Q2 2022 Raymond James Financial Inc Earnings Call
Good morning, and welcome to Raymond James Financial's second quarter of fiscal 2022 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 Senior Vice President of Investor Relations at Raymond James Financial. Please go ahead.
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 Chair, and Chief Executive Officer, and Paul Sugary 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 acquisition.
Including acquisition of Charles Stanley Group plc.
Completed on January 20, <unk> 2022 .
As well as our announced acquisitions of Tristate capital Holdings, and some ridge partners.
And our level of success in integrating acquired businesses divestitures 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 a negative of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward looking.
Statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements. 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 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.
Now I'm happy to turn the call over to chair and CEO , Paul Reilly Paul.
Good morning, Thank you for joining us today.
I'm going to begin on slide four.
I am very pleased with our results for the fiscal second quarter and the first half of the fiscal year, especially given the challenging market conditions.
We continued to invest in growth across all of our businesses in the private client group excellent retention and recruiting of financial advisors contributed to best in class growth with domestic net new assets of 11% over the 12 month period. Furthermore, the Charles Stanley acquisition, which can.
Closed during the quarter significantly expanded our presence in the U K, which is a very attractive market for wealth management.
And the capital markets business, while investment banking revenues were negatively impacted by the heightened market volatility during the quarter. We continue to see strong pipelines as the expertise we have both added organically and through niche acquisitions has been performing extremely well.
In the fixed income business, we announced the pending acquisition of some ridge partners during the quarter.
Which will enhance our platform with technology, driven capabilities and a fantastic team with extensive experience in dealing with corporates.
Raymond James Bank grew loans, an impressive 7% during the quarter, reflecting attractive growth across all the loan categories.
The Tri State capital acquisition, which is expected to close by the end of our fiscal third quarter will add a best in class Third Party Securities base lending capability, while also diversifying our funding sources.
They will also bring a diversified asset manager and chartwell, which would be a great addition to our multi boutique model and asset management.
So as we always do in any market cycle, we continue to invest for the long term always putting clients first.
It's an uncertain market conditions, such as these that remind us the importance of focusing on and making decisions for the long term.
While our strategy may not always be popular over short term periods. Today I believe we are well positioned for the expected increases in short term rates with record clients' domestic cash sweep balances strong loan growth at Raymond James Bank high concentration of floating assets.
And an ample balance sheet flexibility given solid capital ratios, which are all well in excess of regulatory requirements.
Turning to results in the fiscal second quarter. The firm reported net revenues of $2.67 billion and net income of $323 million or earnings per diluted share of $1 52.
Despite higher asset management and related administrative fees, reflecting the strong year over year growth in P. C. G assets in fee based accounts diluted EPS declined 10% compared to the prior quarter, primarily due to bank loan loss provisions for credit losses during the current quarter.
To support the strong loan growth compared to a benefit in the prior year quarter.
This quarter also had a higher effective tax rate, which Paul Shoukri will explain later on the call.
Excluding $11 million of acquisition related expenses.
Quarterly adjusted net income was $331 million or earnings per diluted share of $1 55.
Annualized return on equity for the quarter was 15% and adjusted annualized return on tangible common equity was 17.2% an impressive result, especially in this very low rate environment and given our strong capital position.
Moving to slide five we ended the quarter with total assets under administration of 1.26 trillion dollars and record P. C. G assets in fee based accounts of $678 billion. These figures include the assets from the acquisition of Charles Stanley, which was completed on June .
Annual raw twenty-first.
Excluding the impact of the acquisition total client assets under administration declined 2.8% compared to the immediately preceding quarter financial assets under management of $194 billion decreased 5% sequentially as net inflows were more than offset by declines in <unk>.
Equity markets during the quarter.
We ended the quarter with a record 8730 financial advisors, a net increase of 403 over the prior year period and 266 over the preceding quarter, which includes the 200 Charles Stanley Financial Advisors.
Our focus on supporting advisers and their clients has led us to strong results in terms of advisor retention as well as recruiting experienced advisers to the Raymond James platform throughout our multiple affiliation options.
Over the trailing 12 month period, ending March 31, 2022 we recruited to our domestic independent contractor and employee channels financial advisors with approximately $340 million of trailing 12 production and approximately $53 billion of client assets.
At their previous firms.
And highlighting our industry, leading growth we generated domestic P. C. G net new assets of approximately $106 billion over the four quarters ending March 31, 2022, representing approximately 11% of domestic P. C. G assets at the beginning of the <unk>.
Period.
Second quarter domestic P. C G net new asset growth was nearly 9% annualized.
Client domestic cash sweep balances grew 4% sequentially to a record $76.5 billion.
Raymond James Bank continue to generate impressive loan growth up 22% year over year and 7% during the quarter to a record $27.9 billion.
This growth was driven by securities based loans and residential mortgages largely to P. C G clients as well as strong corporate loan growth.
Now moving on to the results on slide six.
The private client group generated quarterly net revenues of $1.92 billion and pretax income of $213 million on a year over year basis revenues grew 17% and pretax income grew 11% primarily driven by higher assets in fee based accounts.
The capital markets segment generated quarterly net revenues of $413 million in pre tax income of $87 million.
Capital markets revenues declined 5% over the prior year period, primarily driven by lower fixed income brokerage revenue and equity underwriting revenues.
Sequentially quarterly net revenues decreased 33% driven by lower investment banking revenues, primarily due to the impact of increased geopolitical and macroeconomic uncertainties.
