Q1 2023 Raymond James Financial Inc Earnings Call
Good afternoon, and welcome to Raymond James Financial's first quarter fiscal 2023 earnings call.
This call is being recorded and will be available for replay on the company's Investor Relations website.
Now I will turn it over to Christine <unk> Senior Vice President of Investor Relations at Raymond James Financial.
Good afternoon, 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, Impulse, Shoukri Chief Financial Officer.
The presentation being reviewed today is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions call. 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.
And our level of success in integrating acquired businesses divestitures anticipated results of litigation and regulatory developments or general economic conditions.
In addition words such as May will could anticipates expects believes or continue or 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.
With that I'd like to turn the call over to chair and CEO , Paul Reilly Paul.
Good afternoon, and thank you for joining us today.
Although there was a lot of disappointment for us in the box playoff game and even more disappointment for me is Paul Choucroute Bulldogs won the National Championship Raymond.
Raymond James came through again with another good solid performance.
During a volatile and challenging market environment, we generated strong quarterly results, including record net income available to common shareholders of $507 million annualized return on common equity of 21, 3% and annualized adjusted return on.
Tangible common equity of 26, 1%.
Once again these results highlight the value of having diverse and complementary businesses.
Record private client group results driven by robust organic growth along with strong expansion of net interest margins in the bank segment and yields on the R. J B D. P balances at third party banks and the P. C. G segment offset market driven declines experienced through the capital.
Markets businesses.
As demonstrated this quarter with the sharp increase in net interest income and our JBT P fees, we have been and remain well positioned for continued rise in short term interest rates with diverse and ample funding sources, a high concentration of floating rate assets.
And strong balance sheet flexibility given solid capital ratios.
Turning now to the results starting on slide four.
In the first fiscal quarter. The firm reported net revenues of $2.79 billion record pretax income of $652 million and record net income available to common shareholders of $507 million or $2.30 per diluted.
Sure.
Excluding expenses related to acquisitions and the favorable impact of a $32 million insurance settlement received during the quarter.
Adjusted net income available to common shareholders was $505 million or $2.29 per diluted share.
Quarterly net revenues were flat compared to the prior year quarter and down 2% compared to the preceding quarter largely driven by the benefit of higher short term interest rates on net interest income in our J B D. P fees from third party banks offset by the March.
Kit driven declines in investment banking revenues and asset management and related administrative fees rec.
Record quarterly net income available to common shareholders increased 14% over the prior years fiscal first quarter largely due to higher net interest income and our JBT P fees from third party banks.
And as I mentioned earlier, we generated very strong returns with annualized return on common equity of 21, 3% and annualized adjusted return on tangible common equity of 26.1% impressive results, especially given the.
<unk> market conditions, and our strong capital position.
Moving on to slide five we ended the quarter with total client assets under administration of 1.17 trillion dollars P. C. G assets in fee based accounts of $633 billion and financial assets under management of $186 billion.
With our unwavering focus on retaining supporting in attracting high quality financial advisers P. C. G consistently generate strong organic growth.
We ended the quarter with nearly 8700 financial advisors and generated domestic net new assets of $23 billion in the quarter, representing a 9.8% annualized growth rate on beginning of the period domestic P. C G assets.
Net new assets were strong this quarter and also helped by the seasonally high interest and dividends received in December .
Over the trailing 12 month period, we generated net new asset growth of 7.3% of domestic P. C. G assets at the beginning of the period.
During the same 12 month period, we recruited to our domestic independent contractor and employee channels financial advisors with nearly $300 million of trailing 12 month production and approximately $40 billion of client assets at their previous firms.
Total clients' domestic cash sweep balances declined 10% to $60 billion, representing 5.9% of domestic P. C G assets under administration.
The domestic sweet balances represent our lowest cost deposits as we have yet to utilize enhanced yield savings accounts to attract cash deposits.
Total bank loans grew 2% sequentially to a record $44 billion, reflecting growth at both Raymond James Bank and Tristate capital Bank.
Moving to slide six the private client group generated record results with quarterly net revenues of $2.06 billion and pre tax income of $434 million.
Asset based revenues declined however, the segment's results were lifted by the benefit from higher short term interest rates, including increased yields on our J B D. P fees from third party banks and the bank segment.
The capital markets segment generated quarterly net revenues of $295 million and a pre tax loss of $16 million.
Capital markets revenues declined 52% compared to the record setting results in the prior year and quarter, mostly driven by lower investment banking revenues largely due to the volatile and uncertain markets.
The asset management segment generated pretax income of $80 million on net revenues of $207 million.
The decreases in net revenue and pretax income were largely attributable to lower financial assets under management as net inflows the fee based accounts in the private client group were offset by a year over year fixed income and equity market declines.
The bank segment generated record quarterly net revenues of $508 million and pre tax income of $136 million.
That revenue growth was primarily due to higher loan balances and significant expansion of the banks net interest margin to 3.36% for the quarter.
144 basis points over a year ago quarter, and 45 basis points from the preceding quarter.
Reflecting the flexible and floating rate nature of our balance sheet.
And now for more detail review of our financial first quarter results I'm going to turn the call over to Paul Shoukri Paul.
Thank you Paul.
Starting with consolidated revenues on slide eight quarterly.
Quarterly net revenues of $2.79 billion were flat year over year and declined 2% sequentially.
