Q2 2023 Raymond James Financial Inc Earnings Call
Good afternoon, and welcome to Raymond James Financial's second 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 Kristy wall 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, Chairman, and Chief Executive Officer, and Paul Shoukri, Chief Financial Officer. The presentation being reviewed today is available on Raymond James' Investor Relations website.
Knowing 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 in <unk>.
And if it's of our acquisitions and our level of success integrating acquired businesses.
Stitcher is anticipated results of litigation and regulatory developments or economic conditions and.
In addition words such as May will could anticipates expects believes or continue or negative of such terms 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 these 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'll turn the.
All over to chair and CEO , Paul Reilly Paul.
Good afternoon, and thank you for joining us today.
Paul and I are joining you from Orlando, Florida, we have over 4000 people attending our independent Advisors conference, it's great to see such an upbeat mood and people really having a good time getting back together as well as all the other educational sessions, we have here.
Since our founding over 60 years ago, Raymond James has maintained an unwavering commitment to placing clients first through conservative decision, making that keeps us well positioned over the long term.
While remaining focused on the long term has not always been easy for fully appreciated in good times.
It has served us very well over time.
And its in times such as these when even the financial system itself is challenged.
Philosophy, not only carries us through.
Enables us to thrive.
Just a few examples of our differentiated positioning that we have benefited recently from includes tier one leverage capital ratio of 11, 5% over two times, the regulatory requirement to be well capitalized.
The 8% of our bank deposits are FDIC insured, including nearly 95% of Raymond James Bank amongst the highest in the entire industry.
And a level ratings with all three credit agencies, which Fitch reaffirmed in March at the height of the turmoil.
A few weeks later, we were able to renew and upsize, our five year committed revolver with enhanced terms. Thanks to the fantastic relationship we have with all of our bank partners.
Further we were able to buy back 350 million of shares at what we believe were attractive prices and we still have $1 1 billion of capacity remaining.
Under our board authorization.
In times like these we are reminded of the importance of keeping a long term client focused approach and our stakeholders benefit and appreciate the firm's dedication to placing them first now turning to our results. Despite the challenging market in the high market volatility during the first six months.
The fiscal year, we generated record net revenues and record earnings.
Reviewing second quarter results starting on slide four the firm reported record quarterly net revenues of $2.9 billion.
Net income available to common shareholders of $425 million or $1 93 per diluted share.
<unk> expenses related to acquisitions adjusted net income available to common shareholders was $446 million or $2.03 per diluted share.
The increase in interest related revenues driven by short term interest rates drove significant earnings growth over the prior year.
And despite the challenging market conditions, and our robust capital position.
We generated strong returns with annualized return on common equity of 73% and annualized adjusted return on tangible common equity of 22, 3%.
Moving to slide five we ended the quarter with total client assets under administration of 1.2 trillion dollars.
TCG assets in fee based accounts of $666 billion and financial assets under management of $194 billion.
With our continued focus on retaining supporting in attracting high quality financial advisers.
<unk> consistently generate strong organic growth, which is evident again this quarter with domestic net new assets of $21 $5 billion, representing an eight 4% annualized growth rate on the beginning of the period domestic PC G assets.
During the prior 12 months, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $275 million of trailing 12 production and nearly 38 billion of client assets at their previous firms total clients domestic.
Weak and enhanced savings program balances ended the quarter at $52 $2 billion down 14% from December of 2022.
The sequential decline reflects the expected cash sorting activity, which was partially offset by the launch of our enhanced savings program.
We are pleased with the early success of our enhanced savings program. This product offered the TCG clients. The Raymond James Bank is a fantastic option for clients seeking competitive rates, while maintaining a high level of FDIC insurance.
We believe this product is really unique in the industry and certainly appealing in the current environment.
As of this week enhanced savings program balances have surpassed $4 $5 billion.
Total bank loans decreased to 1% from the preceding quarter to $44 billion, primarily reflecting a modest decline in securities based loans due to higher interest rate environment.
We will touch on this more later on the call, but we plan to remain very prudent with growing our corporate loans over the next several months given volatile market conditions moving to slide six.
That client group generated record results with quarterly net revenues of 2.14 billion and pre tax income of $441 million year over year.
Asset based revenues declined due to market declines. However, tcg's results were lifted by the benefit of higher interest rates on interest related revenues and fees.
As Paul Sugar will explain in more detail this quarter was negatively impacted by some seasonal expenses as well as elevated legal cost.
Revenues declined 27% compared to the prior year quarter, mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues.
