just squeeze in one more tychy tack modeling question I was hoping you can provide some guidance on the tax rate for next year and the trajectory for third party cast wheat fields, just recognizing that as you noted the banks are flush with liquidity don't have quite.
As much demand.
For client cash.
Yeah, I mean, the effective tax rate for this fiscal year ended right around just below 22%, which was really benefited by the <unk>.
Non taxable gains in the corporate owned life insurance portfolio. So.
So we would still guide you know all else being equal to around 24%.
Over the year now with that being said, where where our stock prices now we would expect it to be lower than that in the fiscal first quarter.
The timing of our stock based compensation that fast.
There would be a tax benefit there in the first quarter based on the current price.
But we think 24% over the year plus or minus.
The impact from corporate owned life insurance and just just as a reminder of the culprit of long life insurance creates non.
[noise] taxable gains when the equity markets are up and does the opposite when equity markets are down and that's that's sort of the impact to the the tax raise the tax rate and that type of environment and what was the second part of your question.
Sorry, just a context around third party cash rebuilds, whether you're seeing any return to bank demand, especially in light of bed tapering and maybe faster are these rate hikes happening sooner than anticipated.
Yeah, I would say that we are not seeing an improvement in.
Third party bank demand and so we would I would say see more pressure on the capacity than the right because I think we're going to try to manage the rate.
Based on <unk>.
Shifting the lack of capacity at this type of right to.
Either our balance sheet and investing in other assets essentially.
That gets helped with.
An acquisition like the Tristate acquisition for example, bringing more back balances on the balance sheet. The bank growth is anticipated to be strong our bank Raymond James Bank growth is anticipated to be strong this year as well and we can also accelerate purchases of agency mortgage backed securities if that demand from third party banks doesn't pay.
And I would always really expected with the contract maturities in the second half of the fiscal year. So as we get closer to that I think we'll be able to provide you know more clarity on what the demand looks the demand profile looks like at that time.
Fair enough. Thanks, so much for taking my questions.
And our final question for today comes from the line of Alex Blow steam of Goldman Sachs. Please proceed with your question.
Good morning. This is actually Ryan Bailey on behalf box. The first question I had was really just a clarification on some of the comments on pump pressure.
Not specifically related to your non advise the comp expense it sounded like that was within P. C. G always that related to additional pressure on ta packages or the payout grid.
No I think the Ta pressures.
Again, we talked last year that we adjusted Ta to be more and market and I think.
Shows that are recruiting we're doing very well so I don't see any additional ta pressure, but the pressure that we're really saying is on.
The admin support across.
Whether it's operations tech risk.
Branch professionals, there's just there's.
Comp is under pressure for the whole industry I know that from round tables every firm talks about it that they're having.
Longer to recruit recruiters are being recruited away. So they are having a harder time hiring.
We see packages come in.
So we know there is just we see comp pressure and until I think the market more normalizes. When there is more of a return across the sector that could continue for the year. So it's a general comment or not.
I'm, just saying there is a bias that that line could be more impacted and then some think but we'll see throughout this year.
Okay Uhm and.
And maybe then just a quick question on the bank.
I think I'll you just mentioned that respecting still strong growth in Raymond James Bank is there any sort of impacts more tactically just given the acquisitions or sort of business as usual and growing growing the bank.
We have plenty of funding and capital for them to continue growing yet.
They're strong growth rates, so long as I can find assets that generate good risk adjusted returns, which is their mandate to be deliberate and patient.
But also opportunistic so there's no shift and sort of their growth trajectory or anticipated growth trajectory due to the acquisition.
Got it thank you.
Okay, well I think that's the last question operator, so I want to.
Everyone for joining the call clearly.
Don't like using the word record so much but actually I.
I do like it I.
I like having him I just felt like using the word because we're not bragging firm but.
I'm very proud of the results in our people and how they've navigated this very very tough time as of now with the economy things look solid, but we know they're going to turn so we always pride ourselves in being balanced and.
Hi, Thank you for joining the call and we will talk to you again next quarter.
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