As I referenced earlier in March we announced the acquisition of some ridge partners, a technology driven fixed income market maker specializing in investment grade and high yield corporate bonds municipal bonds and institutional preferred securities. This acquisition is further evidence of our continued commitment.
To providing cutting edge technology to advisers clients and stakeholders. We currently anticipate the acquisition to close in the fourth quarter of 2022 subject to regulatory approval.
The asset management segment generated net revenues of $234 million and pretax income of $103 million on a year over year basis revenues grew 12% and pretax income grew 18% over the fiscal second quarter of 2021 primarily the result of higher asset.
Under management.
Raymond James Bank generated quarterly net revenues of $197 million and pretax income of $83 million.
Net revenue growth was primarily due to higher asset balances as the bank generated attractive growth in its loan portfolio, along with net interest margin expansion.
Despite revenue growth pretax income declined 25% compared to a year ago quarter caused by the bank's loan loss provision for credit losses in the current quarter, reflecting strong loan growth compared to the bank's loan benefit for credit losses and comparative periods.
Looking to the fiscal year to date results on slide seven we generated record net revenues of 5.4 of $5 billion. During the first six months of fiscal 2022 up 19% over the same period a year ago.
Record earnings per diluted share of $3.61 increased 14% compared to the first six months of fiscal 2021 . Additionally.
Additionally, we generated strong annualized return on equity of 18.1% and annualized adjusted return on tangible common equity of 20.6% for the six month periods.
Moving to the fiscal year to date segment results on slide eight the private client group capital markets and asset management segments, all generated record net revenues and record pre tax income during the first six months of the fiscal year again, reinforcing the value of our diverse and comp.
Entry businesses.
Now for a detailed review of our second quarter financial results I will turn the call over to Paul Shoukri Paul.
Thanks, Paul starting with consolidated revenues on slide 10.
Quarterly net revenues of $2.67 billion grew 13% year over year and declined 4% sequentially.
Record asset management fees grew 25% over the prior year's fiscal second quarter, and 6% over the preceding quarter private client group assets and fee based accounts ended the quarter relatively unchanged compared to December 2021, However, adjusting for the acquired assets of Charles Stanley P. C. G.
Assets in fee based accounts declined approximately 3%, creating a headwind for asset management revenues in the fiscal third quarter.
So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal third quarter.
I'll discuss accountant service fees and net interest income shortly.
Skipping ahead to investment banking revenues as Paul described this line item declined significantly compared to the preceding quarter, but at $235 million. It was still a very strong quarter compared to our results prior to fiscal 2021.
Given the heightened market volatility, we would not be surprised to match. This quarter's results for the next two quarters, which will result in the investment banking revenues ending fiscal 2020 to close to the record set in fiscal 2021.
While our pipelines are strong there's a lot of uncertainty over the next two quarters that could impact investment banking revenues positively or negatively for the rest of the fiscal year.
Other revenues of $27 million were down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid.
Cost increases impacting affordable housing developers.
Moving to slide 11.
Clients' domestic cash sweep balances ended the quarter at a record $76.5 billion up $3 billion or 4% over the preceding quarter and representing 7% of domestic P. C. G client assets.
Notably $17 billion or 22% of total cash sweep balances are held in the client interest program. The vast majority of which are invested in very short term treasuries and could be redeployed to generate much higher yields over time.
Either at our own bank or with third party banks as interest rates increase and demand for cash balances recover.
Turning to slide 12.
Combined net interest income and BD P fees from third party banks was $224 million up a robust 9% from the preceding quarter.
This growth is largely a result of strong asset growth and a higher net interest margin at Raymond James Bank, which increased nine basis points to 2.01% for the quarter.
The increase of the bank's NIM during the quarter was attributable to a higher yielding asset mix given the strong loan growth as of March interest rate increase really won't start benefiting the bank's NIM until the fiscal third quarter for.
For example, following the March rate increase the bank's current spot NIM is around 2.15%.
The average yield on RJ BD P balances with third party banks increased to 32 basis points in the quarter.
And the spot rate is just over 50 basis points, reflecting the March rate increase.
Both the NIM and the average yield from third party banks are expected to increase further with additional rate increases as less than 25% of the firm's interest earning assets have fixed rates and those assets have an average effective duration of less than four years.
And all of the deposit sweep relationships with third party banks are floating rate contracts. So we should have significant upside from rising short term interest rates.
To that point.
Let me walk through how we are positioned to rising short term interest rates.
Based on current clients' domestic cash sweep balances, which decreased by over $2 billion $274 billion. Thus far in April largely due to the quarterly fee billings and income tax payments use.
Using static balances and an instantaneous 100 basis point increase in short term interest rates, which includes the 25 basis point rate increase in March.
We would expect incremental pre tax income of nearly $600 million per year.
With approximately 65% of that reflected as net interest income and 35% reflected as accountant service fees.
This estimate assumes a blended deposit beta of around 15% for the first 100 basis point increase commensurate with what we experienced in the last rate cycle.
Importantly, this analysis does not incorporate the tristate capital acquisition, which should provide incremental upside to higher short term interest rates as the vast majority of that $13 billion of balance sheet assets are also floating rate assets.
As they have always shared a similar approach to limiting duration risk.
Moving to consolidated expenses on slide 13.
Starting with our largest expense compensation.
The compensation ratio for the quarter was 69.3%, which increased from 67, 7% in the preceding quarter, but remained below the year ago period compensation ratio of 69.5% and below our 70% target and a low interest rate.
Arent.