Asset management and related administrative fees declined 10% compared to the prior year quarter, and 4% compared to the preceding quarter inline with the guidance. We provided on last quarter's call based on lower fee based assets at the end of the preceding quarter due to the equity market.
Declines.
This quarter fee based assets grew 8% this growth should provide a tailwind for asset management and related administrative fees, which we expect to increase 5% to 6% in the fiscal second quarter, reflecting two fewer billable days.
Brokerage revenues of $484 million declined 13% compared to the prior years fiscal first quarter and grew 1% over the preceding quarter.
The year over year decline was largely due to lower fixed income and equity brokerage revenues in the capital market segment as well as lower asset base Trail revenues and P. C G.
I'll discuss accountant service fees and net interest income shortly.
A much more difficult market environment than we anticipated on last quarter's call investment banking revenues of $141 million declined 67% compared to the record set in the prior year quarter, and 35% compared to the preceding quarter.
Despite a healthy pipeline and good engagement levels, there remains a lot of uncertainty and the pace and timing of deal closings given the heightened market volatility at this point it is too difficult to say when conditions will become conducive to increased activity.
Other revenues of $44 million declined 45% sequentially, primarily due to lower revenues in the affordable housing investments business, which was seasonally high in the preceding quarter.
Looking forward. This business continues to have a strong pipeline.
Moving to slide nine climb.
Clients' domestic cash sweep balances ended the quarter at $64 billion down, 10% compared to the preceding quarter and representing 5.9% of domestic P. C. G client assets.
The sweep balance declines were experienced in the client interest program at the broker dealer as well as with third party banks.
As of last Friday. These balances have declined to just under $57 billion, reflecting the quarterly fee payments of approximately $1.1 billion paid in January as well as additional cash sorting activity during the month.
Raymond James Bank deposit sweep program continues to be a relatively low cost source of funding in Tristate capital Bank adds an independent deposit franchise, providing a more diversified funding base.
And as we've seen deposits declined significantly across the entire financial system, we realize even greater value and having multiple funding sources.
To that end we are also in the process of launching an enhanced yield savings program for our private client group clients.
Turning to slide 10.
Combined net interest income and our JBT P fees from third party banks was $723 million.
253% over the prior years fiscal first quarter and 19% over the preceding quarter.
This strong growth reflects the immediate impact from higher short term rates, given the limited duration and high concentration of floating rate assets on our balance sheet.
Our long standing approach has been to maintain a high concentration of floating rate assets, which is proving to be a significant tailwind in this rising rate environment.
The bank's net interest margin shown on the bottom portion of the slide increased 45 basis points sequentially to 3.36% for the quarter and.
And the average yield on our JBT P balances with third party banks increased 87 basis points to 2.72%.
Both the NIM and the average yield on our JBT P balances increase more than we expected on last quarter's call as the deposit beta on the last rate increase was closer to 15%.
The spot NIM for the Bank segment is currently close to 3.5%.
And the spot yield on our JBT P balances is approximately 3.2%.
So we currently expect continued near term tailwind for net interest income and related fees.
By the ongoing cash sorting activity.
The anticipated rate increases should also help but remember there are two fewer days in the second fiscal quarter.
While we still have sweep balances with third party banks that could be redeployed to the bank segment.
Longer term if rates stabilize at these levels, we expect the bank's NIM will be impacted by the mix of deposits anticipating a larger portion of higher cost deposits being utilized to fund the future balance sheet growth.
While we are pleased to see the significant NIM expansion as we have said in the past we have always prioritized net interest income over net interest margin and our goal is to continue growing net interest income as we deliberately grow the balance sheet over time.
Moving to consolidated expenses on slide 11.
Beginning with our largest expense compensation.
The total compensation ratio for the quarter was 62.3% nearly flat from the preceding quarter.
The adjusted compensation ratio was 61.7% during the quarter.
Despite lower capital markets revenues the compensation ratio largely reflects the significant benefit from higher net interest income and RJ BT P fees from third party banks.
As a reminder, the impact of salary increases effective on January one and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal second quarter.
Non compensation expenses of $398 million decreased 13% sequentially.
Adjusting for acquisition related non compensation expenses of $11 million.
And the favorable impact received of $32 million.
Both included in our non-GAAP earnings adjustments non compensation expenses were $419 million during the quarter.
The bank loan provision for credit losses of $14 million in the quarter, primarily reflects changes to macroeconomic assumptions used in the seesaw models as well as modest loan growth.
I'm proud of our continued disciplined management of expenses exhibited again this quarter.
Where we remain focused on investing in growth and ensuring high service levels for advisors and their clients.
Given the benefits from higher short term interest rates, we expect to maintain our compensation ratio well below 66% as it has been around 62% over the past two quarters, even with much lower revenues in the capital markets segment this quarter.
Non compensation expenses, excluding provision for credit losses, and the aforementioned non-GAAP adjustments.
Are still expected to be around one $7 billion for the fiscal year.
Slide 12 shows the pretax margin trend over the past five quarters.
In the fiscal first quarter, we generated a pretax margin of 23.4% a very strong result, highlighting the benefit of our diversified business model the upside we preserve to higher short term interest rates.
And our consistent focus on being disciplined on expenses.