The extremely challenging market environment, particularly for investment banking has strained the near term profitability of this segment.
However, we are focused on managing controllable expenses as near term revenues are depressed.
The asset management segment generated pretax income of $82 million on net revenues of $216 million.
The year over year decreases in net revenue and pretax income were largely attributable to lower assets and fee based accounts.
Net inflows into fee based accounts and to the private client group were offset by market declines.
Solid net inflows for Raymond James Investment management helped boost financial assets under management, which should provide a tailwind in the fiscal third quarter.
The bank segment generated record net revenues of $540 million and pre tax income of $91 million.
Revenue growth was largely due to the continued expansion of the banks net interest margin to 363% for the quarter up 162 basis points over the year ago quarter, and 27 basis points from the preceding quarter.
The NIM expansion reflected the flexible and floating nature of our balance sheet, although as Paul Choucroute will explain we do expect some headwinds to know.
Which reached very high levels across the industry over the past couple of months.
Looking at the fiscal year to date results on slide seven we generated record net revenues of $5 $66 billion and record net income available to common shareholders of $932 million up 4% and 21% respectively over the prior years.
Our records.
Additionally, we generated strong annualized return on common equity of 19, 3% and annualized adjusted return on tangible common equity of 24, 2% for the six month period.
On slide eight the strength of the <unk> segment for the first half of the year, primarily reflects the strong organic growth and TCG and the benefit of higher interest related revenues.
Whereas the weaker capital markets results reflected the challenging environment for investment banking and brokerage revenues, especially when compared to the record activity levels in the year ago period.
And now I'm going to turn the call over to Paul <unk> for a more detailed review of the second quarter financials Paul.
Thank you Paul.
Starting on slide 10 Consol.
Consolidated net revenues were a record $2 $87 billion in the second quarter up 7% over the prior year and 3% sequentially being.
Being able to generate record quarterly revenues during a period when capital market revenues were so challenged across the industry reinforces the value of having diversified and complementary businesses.
Asset management and related administrative fees declined 11% compared to the prior year quarter, an increase of 5% sequentially due to the higher assets and fee based accounts at the end of the preceding quarter, partially offset by fewer billable days in the fiscal second quarter. This.
Quarter fee based assets grew 5%, providing a tailwind for asset management and related administrative fees in the fiscal third quarter.
Brokerage revenues of $496 million declined 12% year over year and grew 2% sequentially.
This year over year decline was largely due to lower asset based trail revenues in PCB as well as lower fixed income brokerage revenues in the capital markets segment.
I'll discuss account and service fees and net interest income shortly.
Investment banking revenues of $154 million declined 34% year over year and grew 9% sequentially.
As experienced across the industry M&A revenues were particularly challenged this quarter declining 37% year over year and 15% sequentially.
Despite a healthy banking pipeline and solid new business activity, there remains a lot of uncertainty and the pace and timing of deals launching in closing.
The heightened market volatility.
It remains too difficult to say when conditions will become conducive to increase investment banking revenues.
Moving to slide 11.
<unk> domestic cash sweep and enhanced savings program balances ended the quarter at $52 2 billion down.
Down, 14% compared to the preceding quarter and representing four 9% of domestic <unk> client assets.
The enhanced savings program added approximately $2 7 billion in new deposits in March as the offering was only opened two net new balances until April .
And a good portion of these new balances were derived from brand new clients to the firm following the Silicon Valley Bank collapse highlight.
Highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.
Paul said enhanced savings program balances exceeded $4 $5 billion. This week continuing to grow nicely and partially offsetting the anticipated decline in sweep balances largely due to the quarterly fee billings in April .
And while it's difficult to parse through the disclosures to make sure we're comparing apples to apples.
A handful of peers, who have reported thus far we estimate year over year cash sweep declines for those peers were approximately 35% to 45%.
This compares to a 35% year over year decline in our domestic sweet balances through March.
So this dynamic of declining sweep balances has really been experienced at roughly the same order of magnitude for most of the firms in our industry.
And as most of you know we have been expecting communicating and preparing for the sorting activity for quite some time.
Looking forward, we expect additional cash sorting activity. Although we believe we are much closer to the end of that dynamic than we are to the beginning if rates settle out near current levels.
As the average sweep balance per account over the approximately $3 4 million accounts domestically is now less than $15000.
And we hope to continue to offset any further cash sorting activity through our diversified funding sources, including the enhanced savings program.
This state deposit franchise and other initiatives.