The sequential increase was mainly the result of lower capital markets revenues, which led to the revenue mix shift towards higher compensable revenues and the P. C. G segment as advisor payouts, particularly to independent advisors, who cover their own overhead expenses are typically higher than the associated comp.
Insatiable of our other businesses.
On a sequential basis the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year as well as annual salary increases and continued hiring to support our growth.
Non compensation expenses of $388 million increased 14% sequentially.
Predominantly driven by the bank loan provision for credit losses, compared to a loan loss release in the preceding quarter.
As well as higher communication information processing expenses.
Excluding the bank loan provision in acquisition related expenses, which creates some noise in the comparison non compensation expenses of $356 million grew 3% over the preceding quarter.
Also keep in mind expenses included just over two months of results for Charles Stanley, which closed on January 21.
So overall, we have remained 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 14 shows the pretax margin trend over the past five quarters.
In the fiscal second quarter, we generated a pretax margin of 16, 2% and adjusted pretax margin of 16, 6% in line with our 16% target in this low interest rate environment.
Based on the expectation for the additional increases in short term interest rates, we will revisit our pre tax margin and compensation ratio targets at our upcoming analyst and Investor day scheduled for May 25th.
Hopefully by then we will have more clarity on other important variables such as the outlook for investment banking revenues the level of business development expenses as conferences and travel continue to ramp up and the impact of recently closed and pending acquisitions.
On slide 15 at the end of the quarter total assets were $73.1 billion, a 7% sequential increase reflecting the addition of approximately $3 billion in assets, mostly segregated client cash balances from Charles Stanley.
As well as solid growth of loans at Raymond James Bank.
Liquidity and capital remain very strong.
RG F corporate cash at the parent ended the quarter at $2.2 billion, increasing 59% during the quarter, primarily due to significant special dividends from our well capitalized subsidiaries during the quarter.
The total capital ratio of 25% and a tier one leverage ratio of 11.1% are both more than double the regulatory requirements to be well capitalized providing significant flexibility to continue being opportunistic and invest in growth.
The effective tax rate for the quarter did increase to 25, 4% up from 21% in the preceding quarter.
The primary drivers of the sequential increase or the favorable impact from share based compensation that vested in the preceding quarter and nondeductible losses on our corporate owned life insurance portfolio due to equity markets.
That are used to fund our nonqualified benefit plans compared to a non taxable gains on these portfolios in the preceding quarter.
Slide 16 provides a summary of our capital actions over the past five quarters.
As of April 27, 2022, $1 billion remains available under the board approved share repurchase authorization.
Due to regulatory restrictions, we do not expect to repurchase common shares until after closing the Tristate capital Holdings acquisition currently expected to occur by the end of the fiscal third quarter.
As we explained on prior calls our current plan is to offset the share issuance is associated with the transaction after closing.
But given the heightened market volatility, we'll obviously keep a watchful eye on market conditions between now and then.
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.
The bank loan loss provision of $21 million was primarily driven by strong loan growth during the quarter.
The bank loan allowance for credit losses, as a percentage of loans held for investment ended the quarter at 1.17%.
Down from 1.5% at March 2021, and essentially unchanged from 1.18% at December 2021.
Now I'll turn the call back over to Paul Reilly to discuss our outlook Paul.
Thank you Paul.
As I said at the start of the call I am pleased with our results and while there are many uncertainties I believe we are well positioned to drive growth across all our businesses.
In the private client group next quarter results will be negatively impacted by the expected, 3% sequential decline of asset management and related administrative fees that Paul described earlier, however, focusing more long term our recruiting pipelines remain strong and combined with solid retention.
I'm optimistic we will continue delivering industry, leading growth as advisers are attracted to our client focused values and leading technology platform.
Furthermore, The addition of Charles Stanley provides an opportunity to accelerate our growth in the U K wealth management market through multiple affiliation options similar to our advisers choice offerings in the U S and Canada.
And the capital market segment M&A.
The M&A pipeline remains robust, but closings will be heavily influenced by market conditions throughout the remainder of the fiscal year.
And while market uncertainty and geopolitical concerns loom in the near future.
I'm confident we have made significant investments over the past five years to strengthen our platform and to grow our team and productive capacity positioning us well to grow over the long term.
In the fixed income space, although depository clients are still flush with cash and searching for yield optimization opportunities. We expect results to be more volatile over the next few quarters given elevated interest rate uncertainty.
Additionally, we expect the pending acquisition of some ridge partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace.
In the asset management segment, while the financial assets under management are starting in the fiscal third quarter lower due to the equity markets. We are confident that strong growth of our assets and fee based accounts in the private client group segment will drive long term growth of financial assets under management.
In addition, upon the close of Tristate capital, we expect Chartwell investment partners, which will operate as a subsidiary of Carillon towers associates to help drive further growth through increased scale distribution.
And operational and market synergies.
And Raymond James Bank should continue to grow as we have ample funding and capital to grow the balance sheet Raymond James Bank is well positioned for rising short term rates and we expect tristate capital to further enhance this benefit to the firm given their floating rate asset concentration and their leading position in third party S. B.
L business.
Before closing I want to call your attention to our annual corporate responsibility report that was released during the quarter. The report, which can be found on our Investor Relations website highlights our foundational commitment store people sustainability community and governance and illustrates our long standing approach.
Doing business rooted in our values and brought to life through our people driven culture.
This report summarizes many of the inspiring things that our advisors and associates across the firm do to contribute to their communities and the things we do as a firm to help the environment.
As always and foremost I want to thank our advisers and their associates for their perseverance and dedication to providing excellent service to their clients each and every day.