Similar to my comments on the compensation ratio given the interest rate tailwind. We currently believe we are well positioned to continue delivering pretax margins above the previously disclosed 19% to 20% target.
However, given the cash sorting dynamics as well as interest rate and market uncertainty. We believe it is premature to formally update our targets in this volatile environment.
On slide 13 at quarter end total assets were $77 billion.
A 5% sequential decrease primarily reflecting the decline in client interest program cash balances.
The reduction of balance sheet assets help increase the tier one leverage ratio during the quarter.
Liquidity and capital remains very strong.
R. J F corporate cash at the parent ended the quarter at $2 billion, well above our 1.2 billion dollar target.
The tier one leverage ratio of 11.3% the total capital ratio of 21.5% are both more than double the regulatory requirements to be well capitalized.
Our capital levels continued to provide significant flexibility to continue being opportunistic and invest in growth.
The effective tax rate for the quarter was 21, 9%, reflecting a tax benefit recognized for share based compensation that vested during the period.
Going forward, we still believe 24% to 25% is an appropriate estimate to use in your models.
Slide 14 provides a summary of our capital actions over the past five quarters.
In December the board of directors increased the quarterly cash dividend on common shares 24% to 42 cents per share and authorized share repurchases of up to $1.5 billion, replacing the previous authorization of $1 billion.
Yeah.
During the fiscal first quarter, the firm repurchased 1.29 million shares of common stock for $138 million at an average price of $106 per share.
As of January 25th 2023.
$1.4 billion remained available under the board's approved common stock repurchase authorization.
Since the closing of the Tri State acquisition on June 1st through January 25, we have repurchased approximately 3 million common shares for $300 million.
Our approximately $100 per share under the board authorization.
We remain committed to offset the share issuance associated with the acquisition of Tri state as well as share based compensation dilution.
And still expect to achieve our objective of repurchasing $1 billion of shares in fiscal 2023.
But of course, we will continue to closely monitor market conditions and other capital needs as we plan for these repurchases over the coming quarters.
Lastly on slide 15, we provide key credit metrics for our bank segment.
Which includes Raymond James Bank, and Tristate capital Bank.
The credit quality of the loan portfolio remains healthy.
Criticized loans as a percentage of total loans held for investment ended the quarter at 1.01%.
The bank loan allowance for credit losses, as a percentage of total loans held for investment ended the quarter at point, 92% down from 1.18% at December 2021, nearly flat sequentially.
The year over year decline in the bank loan allowance for credit losses as a percentage of total loans held for investment reflects the higher proportion of securities based loans largely due to the acquisition of Tristate capital Bank.
Securities based loans, which account for approximately 34% of our bank loan portfolio.
Generally collateralized by marketable securities and typically do not require an allowance for credit losses.
The bank allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 1.64% at quarter end.
We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation supply chain constraints and a potential recession on our corporate loan portfolio.
Now I'll turn the call back over to Paul Reilly to discuss our outlook.
Paul.
Thank you Paul.
As I said in the start of the call I am pleased with our results and our ability to generate record earnings during what continues to be a very volatile market.
And while there are many uncertainties, we believe we're well positioned to drive growth over the long term across all of our businesses.
In the private client group next quarter results will be favorably impacted by the expected, 5% to 6% sequential increase in asset management and related administrative fees.
Additionally, this segment will continue to benefit from higher short term interest rates as described by Paul.
Focusing more on the long term I am optimistic we will continue delivering industry, leading growth as current and prospective advisors are attracted to our client focused values and leading technology and production solutions.
And the capital market segment, while M&A pipelines remained healthy the pace and timing of closings will be heavily influenced by market conditions.
And in the fixed income space depository clients are experiencing declining deposit balances and have less cash available for investing in securities putting pressure on our brokerage activity.
However, some ridge with its rapidly evolving fixed income and trading technology marketplace enhances our position as this business typically benefits from elevated rate volatility.
Over the long term, we are well positioned across capital markets for growth given the investments we have made over the past five years, which have significantly increased our productive capacity and market share.
And the asset management segment financial assets under management are starting the fiscal second quarter up 7% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive.
We remain confident that the strong growth of assets in fee based accounts in the private client group segment will drive long term growth of financial assets under management.
In addition, we expect Raymond James investment management, which generated modest net inflows this quarter to help drive further growth through increased scale distribution operational and marketing synergies.
In the bank segment is well positioned for rising short term interest rates and has ample capital to grow the balance sheet prudently. However, in an increasing rate environment loan growth will face headwinds until rates stabilize and borrowers adjust to a new normal and the cost of borrowings.
Additionally, as cash sorting has continued in the sweep program, we expect to increase the focus on funding the growth of the bank's balance sheet with higher costs diversified sources over the long term.
Currently we have sweet balances at third party banks that could be redeployed to the bank segment. However, the past has also taught us the cash sweep balances can decrease or increase rapidly depending on market conditions.
Importantly, the credit quality of the bank segments loan portfolio remains strong and we are closely watching economic conditions related to the lending portfolio.
And just a short period since the closing of the acquisition of Tristate capital I am very pleased with their performance.
Being true to Tri state's independent operating model, including remaining a separately chartered bank with its own client relationships.
This model coupled with our strong capital should foster its ongoing growth.
It's no accident that our businesses are positioned well for future growth. It is a result of our steady focus on making decisions for the long term.