With that operator, please open the lineup for questions.
Okay.
Thank you very much and if you elect to register a question. Once again it is the one for by the four on your telephone keypad.
Tom probe technology request.
That's a question Hasnt been asked Eric to draw your registration that's the one.
<unk> for Baidu free trading a speaker phone please.
And said before entering your question.
One moment, please our first question.
And we'll proceed with our first question on the line from Alex Blaustein with Goldman Sachs Go right ahead with your question.
Hey, good morning, everybody. Thanks for taking the question. So I wanted to start with the question around capital.
You guys saw the tier one leverage drift down over a 100 basis points quarter over quarter at the holding company level. It looks like it's all coming from the broker dealer.
The cash balance has picked up there and liabilities that as well so maybe flesh out a little bit sort of what what happened what drove the increase this quarter, that's kind of weighing on tier one leverage a bit here and then more importantly is that something you expect to reverse pretty quickly and I guess, regardless shall we still expect you guys to buy back all the stock that you expect to issue on the back.
Tri state clothing.
Yes, Thanks, Alex I think before going into sort of the quarter to quarter movements just stepping back.
11% tier one leverage ratio, we're still well over two times, the regulatory requirement to be well capitalized at 5%. So.
Just important to note that we still have.
A significant amount of capital to continue to investigate growth growing the balance sheet and growing our businesses.
Without being said.
Since the beginning of the fiscal year, our client cash balances have increased over 15%, which is an amazing number if you think about it we're six months into our fiscal year.
And most of that has come as you mentioned to the broker dealer and the client interest program.
The vast majority of which are used to fund.
Short term treasuries, we're talking 30 day 60 day type treasuries pursuant to the segregated asset.
<unk> rules. So these are the first cash balances that will be redeployed either on balance sheet or off balance sheet as.
Demand from third party banks.
<unk>.
Recover after the increase in short term interest rates and just to kind of dimension that impact to our tier one leverage ratio.
Before the.
Pandemic.
These balances were hovering right around $2 billion. So at $15 billion of really overflow is what I would call. This client accommodation that's eating into about 300 basis points of the tier one leverage ratio and frankly, when we set the 10% target.
A little less than a year ago.
We don't look at this impact on this portion of the balance sheet. The same as we do other portions of the balance sheet. Because again. They are invested in 30 or 60 day treasuries, which are obviously highly liquid. So it's really just geography in terms of putting this on the balance sheet here versus putting it with third party banks, where it's not on the balance sheet and.
Doesn't eat in the tier one leverage ratio, which we will do when their demand resumes Oh.
We're funding our own bank, which we would earn a higher spread on obviously than we do.
30 day treasuries, so hopefully that answered your question there.
Got it so don't want to put words in your mouth, but it sounds like the 10% tier one leverage minimum is not quite the minimum in absolute terms, we should really think about where that debt balance sits and where that sort of confirms and how that impact.
Capital ratios, a little bit more dynamically is that right.
Yes, I mean, I think that's a good way of thinking about it.
Okay, Great and then just piggybacking on the point you made around the building cash levels, obviously, we've seen that across the industry, but with rising rates the conversations around cash sorting.
Obviously picking up pretty materially.
In the last cycle. If my math is right I think you guys have seen about a 15% to 20% decline in sort of peak to trough.
Cash balances across the franchise.
Given the changes in the customer mix and how much you've grown is that still the right framework to think about how much could leave in this cycle understanding the pace of rate is likely to be much faster this time around.
Yes, I think I think you're right in the last cycle. It was around a 15% to 20% decline, but I mean remember we just in the last six months increased balances by 15%. So if that if we see a decline over the next year or two as rates rise and really the decline happens after the first 100 basis points.
Then it's not really that.
That big of a deal considering we just got that in the last six months here and it's sitting in short term treasuries and remember that declining cash balances will be more than offset by the increase in short term interest rates based on our assumptions and the other factor that you need to consider is when when you do have.
The decline in cash like that due to cash sorting the value of that cash becomes more valuable. So as an example today.
Spot yield of our balances with third party banks is right around 50 basis points, which is right around fed funds target before the pandemic, we were getting fed funds target plus 10, or 15 basis points. So the spread on not only those balances, but also loans and a more cash tight environment, the cash becomes more valuable and that offsets.
Portion of the impact from declining cash balances in the system as well.
Great if I could just squeeze in one more busy busy morning, obviously between a bunch of calls here, but tri state. So I believe you initially targeted $3 billion of sort of funding replacement.
On their balance sheet. Once the deal closes is that is that still the case I think in the first year you targeted use at about $3 billion why wouldn't you go a little faster given that their deposit beta I think is going to be a lot higher than yours.
Yes.
Asked about the cash.
Cash sorting issue just but in your prior question. So you know we're going to look at they bring a.
Suffice funding sources, they have very good depository clients many of which are also clients on the asset side and they're going to continue running independently of course, so yes, we're going to do what makes the most sense for for both them and US we're not beholden to the assumptions we used in the due diligence and valuation process.
Or are we going to make decisions to boost.
Boost short term results that may compromise long term results. So we're going up as we do with all of our decisions make them based on what's best for our investors over the long term.
Great. Thanks for entertaining all the questions.
I just want to reiterate.
Tri State operating as an independent subsidiary has to take care of its clients cash needs and commitments to so it's not just math right. We just.
They need to go have a lot of client balances to manage and the 3 billion was just a rough estimate of the excess where we could replace them without they felt without impacting their business.
Okay.
Thank you very much we'll get to our next question on the line from Steven <unk> with Wolfe Research go right ahead.
Hi, good morning pause.
So wanted to start off with just a question on Tri state the rate backdrop is clearly much more constructive since the deal was first announced and given the revenue upside is coming from less compensable spread income I was hoping you could provide some thoughts on the updated T I C accretion expectations.
Just on the current forward curve and how we should be thinking about where P. P. N. Our margins could potentially settle out with higher rates in a fully integrated T. S. E deal as we think about your normalized earnings power.
I think theres, a theres a lot baked into that question.
But I don't think it's there's a lot that has changed since we announced the acquisition in the 8% to 12% type of accretion, but I don't think maybe at the analyst Investor day, we can get into more detail with all the different variables one thing I will say.
Is that their loan growth since we announced the transaction and they are separate public company. So I also don't want to get too much into their own results or what the upside is to higher rates going forward for their results until after we close the transaction, but I.
I think I can say that the loan growth since they.
Since we announced the transaction has been much stronger than we were projecting of course, we try to use conservative projections, but they've had really continued to have strong loan growth since announcing the transaction so that coupled with the higher increases in short term rates that we're expecting and again vast majority of their assets are floating rate assets.
Certainly a nice tailwind for us going forward.
And Paul I mean, any insights you can share just in terms of how we should think about that that terminal P. P. N. Our margin I think the big debate is you're gonna be integrating this deal the accretion.
<unk> have certainly been been favorable over the last few quarters. You did note. The loan growth has also come in better on the big debate is how how much of that revenue are you going to allow to fall to the bottom line versus get reinvested back in the business and just wanted to get some sense as to how we should be thinking about peak margin potential over the next couple of years.
<unk>.
Yes, Steven I would say that the peak margin potential is going to be driven more by the increase in short term interest rates and the impact that has on our 75 plus billion dollars of client cash balances.
<unk>.
Any particular transaction that we've closed or that is pending so.
I would say I would look at that and as I said earlier on the call that.
That impact in the first 100 basis points, we're projecting to be somewhere in the $600 million range. So it's obviously significant accretion to earnings for us in the <unk>.
First 100 basis points.
Very helpful. And then just if I could squeeze in one more just on the securities portfolio. I know historically, you guys have tended to favor more short end versus long end gearing certainly given the pace of fed tightening that's anticipated that's going to serve you pretty well here, but given.
The forward curve is actually starting to bake in a couple of fed cuts a few years out wanted to get some perspective on.
Whether there's any appetite to actually extend duration.
Given some of the higher MBS proxies in particular.
Which could potentially protect you in the event looking a couple of years out that the fed does in fact start easing and maybe we don't have our and we don't have the soft landing that many of us were hoping for.
Yes, so at this point.
I think we've undertaken some criticism for being flexible.
Flexibility just isn't maximizing short term earnings for us its Max <unk>, the business model to be able to take advantages of acquisitions investments in.
Keeping keeping flexible in difficult times, which right now is uncertain. So.
After waiting we're certainly not ready to lock in short term rates are.
Longer term rates, while we're in the middle of the.
What we think will be an increasing interest rate cycle, but that doesn't mean at some point in the future.
Where are we think with asset liability management, we wouldn't lock in a portion, but that's not that's not on the near term goals right now.
Understood. Thanks, so much for taking my questions.
Thanks, Steve.
Thank you very much we'll get to our next question on the line from a non Ghazaliya with Morgan Stanley go right ahead.
Okay.
Hey, good morning, Paul and Paul.
I wanted to.
He always thoughts a little bit more on the deposit beta and the 15% assumption for.
This cycle.
First if you can remind us where deposit rates peaked in the last cycle.
Then if I think about the differences this time around.
Macro level, we're getting a much faster pace of rate hikes and lost time inflation is higher.
That is going to shrink their balance sheet sooner.
And for Raymond James Specifically me as a bank is a lot larger and you have the upcoming acquisition of Tri State.
So.
With that in mind, you know what are your thoughts on how the deposit beta dynamic will play out and.
What that will do it you are.
Two to deposit with the cycle.
Yes.
There are a lot of differences this cycle versus last rate cycle. So your guess is probably as good as ours, we're going to be very competitive and try to be generous with our clients. The 15.
Percent kind of assumption slash guesstimate that we have for the first 100 basis points.
Which includes the first rate increase in March where the deposit beta was obviously extremely low across the industry.
Assume that Theres, a pickup in deposit beta with the subsequent increases so.
In the last rate cycle, we peaked out at around 60 basis points on average for the cost of funds.
Sweep.
And that's when fed funds target topped out at about two 5%. So usually the investable cash going back to the cash sorting topic gets invested in.
In short term alternatives like purchased money market funds I think we have the best purchase money market fund platform in the industry for our clients who are looking to.
Optimize their yields so.
That's kind of how we're thinking about it in terms of bifurcated the cash in the account and how how we pass on.
The sort of operational cash component of the accounts, but we're obviously going to kind of look at the competitive environment as rates rise and try to be fair and competitive with our clients.
If you look to that.
You know all cycles are different and things happen different. So the first thing is you have to be flexible and responsive we've done a good job even planning out various scenarios and cycles, what we do well in advance.
So our best guess right now is so it'll be like the last cycle just faster. So we may have to move quicker, but we think the relative spreads and things will still be there. We certainly have a lot more cash.
And economically even though when you lose balances you still gain net interest income.
Because of the rate differentials so.
It should be positive at least through the next couple of raises and then longer term as whatever longer term is so.