Especially in volatile and uncertain market conditions.
We are well positioned for the continued rise in short term interest rates with diverse funding sources solid loan growth.
High concentration of floating rate assets and ample balance sheet flexibility given the solid capital ratios, which are all well in excess of regulatory requirements.
Finally in these uncertain times is when clients need trusted advice the most.
And I want to thank our advisors and associates for their unwavering dedication to providing excellent service to their clients each and every day.
Our strong results are a direct reflection of your contributions. So thank you very much to all of you.
With that operator will you. Please open it up for questions.
Thank you.
And if you'd like to register for a question press. The one followed by the four on your telephone keypad right now you'll hear it's retold prompt to acknowledge her request. This question has been answered and he would like to withdraw your registration. Please press the one followed by the three.
And one moment please for the first question.
And our first question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.
Hey, Thanks, Hi, Paul Paul how are you.
Great Kevin.
Nice to speak with you after the press release and the evening, which is great.
I guess just a couple quick ones on my end first on the buyback so you repurchased $138 million, it's a bit below the implied 250 million average target.
And so I guess the implication is there's going to be some catch up so I'm just trying to understand the factors that impacted our cadence of whether it was being price conscious or were you in blackout during the quarter that we didn't see or maybe any other reasons just trying to think about again kind of the cadence there.
No, we're still targeting the $1 billion of.
<unk> for fiscal 2023, as we've said several times now and so that obviously means we would have to ratchet that up on an average basis going forward to get to that billion dollar mark.
There was a lot of volatility in this particular quarter and then as you point out there is always a blackout period. So.
We were pleased to get $136 million and but understand.
That to hit our target going forward, we're going to have to kind of increase that average, but with that being said we're still good.
A lot can change between now and the end of the fiscal year. So we do monitor.
Market conditions in all of the sources and uses that we have for cash and capital at the firm.
Yeah.
Got it okay.
Thank you and then just a follow up here on net interest income in private client so yes.
That's been obviously very strong in that came in better than we were looking for and we see that decline in kind of the client.
Interest program and so I'm, just trying to think about the other drivers there.
We kind of continue to shrink there driven by margin and just higher margin rates or some.
Some of your peers had some second lending that helped as well. So I'm curious if there was any kind of lumpy SEC lending in there just trying to think about some of the moving parts, it's keeping that really strong.
No SEC lending was not a driver really was just the higher yields on both the segregated assets pursuant to the broker dealer regulations as well as the higher yields on the margin balances.
We'll point out going forward.
Sort of.
Last in first out.
Type of cash is really the client interest program cash and that has declined the most dramatically.
This cash sorting cycle and so we're probably at around $3 billion to $4 billion of those balances today versus sort of the average balance for the quarter of $6 billion. So.
That would that would be something you would need to consider.
Which would partially be offset by the higher rates going forward as well.
Factoring in a full quarter of last quarter's rate hikes and potential rate hikes this quarter, but something that you would need to factor into your modeling.
Yeah understood Okay, great I'll leave it there thank you very much.
Thanks, Kevin Thanks, Kevin.
And the next question comes from the line of Gerry O'hara from Jefferies. Please proceed with your question.
Great Thanks and.
Good evening I was hoping you might be able to just give a little incremental color on the.
The enhanced yield product, where do you see the sort of demand coming for that and what the potential kind of.
Rates might be that can be offered to clients.
Yes, if you look at I think almost everyone is offered.
Enhanced yield programs today.
Not new we just haven't had a need for them because of the amount of client cash we've had as that dwindles more than just Stephen as a defensive mechanism.
We will offer them and that's the account whether people if people and money markets and one in insured product, which we have or if.
People are thinking of moving their money they have a competitive yield without moving their money into sweeps into money markets or fixed income products or things. So that's really a number of firms in the industry have primarily been relying on that we haven't because of the cost of funds but.
As we've had we're reaching an area where we've always said if we get to this area will offer some of those products the competitive rates in today's market, probably between 375% to 4% somewhat.
Cut some outliers on either side, but thats the cost.
And what our competitors have been doing and to the point that we're going to make sure. We're always on the positive side. The cash good news is even at those much higher rates, we can still earn a spread.
And also since we really have all low yield deposits almost virtually zero high.
High cost deposits, adding some will just be it won't be as big of an impact on our and our cost of funds is most places have significant deposits today.
Great. Thanks, and then maybe one just on the recruiting environment.
Is there anything.
Seasonal kind of about turning that turning the calendar that would.
It would be sort of advantageous as it.
Relates to <unk>.
Tracking and recruiting advisors and perhaps if you could also just kind of touch on.
Just any of the dynamics around trend just transition assistance and what youre kind of seeing in the marketplace. Thank you.
Thank you for years, everybody instead, what we hear it's competitive it's been competitive a long time continues to be competitive.
I would say that the competitive environment.
About the same I'd say the only thing new in the last year is there are some third party aggregators that have paid more than the other firms competing for people and the advisor space, but.
We are at a very strong backlog last year, our employee division led the way and said its own record and our independent Division was a little slower in this first quarter.
<unk> recruiting faster they employ a little slower.
Through one quarter, but what we see as the backlog is very very strong in both division very large teams.
So we still feel good about the recruiting and it's.
If you just looked at the last few years I think we've been.
Right right up at the top of the charts on net new assets in recruiting.
Theyre Jerry any other questions.
Good for me Thanks, gentlemen.
Alright, Thanks Gerry.
And the next question comes from the line of men Ghazaliyah with Morgan Stanley . Please proceed with your question.
Hey, good afternoon.
Hey, Mike I wanted to ask a question on cash starting Guy can you comment on the broader trends.
Cash starting.
We're sort of getting closer to that 5% of client assets that has been.
The lower end of the range in the past so is that 5% still a good base for where our cash that should settle and how quickly do you think we get that.
I think I think the true answer is no one really knows.
That's 5% number was based on that 2016 to 19 period. So we don't have a lot of the industry a lot of great historical benchmarking because of course, even in that 2016 to 19 period. The fed funds target topped out at two 5% and so arguably.
Client sensitivity around rate is.
Heightened when Youre at today's fed fund target rate and.
The yields that you can earn on your investable cash balances so.
5% as good a guess as any but we're certainly not hanging our hat on that potentially being a floor, which is why as Paul says we are looking at all the diversified sources of funding that we can offer our clients that would be attractive to our clients.
And also gives us.
Additional appreciation of the Tristate capital franchise, because they have a independent and diversified funding sources as well.
Think we tried to figure out where the bottoms are are we when we acquired <unk>.
State joined Us when we talked about diversified funding I think a lot of people said well why are you, even bringing that up I mean, you've got record cash deposits well, we always anticipate these timeframes.
And just in 2019, where we started ready to roll out some higher yielding products because no one wanted to cash all of a sudden we.
Got flooded with Kashagan overnight. So we know these dynamics can change and change rapidly and so.
Cash sorting as we reported continued with a 5% to the bottom or it goes a little lower.
Don't know.
A lot of the lower balanced deposits, which are significant.
I've been very very steady so at some point the.
The higher deposits, probably find a home where.
It's material enough.
Today's rates to make a difference on the lower of just like bank accounts, it's not enough to make a change. So we're just.
We always are.
Always prepare and fear the worst but generally because you just don't know so I wish I hope 5% is the bottom.
But we'll see we'll be prepared.
It wasn't.
Got it okay.
Great and then.
In terms of deposits. You know you noted you are allocating more deposits to the bank rather than a third party bank program.
So is there a specific.
Loan to deposit ratio or liquidity level, you're thinking about maintaining at the bank.
And you know how should we think about this going forward if that cash sorting continues at the same rate.
Yes, the biggest constraint on that is just sort of the percentage of PDP sweep deposits that we want in our own bank because we always wanted there to be a cushion.
Of balances that are swept to third party banks in case balances as Paul said do declined more more rapidly than we expect so that's really kind of the governing factor.
Roughly at 75% today in terms of the amount of this BD piece sweep cash centers going to our own banks.
Maybe it will go a little bit higher than that of the $14 billion to $15 billion of cash with third party banks today, a good portion of that could be swept over to our own bank, while still preserving clients FDIC insurance.
Offer them, which is best in class in the industry by the way as far as we can tell.
But we also want to make sure we're being prudent to not exposing ourselves to funding risk by shifting to much over we have plenty of capital and liquidity. So our first sources to fund the bank.
That's our business and then.
To the extent.
The sweep is really a cash overflow and a lot of ways, but a good part of our business model. So.
Right now we're.
We're not alarmed we still have flexibility, but at some point.
We've known people that have gone up to 90% of cash or something we just.
That's a little too.
To leverage for us.
And the next question comes from the line of Alex Blaustein with Goldman Sachs. Please proceed with your question.
Hey, guys. Good evening, thanks for the question.
So apologies for a two parter, but it is related so I'm, hoping to just better understand the balance sheet strategy for you guys from here. So on the one hand, Paul you talked about slowing loan growth in this environment and then at the same time you are talking about launching an enhanced yield product on the deposit side. Despite the fact that you have lots of liquid.
<unk> and third party bank deposits, we still so maybe help me understand.
How much of that $18 billion third party bank is ultimately sweeper Bowl to your bank.
How big the enhanced yield program, you think ultimately will be for you guys over the next.
12 months and how are you thinking about the overall growth at the bank in terms of the growth in assets.
Yes, so the growth ultimately the growth in the bank is driven by client demand right and so as Paul said in his prepared remarks that client demand is experiencing headwinds now that interest rates are on the move as you would expect until they get used to the new normal.
<unk> rates, we expect those headwinds to continue but one thing we will not do is when client demand does slowdown naturally given the rate environment today, we're not going to stretch for growth or get into asset classes that are not really client oriented.
That being said in terms of the funding.
We always wanted to prepare for the future.
One quarter is certainly not a trend and so we want to be there for our clients, whether it's a year to two to five years out from now and so we want to make sure that we're <unk>.
Diversifying and strengthening our funding sources, so that we have ample funding for when client demand does come back because we know it will eventually come back we just don't know when or how quickly it will be so thats sort of how we think about the strategy is a long term strategy versus trying to manage it quarter to quarter.
I think in terms of the amount is we don't know so what you do is you turn on the program start raising money and you can always accelerate it by.
Letting more clients know pushing it more changing the rate in a competitive market.
Lots of levers to speed. It up you certainly can slow it down or you can stop it so but you can't do any of those unless just started so we have the technology up and running we've got it.