Yeah, I guess a follow up to that is you know what the rate sensitivity that the 600 million will look like for the next 100 basis points right because per say you know what we're gonna get several rate hikes in short order you know, presumably by the time, we get to.
June July we will be talking about the next 100 basis points Michelle.
Any thoughts on what that 600 million should look like.
On your comment to make sure I mean, we need to have got that a little bit, but you know what.
Would love your thoughts on that.
I think I think when most people are assuming is that the incremental benefits with incremental rate hikes are going to decline.
Significantly still be a benefit net net but declined relative to the first 100 basis points, that's a lag catches up and the deposit betas increase but again, if we're guessing on the first 100 basis points. Then we're certainly going to be guessing on the second 100 basis points. So time will tell.
Got it and just one quick clarification and sorry, if I missed this but can you quantify if there was any material hits two Aoc I this quarter.
No certainly I don't think I would call. It material you saw that our equity balance sheet equity was flat during the quarter. Despite strong earnings net of dividends. So I think the.
<unk> impact was somewhere around 300.
For the quarter and that's again, a testament to our aversion to taking.
Too much duration risk, we keep that securities portfolio, very short and we are actually shortening and now we're buying treasuries now with sort of two year lives today, just position ourselves as Paul said to give us even more flexibility going forward given all the uncertainty around rates.
Okay.
Great. Thanks, so much.
Thank you we'll go to our.
Next question on the line.
From Bill Katz with Citigroup.
Okay. Thank you very much for taking the questions. This morning in your prepared commentary.
Just coming back to capital for a moment.
So if I hear you correctly some of the sort of the pressure on the tier one leverage ratio sequentially, probably abates a little bit.
Just given how client cash will move around a little bit.
And you, obviously get the favorable impact from higher rates and notwithstanding a flat investment banking outlook and the deal with Trc.
You mentioned, maybe some caution around buyback I'm sort of curious why that would be the case at this point in time, given what should be a pretty fat capital ratios net of everything.
Yeah, the only cautionary isn't.
Backing out of our.
Plan to buyback the TFC purchase price. It's just we're in a very uncertain economic environment and if things tanked.
We'd have to look at.
If the market really tanked in you.
No no telling what happens or if the geopolitical thing really heightens it becomes global will be more cautious.
More on pace now as the price if that happened in the stock prices were affected.
We'll probably still be able to accomplish it but we're just we always look at the macro outlook number one for us is safety and flexibility and.
Secondary is execution. So it was nothing more than abroad cautionary.
In a world that anything can go right now.
And the worst case is we take a look at it but because capital and liquidity stay number one, but we still plan to execute that buyback all things being.
Predictable and maybe the one thing I would add to that is whether we buy back that stock and one or two quarters. Following closing of three to four quarters. Following closing it seems like a long time and the models, but for us it's a blip.
Make decisions for the next three to five years not for the next three to five quarters and the timing of the buybacks really doesn't impact results all that much a year to two years out so.
If it makes more sense given all of this.
Factors that Paul just described to wait a couple of quarters and we'll wait a couple of quarters, we're going to err on the side of caution just as we always do.
Okay. Thank you and then maybe just a two part unrelated question I apologize for missing it this way, but on the on the P&L.
Communications had a pretty big sequential step up and I think business development are suddenly had a pretty pretty.
Pretty flat can see relative to sort of good organic growth any geography changes here any impact from Charles Stanley that you could help us maybe unpack a little bit.
Yeah, you nailed it it's really a lot of the impact from Charles Stanley They had.
Around $45 million of total expenses reflected in the quarter since they closed end.
Yeah, a portion of a big portion of that of that pit.
Communication information processing line.
So I think that's what you're really seeing there.
Is just the impact from the two months of Charles Stanley acquisition, and some of those line items.
Got you and then just a related question is actually I. Appreciate we are all trying to get at the pretext margin discussion, but as you look at your core business today I think one of the things you've talked about you've been spending pretty regularly now over the last couple of years to sort of build the scale and the opportunity set is there anything in the core businesses that you've been under investing in and I'd be curious would you be willing to.
It changed the payout grid on the private client side to accelerate growth, even more or sort of a 75% blended payouts a reasonable thought process from here. Thank you.
Well.
I think we've spent well in our infrastructure and its very large.
Leverages Bowl.
The systems that we've put in.
And all the back office have been a significant investment we are we have increased our technology run rate.
Again this year. So we're you know we'll continue to invest in technology.
As we move our all of our systems forward in the next big investments really around our client apps, because we have felt that we've gotten more work to do but are leading the leading wealth planning desktop. So now we're putting that same technology to the client out so the advisor and client to have that same intimacy, so but outside of.
That no I think we're well invested we're not.
Really looking at anything and we've invested now I mean.
Last if we're ever going to acquire or anything and we've got three in the Hopper one closed in <unk>.
Two hopefully to close soon so we've got a lot going on and we think we've been investing well across the firm in and believe in the long term growth will be great with these acquisitions. They werent focused on short term growth, although once integrated I think they'll do very well.
Thank you very much.
Thanks, Bill Thanks Bill.
Perfect. Our next question on the line from calibrate from K B W. Great ahead.
Hi, Good morning, maybe just getting some clarity on the P. C G asset management revenues and the guidance of that being likely down 3% or so in fiscal <unk>.
I guess, we're seeing those fee based assets essentially flat over the past two quarters and I understand that's really due to adding the Charles Stanley assets, So organic laid out they're down 30%, but I guess the question is I guess, where are those Charles Stanley revenues coming through in that segment than just given what you said it would imply that none of those revenues really coming through.