Tested.
And now we're going to go out and open it up to a degree and if we need it more we'll spread it out to a broader base of the advisor segments.
So.
If it ends up being more than we need and we see cash goes the other way from slow it down or turn it off so it's about being prepared.
Same in Tri State has third party sources too.
Which suggest prepare to turn them on and make sure they're good interest and then.
If we need them, we can be more aggressive if we don't we can just stop so there's just a balance.
We know how much I guess, we need yes.
<unk> casualty, we would tell you we know how much we have to raise that.
We always we always assume we felt we can run models and speculate but the truth is we really don't know so we just need to be able to react to it.
And the next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.
Okay. Thank you very much for taking the questions and also appreciate you're moving back to the conference call Tonight.
Just following up on some of this last line of questioning as you think about earning asset growth eight can you grow that in an environment, where they're sorting and mixed loan demand.
And if it does grow could you talk a little bit about the sort of decision, making between loan growth and the investment securities portfolio. Thank you.
Again right now.
Tighter funding environment and more uncertain funding environment, we are certainly prioritizing client demand and client funding needs over the securities portfolio.
Just like we prioritize the security portfolio, when we needed to accommodate surplus client cash balances again, our balance sheet is primarily there for <unk>.
Clients and that's how we that's kind of a difference between how we think about our balance sheet and many of our peers is that we really do think about declined demand both on the asset and on the funding side.
So yes in terms of the loan growth going forward as Paul says, we really don't know what it's going to be what we're not going to do is force our stretch for growth.
But we will continue to provide.
Pfizer's provide excellent advice to their clients and to the extent that there.
Need mortgages, our securities based loans or a corporate clients reengage in M&A and they need financing then we want to be there for them.
Okay, and then just a follow up maybe switched back to capital for a moment, obviously, you said a pretty strong capital position as you both had mentioned Q.
Can you update us on what your latest thinking as of where you'd like to have that tier one leverage ratio settle out and I think you've mentioned a couple of times of opportunities to deploy your capital will you be able to buyback would you buy back the full billion dollars or is it a function of potential M&A and if you inch in M&A, where might you be looking thank you.
So yes, let.
Let me go backwards until the question and first we'd like organic growth the best it's been.
Our focus.
Because it's sustained this large consistent.
Net new assets, even when we're not doing acquisitions in the <unk> space, we're still growing.
But we like acquisitions are the right targets and we can't.
Can't tell if and when those what happened I think last few years people doubted if we're serious then we close three deals pretty quickly. So our goals right now on our balance sheet, we gave a tier one target of 10% we're still at that target.
It's gone up faster.
Good news is part of that is earnings but the other reason is just really the shrinking the corporate balance sheet to cash has come off the balance sheet that ratio went up without really a lot of changes we're still committed to it.
We're committed to the $1 billion target as Paul mentioned.
His remarks that.
We wanted to do with $1 billion. This year, we've got partially there this quarter and we know we have to get more aggressive to hit that but that's our plans.
In terms of other capital will always say if.
The great a great acquisition showed up tomorrow.
And it required a lot of capital what do we use it instead of buybacks, possibly as that's accretive vantage Don.
Don't have one sort of theoretical question, but if it did we will always balance what's the best use of capital, but our plans right now.
As to focus on our commitment to hit that billion dollar target.
And the next question comes from the line of Jim Mitchell with Seaport Capital. Please proceed with your question.
Hey, good afternoon guys.
Paul maybe on just the NII thoughts if you think about average fed funds could be up if you look at the forward curve could be up close to 90 basis points in the first quarter versus the fourth.
But then you have sort of this mix shift in deposits you have higher spot NIM going into the first quarter. So how do we think about that.
NIM and NII in the first quarter and how you're thinking about the trajectory you've kind of mentioned you want to grow NII can you can you do that consistently or do we should we expect the negative mix shift starts to hurt NII growth. After <unk>, just trying to think through whether it's <unk> or full year, whatever you want to give us.
Yes, obviously theres, Jim a lot of.
Variables that kind of go into that but as we look into our fiscal second quarter. I mean, we're entering in with a spot rate.
Three 5% for the bank's NIM.
The bank segment and so that's before any additional <unk>.
Benefit from further rate hikes, potentially and so and we have grown the bank's portfolio too.
2% their assets have grown 2% sequentially. So net net.
When you sort of think about the fact that theres two fewer days in the second quarter than the first quarter. We still believe we will be able to grow.
Net interest income overall in the second quarter and that will likely be offset by decline, partially offset by a decline in the PDP fees, just because the balances are down.
Probably the average balances sequentially, it probably be down 20% to 25%.
As we put up a greater proportion of the funds to the.
To the bank segment, but again, we will have a higher spread on those balances we're entering in with a spot rate of three 2% versus the average yield that we earned during the quarter first quarter of two 7% I think also as we would have to really hustle on raising high cost deposit switch.
Does that to be significant enough to have a huge impact on that number in the shorter term but.
But obviously if the <unk>.
Cash dynamic assortment continues that will start impacting us.
As we raise so we'll just have to see how that goes.
Right, Okay, and maybe just as a follow up.
On admin comp and TCG was up I think 21% year over year, 7% sequentially.
Is that a new run rate or is there some intersegment because I did notice that the comp and benefits line in corporate other was down 20 plus percent was there some kind of shifting of.
Of those kind of costs among segments or is that.
Just a higher upward pressure in that line.
Yes, Jim I would tell you that the first quarter comparisons to the fourth quarter are always a little bit noisy just because in the fourth quarter, we're always trying to adjust the bonus and benefit accruals.
To reflect the actual results for the fiscal year, and then we sort of reset those accruals in the first quarter. So I think last year at this time it was like an 11% increase in <unk> and PSEG admin comp as an example.
So theres some theres a lot of noise comparing the sequential.
Year over year of course, we have the acquisitions, we have the Charles Stanley acquisition for the full quarter this year and PSEG.
As well as just kind of overall growth of the business and the PCB business.
With that being said in the second quarter.
We do have the impact of the payroll tax reset.
As we enter the beginning of the calendar year and then we also will see the impact of the salary increases.
That will become effective on January 1st and those salary increases this year were significant as we always have done.
We always want to share in the success of the firm with our associates, who make that success possible.
And particularly in this inflationary environment given our record results in the fiscal year, we did if we were.
We're generous and passing on salary increases to our associates and that will be reflected fully in the second quarter.
And the next question comes from the line of Kyle Voigt with K B W. Please proceed with your question.
Hi, good evening.
Maybe a question just given the forward curve and market expectations now for the fed to begin cutting by year end 2023, and then into 2024 I was wondering if you could help us think about deposit betas through a declining fed funds environment and I think during the last rate cycle.
The adjustments on yields or the betas on the way down for the first few cuts in 2019 are relatively high and help support the bank NIM I guess is it fair to look back towards that last cycle is a good guide for how you would kind of manage your deposit rates the cycle as well.
Yes, we're still having a hard time.
Being exactly right on what the deposit betas are in this up cycle. So certainly trying to predict what it will be in a different cycle is very difficult to do would be based on the competitive environment in <unk>.
A lot of other dynamics.
That apply at the time for example in the last rate cycle, we had surges in cash balances because it was due to the pandemic and so when rates were cut.
We obviously had a did.
Did not have a funding need for per say, we actually had cash. So we have to figure out how to place that may not be the case next time rates decrease I don't think you can compare different cycles, just because each one is so unique.
So most people are sort of guessing that.
Deposit betas.
On the way down will be symmetrical to what they've been on the way up I guess, that's a good guess, but we really don't know.
Okay. Thank you.
And then just maybe a follow up just on the net loan growth in the quarter.
Just wondering if you could help us understand some of the dynamics by by loan bucket and I know, we'll see some more infill in the queue.
Looks like demand for SBS has been a bit weaker.
Thanks, It looks like Youre seeing decent demand for mortgages, even with the tough backdrop.
Given the rest of this year this fiscal year, I guess, where should we expect more of the loan growth to really come from and should be kind of expect that slower SPL.
Man to persist near term.
Yes, we actually do provide a line by line to end of period.
In the supplement so it's kind of buried in there I know, we provide a lot of materials, but there is some more detail there, but you are right.
SPL balances declined sequentially and that was due to frankly, a lot of repayments as the interest rates went up dramatically.
Over the last three to six months on those.
Those lines.
So.
Residential mortgages went up but a lot of that was due to mortgages that were in process. Even before the quarter is as you know mortgages take a while to go through the underwriting and closing process. So.
As we said earlier, we don't know really what the dynamic is going to look like going forward, it's going to be based on client demand, we do expect until the rates settle out.
And clients get used to whatever the new norm is we do expect headwinds for growth across all loan categories, both floating and fixed really because of fixed coupons are up as well, although we don't do much in the way of fixed but certainly mortgages as a category that borrowers are still getting used to.
Five 5% to six 5% across the industry. When it was just three to three 5% a year and a half ago. So it is a pretty dramatic change in a pretty short period of time.
Understood. Thank you.
And the next.
Question comes from the line of Brennan Hawken with UBS. Please proceed with your question.
Good afternoon. Thank you for taking my questions.
I know you've touched on this a couple of times, but I.
I'm still a little confused and so I'd love to ask a follow up.
Paul Sorry, Paul Shoukri, you Hum you speak about the liquidity in the balance sheet often and.
We can certainly see liquidity on the asset side, and so I guess I'm not I'm not 100% clear as to why what the impulse is to raise higher cost funding.
This enhanced yield program.
When you could simply allow for some of the assets to run off, especially the stuff that's easily replaceable like securities.
So could you maybe clarify that for me and then.
Also we've seen some competitors launched similar products in the last few quarters and that has led to a pretty strong mix shift in favor of the higher cost funding do you have any estimates or.
Any.
Rough idea about how much mix shift of that type youll see it in your own deposit base.
Yes, so to your point Brendan we are.
Kind of continuing to let the securities portfolio run off a lot of that growth over the last two years is really accommodate in client cash balances on the balance sheet and so we really built that up well beyond our liquidity targets at Raymond James Bank.
<unk>.
The answer is really kind of all of the above when it comes to funding. We're doing that we're also as Paul said.
Making sure that we.
We're prepared on many other fronts when it comes to funding.
The enhanced yield savings, we're starting with a relatively small amount relative to our overall funding needs, but the point that Paul was bringing up is that we just want to make sure that we have all of these sources turned on and make sure that they are working so we.