Asset management line.
Yes, I think it's just a function of timing Kyle. So we did have those revenues coming through those lines for just over two months of the quarter, but.
The assets weren't really reflected until the end of the quarter. So.
All we're saying is that despite the assets appearing being flat sequentially those revenues will decline somewhere around 3% starting next quarter, because we already have.
Accounting for those revenues at least two months of it so far this quarter.
Got it thanks and then.
Just given how yields trended through the first through the calendar first quarter. Just wondering if you had any details regarding how is the F. S portfolio trended through the quarter. So maybe any anything on end of period of F. S balances would be helpful.
And I guess do you view the securities reinvestment rates right now is attractive enough to really.
Dark moving some of the CIP deposits into the bank to ramp up growth in that securities portfolio more meaningfully.
We're doing that modestly I mean, yes.
Shortening the duration with treasuries to two years from the three to four years that we were buying in the agency mortgage back and the incremental spread on what we're buying versus what's running off from the legacy portfolio is just north of 1%. So.
We think it is somewhat attractive I mean that comes with duration and we want to stay flexible as Paul pointed out before so we're not going to.
Do that in a dramatic way, but we do have a lot of cash in CIP.
Is invested in very short term treasuries in the 30 to 60 day treasuries and so to the extent that we can deploy some of that incrementally into the bank.
To earn a higher yield.
Wait until this demand from third party banks recover then we think that that would be a good tradeoff, but it's not going to be too significant I would say in terms of growth of the securities portfolio, but.
We do expect ongoing growth between now and the end of the fiscal year.
Got it and then just a follow up question.
On that one is the CIP is now sitting at $17 billion in balances is there a certain percentage of those balances. We should think about you wanting to migrate.
Pulling the bank versus moving off balance sheet to free up capital.
Given what you just said is it fair to think about a majority of those you really want to move off balance sheet into the third party sweep.
Yeah, I guess, we don't have any sort of predetermined objectives in terms of where it goes.
We think that there is we know that about $15 billion of those balances are 13 billion today, because they have declined by a couple of billion. So far in April due to fee billings and tax payments.
Sort of what we consider overflow balances that.
Would prefer FDIC insurance wind capacity recovers for that.
Third party banks <unk>, when Raymond James Bank needs that capacity as well so.
Over time, we would expect.
Somewhere around $10 billion of north of $10 billion of that to get redeployed from CIP to third party banks, Raymond James Bank or.
Redeployed into higher yielding alternatives for clients.
Okay.
Got it thank you.
Thank you very much. Okay next question on the line.
Devin Ryan from JMP Securities go right ahead.
Hey, good morning, guys how are you.
Hey, Adam.
Apologies I hopped on a minute late and I know theres been a lot of questions are on a pre tax margin and expenses I don't think you hit this year I'm just trying to think about.
Just that the comp ratio and I appreciate where you get a lot more details on may 25th, but when we look back a couple of years ago comp ratio of $65, 66% when rates were more call. It normalized.
Without making a call on capital markets and kind of considering a few of the small acquisitions you've done I just want to think about maybe what's structurally different today, you know a lot of conversation in the market around expense inflation and higher base salaries and base base overall compensation. So is that meaningful to change kind of the narrative of the comp ratio or the <unk>.
Being so different that it changes the way, we should be thinking about comp going forward and the structure relative to <unk>.
Prior period of kind of more normalized rate environment.
Yes. So this quarter's comp ratio wasn't a surprise to us given capital markets were down and given that.
A lot of our FICA and other stuff hits this quarter, which has always been elevated.
So we felt that was certainly in line and certainly we've had a rate rise, but it really didn't come through the quarter. It was at the end of the quarter. So as rates go up those comp ratios will go down because they are non compensable there'll be pretty significant and again capital markets.
If it recovers from the pace. It is it will drive it down also so we're looking.
We feel pretty good about where it's headed.
In the interest rate environment and.
We do see pressure our recruiting has actually been pretty good there is market pressure. So my guess it will be a slight headwind for everyone, but we don't see it being a significant number.
But.
We're looking at that and looking at the adjustments and sensitive to <unk>.
People that arent in the top part of our payouts, making sure they're compensated so that they can survive a high inflationary environment, but so.
That would be on the other side somewhat but it's going to be well outpaced by I think interest spreads and.
In a more normalized return to capital markets.
Right Okay. Thanks, Paul.
And then just one thinking about kind of the UK opportunity, obviously with Charles Stanley now closed.
I appreciate it's still very small for Raymond James but can you remind us Paul how youre thinking about the addressable market in the UK for the firm and and whether you are having dialogue with other firms. There I know you were talking to Charles Stanley for some time and do them well.
So are there more opportunities like that.
How should we think about the expansion in the UK organic versus inorganic and really I guess the thought is to Charles Stanley now having that kind of deal.
Not necessarily behind you, but but completed does that set you up for more deals in the region.
So strategically it's a very fragmented market with Charles Stanley I think it puts us close to the top 10, just outside and.
So we think there is a lot of opportunity Charles Stanley.
It really is.
High quality people high quality back office, and but they've been slower on growth, mainly because they've been more capital constrained.
We've had a much smaller but a much quicker growing probably an industry leading growth in terms of inorganic.
Recruiting.
The UK market. So we hope the combination that we can between their support our capital and our ability to recruit and grow hopefully to combine the best of all of those worlds now it's going to take a while to integrate that right I mean, we're close but we've got a.