I understand what the ability capabilities or the demand is et cetera, we learned from it and then to the extent that we need to drive more balances through various levers and we have the ability to do that but it's hard to do that if you don't have it even turned on.
I don't know of other institutions that don't have.
Cds enhanced 12.
Been a great aggressively raising money.
Because of our floating rate balance sheet and our.
Unusually high liquidity in both on our balance sheet on client cash we haven't had to.
That's been part of what's driven a lot of the earnings so.
But we could assume that we'll have enough in the last forever or we can start the programs in case, they continue to run off more than the industry expects. The most Dolby will still be well funded so the reason we're starting it is just in case.
If we need more we'll accelerate it so if it wouldn't be prudent to wait until all of a sudden we really need it and we don't have any of the programs in place. Most there is many other firms that have needed it and have been very aggressive because they didn't have that flexibility and we've had the flexibility, but we're certainly going to as we always we look to the long term and.
We're going to have it in place and ready to go and.
The only way you know you have it in places when you're executing it and actually collecting deposits and everything is working well and then you dial it up or you dial it back if you need it.
And the only thing the only other thing I would add is just so much concern around mix shift.
Understandably, so, but it's not like the cash isn't moving we have the best purchase money market fund platform in the industry as far as I can tell.
Institutional share classes offered to.
Any size client and so it's not like the cash is moving to other higher yielding destinations as it should and financial advisors help their clients with those type of decisions. So to the extent that we can offer an attractive product on balance sheet that meets client meet clients' needs. Some are still concerned about money market.
Funds frankly, because they didnt performed very well in the last couple of cycles. So we have to offer an FDIC insured product.
Which keeps the funding on the balance sheet and actually arent as a better spread than if it goes into some of those other products could be a win win so that's kind of how we're looking at it as well.
Yeah sure sure.
Totally get you on the substitutes being being broadly available in any.
Any sense of your expectations for a magnitude of how big this program could be.
No because it really frankly depends on the levers that we pull right.
Have levers around.
The rate we offer the size of account that we limited to the size of the deposit et cetera. So.
As Paul said most of our competitors have already come out with it had to be aggressive because in the last couple of years. They deployed almost all of their deposits to fund balance sheet growth. We always said and we took a lot of criticism for it a year or so ago.
We wanted to keep that cash very flexible.
And so we don't have the same acute pressures on funding that they've had over the past six months and so we're able to be more deliberate and sort of figuring out the right balance for clients and for the firm.
And the final question comes from the line of Steven Chu back with Wolfe Research. Please proceed with your question.
Hi, Thank you so much for squeezing me in here I just had one final question on the capital market and more specifically the profitability or I guess lack thereof in the quarter I recognized one quarter does not a trend make.
We did incur the pre tax loss in this segment.
I wanted to better understand.
And then the lack of complex that we saw within the segment itself.
Thinking about managing expenses and comp if we if we remain in a challenging investment banking backdrop.
The question, we're getting quite a lot because the pre tax margin was strong for the firm the comp ratio.
So well manage for the firm overall and at the same time, you didn't get the positive comp leverage this quarter and much of that was obscured by cat market. So any insights you can provide there would be really helpful.
Yes, so I mean, the capital markets have been difficult for everyone.
The.
Part of there is a couple of factors one it didn't have a good quarter, but secondly, compared to a lot of other firms. We don't have any unallocated overheads. So.
There are other firms that certainly had lower results, but every penny of overhead is allocated to our segments. So you see a fully loaded P&L and it's not the case in a lot of other firms who if they had might have a little bit of a different answer closer answer.
It was an off quarter due to first both M&A and.
We all know what's happening that slowdown in underwriting and the fixed income business again, we've talked about the cash dynamic at third party banks. So it was challenging so we will do what we always do first we have a very variable.
Comp structure that our bonuses are basis, although we raised them are still lower than a lot of places.
And we as we did two years ago, right, where you took a big pay cuts you could see him even through the executive suite year before this year.
So we have a variable comp structure they'll take care of that and then we'll have to just look at.
The business.
Make whatever adjustments and those businesses, we have to the good news is corporately were actually.
We've been very conservative, although we've hired a lot of people we have a lot of open positions and we're just being less aggressive hiring and making sure. We keep the people we need through these cycles. So we don't go in like the tech companies way overloaded and.
And I think that in capital markets Theyre, just going to have to look at what businesses are there and what support they need to make those decisions.
But certainly we don't plan any.
Sizable layoff programs that you've read in.
Another firms.
That's it for me. Thanks, so much for taking my question.
Thank you.
Further questions.
Well. Thank you very much thanks for joining us and again just overall I don't think too. Many people are showing record net income to shareholders this quarter, but.
I think it's a testament to the model and.
But theres a lot of uncertainty going forward, we all know it we all knew the questions you're asking.
We're committed on the capital repurchases. So the only contingency if something comes up that we think can drive more shareholder value and.
On the cash and cash sorting good questions. We could run models and give you answers based on them, but our experience is they all vary from that so we're just.
We're going to <unk>.
Raise as much cash as we need to support the business and not raise it if we don't need it.
So far that's served us well so I appreciate you joining the call and talk soon.
That does conclude today's conference. We thank you for your participation and ask that you. Please disconnect your line.
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