We know we have a year long project just to look at systems integration, but best of class, making sure that you know we.
As always our focus is first retention we've had to.
We don't want to mess up our our consecutive series of integrations, where we've kept the people and part of that is were very very thoughtful on how we put things together, we don't fly them together, we haven't assumed.
Anybody or any system was going to come out on top and Theyre doing both teams on both sides I think a great job of looking at that and then we will integrate the system. So it'll take a while to gear that up but we.
We think both so we're not going to look at any acquisitions during that integration period, but after its integrated up and running and we get it running as we'd like to I think there are opportunities in that market and you can see that RBC entered the market with an acquisition. So I think others see that opportunity too and.
It's going to take a little while to integrated I guess, the bottom line, but we're very optimistic.
Really like the people.
Okay. That's great one last one here just on on the capital market side of the business, where I guess institutional side the M&A.
Pipelines are strong as I heard.
You guys have a pretty diverse focus there, which maybe insulates more from from volatility in other parts of the market.
I guess what are you guys seeing in terms of closure rates how much are deals getting pushed out and then new deals filling back in into the pipeline trying to think about kind of the push and pull in that business I appreciate that.
It can change to the extent markets remain volatile.
Weis versa, but just the comfort in kind of the next 12 months for the M&A advisory business coming off of obviously, a great prior 12 months.
Yeah, so comfort as a hard word to use in this environment right now.
We think at this run rate even in this environment. We can continue but certainly there's a lot of upside what we're seeing is most deals and pause not cancelled in the pipeline.
See new deals coming in.
And to the pipeline, so I would call.
Strong maybe its more robust we've had a very good pipeline and the problem is it's been paused. So part of that is a little bit market market valuation certainly on the underwriting side, but the M&A side, a little bit and then.
The uncertainty is.
Had people sit back and wait and making sure that.
With the political uncertainty globally.
That's not really going to hurt the market. So I would say right now it's.
Pause deals that are still in the pipeline now if there's if the geopolitical thing heats up you've made some of those pause may turn to cancel or if the market really tanks, but.
The market stays study and people get more comfortable geopolitically I think theres a lot of upside too. So so it's just hard to call because those are the two impacts.
Yeah appreciate it okay I'll leave it there thanks, so much guys.
Thanks, Kevin.
Thank you very much.
Our next question on the line from Jim Mitchell with Seaport Research go right ahead.
Hey, good morning, maybe.
Maybe just quickly on the reserve ratio I think you've bounced round 115 to one 2% the last two.
Two quarters is that the right sort of target for you guys given the mix of loans right now and so as we think about provisioning going forward try to stick to that level.
Yeah, I think that is given the mix of our assets one 2% seems reasonable that was roughly the percent that we saw in the provision this quarter, but again, we're using seasonal model. So if macroeconomic conditions deteriorate you know you can see provision.
Increase in vice versa, if macroeconomic conditions improve.
Was there any seasonal contribute in any way to this or was it just all growth.
Most of it was growth related as you saw we had really strong growth at the bank this quarter.
Right.
And can you remind remind us what your betas were in the second hundred I. Appreciate there's you can't predict it but maybe in the last cycle, what the betas were in the second hundred basis points.
If my memory serves me correctly I think we're closer as an industry to 50% range for the last couple of increases.
And.
As we got from 200 to 250 basis points on the fed funds target.
What I recall off the top of my head.
Okay, that's great alright, thanks, thanks for taking questions.
Thanks.
Thank you very much.
With our final question for today from the line of Chris Allen with Compass point go right ahead.
Good morning, guys. Thanks for taking my question. Most I think most of them had covered I guess, what I wanted to quickly just follow up on the some ridge partners deal.
The press release makes it sound like an electronic market maker I'm, sorry, a market maker on electronic trading platforms, but looking at their website it seems a bit more.
Potentially advisor facing so maybe give us some color there and whether this deal is more driven by the.
The need for technology improvements on the fixed income trading side or whether its other synergy opportunities moving forward.
Yes, I think it's.
Theres a lot of pieces to it first.
Culturally and risk management wise.
Talking them for quite some time, we think they are a great fit and what it adds strategically for US is the weakest part of our fixed income platform has been a corporate area, where just versus our.
Competitors, we're a lot smaller.
In the corporate bond area. So they bring really great expertise. There secondly, they do have trader assisted technology, where they are able to source and execute trades with a lot of analytics and we believe that that system can be migrated to other parts of our business to to help tech enable.
The trading which is important there.
Their focus has really been on our institutional clients, although they do have an app.
With some advisor facing but it's relatively small, but we really like the app. So we think it may be something we can convert to our to the advisor side of our business.
So there's lots of pieces, we really like we really like the people the risk management and the technology, we think can be really spread to lots of part of our fixed income business.
Got it thanks guys.
Thanks, Chris.
Well appreciate everyone coming on today I know, it's a crowded day.
I think that given our disciplined that we're really into a market with rising rates that will do really well, we have plenty of capital to deploy even with our three acquisitions and.
We will stay true as we always have to or are guiding our conservative principles, but I think given.
I think we're still in good shape to make all the commitments unless something weird happens in the market, but if it does again with all of our capacity and flexibility I think relatively we'll be in good shape. So appreciate you joining us and we'll talk to you next quarter.
Thank you very much Andrew.
This conclude the conference call for today, we thank you for your participation and ask you disconnect. Your lines have a good day.
[music].
Yeah.
Okay.
[music].
Okay.
Okay.
Okay.
Uh huh.
Okay.
Uh huh.
[music].