And when the sorting dynamic does stabilize.
We then expect to grow sweep balances given our strong organic growth and P. C G.
Meanwhile to be prudent we want to strive to maintain a strong funding cushion of domestic cash swept to third party banks not too much lower than where it ended the march quarter.
We would also plan to keep elevated cash balances in the bank segment, which grew from $1 $8 billion in December to $5 billion at the end of the fiscal second quarter.
While these actions don't optimize net interest margin over the short term, we believe they give us the most flexibility over the long term.
Turning to slide 12.
By net interest income and RJ <unk> fees from third party bank was $731 million up 226% over the prior year quarter and 1% over the preceding quarter.
As a sequential decrease and RJ PDP fees from third party banks was more than offset by higher firm wide net interest income.
The bank segments net interest margin increased 27 basis points sequentially to 363% for the quarter.
And the average yield on RJ PDP balances with third party banks increased 53 basis points to 325%.
Our longstanding approach of maintaining a high concentration of floating rate assets not only helped drive more immediate upside to higher short term interest rates, but also preserve a relatively flexible balance sheet compared to the banks that had much higher concentration of duration risk.
Looking forward, we expect combined net interest income and RJ PDP fees from third party banks to decline sequentially in the fiscal third quarter.
Due to a decrease in third party, our JBT P fees, given the lower average balances with third party banks.
We would also expect the bank segments NIM to contract from the second quarter, given the higher level of cash balances. We plan to maintain during this volatile period as well as the impact from higher cost diversified funding sources.
But as we have always said instead of focusing on maximizing NIM.
We are focused on preserving flexibility and growing net interest income over the long term.
Which we still believe we are well positioned to do after the cash sorting dynamic is behind us.
But near term, we expect headwinds for the net interest income and our JBT P fees for the reasons I just explained.
Moving to consolidated expenses on slide 13.
Compensation expense was $1 8 billion and the total compensation ratio for the quarter was 63, 3%.
The adjusted compensation ratio was 62, 8% during the quarter.
The compensation ratio continues to benefit from higher net interest income and our JBT P fees from third party banks.
The sequential increase in compensation reflects higher revenues as well as the impact of salary increases effective on January one.
Along with the reset of payroll taxes at the beginning of the calendar year.
We are very pleased to generate a 62, 8% adjusted compensation ratio given these factors.
And the extremely challenging market environment for capital markets.
Non compensation expenses of $496 million increased 25% sequentially.
Adjusting for acquisition related non compensation expenses and the favorable settlement received in the fiscal first quarter, which are all included in our non-GAAP , earning adjustment non compensation expenses grew 16% during the quarter.
This increase was largely driven by higher legal and regulatory costs.
Including an unfavorable arbitration award totaling $20 million.
Along with higher communication and information processing expenses, which reflect continued technology investments and the seasonal impact of year end mailings.
The bank loan provision for credit losses for the quarter of $28 million largely reflects the charge off of a C&I loan that has been challenged for several quarters as well as higher allowances in the CRE portfolio.
I'll discuss more related to the credit quality in the bank segment shortly.
In summary, we remain focused on managing expenses, while continuing to invest in growth and ensuring high service levels for advisors and their clients.
While there has been some noise with elevated legal and regulatory expenses this quarter and there are always some seasonal expenses that hit in the first calendar quarter of the year, none of the non compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year.
But legal and regulatory expenses are inherently difficult to predict.
Slide 14 shows the pretax margin trend over the past five quarters and.
In the current quarter, we generated a pretax margin of 19, 4% in.
And adjusted pre tax margin of 24%.
A strong result, given the industry wide challenges impacting capital markets.
On slide 15 at quarter end total assets were <unk> $79 billion.
A 3% sequential increase largely reflecting the $3 $2 billion increase of cash balances in the bank segment during the quarter.
Liquidity and capital remain very strong.
RG out of corporate cash at the parent ended the quarter at $1 8 billion.
Well above our $1 $2 billion target.
The tier one leverage ratio of 11, 5% and total capital ratio of 21, 4% are both more than doubled the regulatory requirements to be well capitalized.
The 11, 5% tier one leverage ratio reflects over $1 billion of excess capital above our conservative, 10% target, which would still be two times, the regulatory requirement to be well capitalized.
Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
We were pleased to have our a minus credit rating reaffirmed by Fitch in mid March and the announcement Fitch cited the firm's strong capital cushion significant deposit funding and access to unsecured debt markets. Among other drivers as a reason for the rating.
Also in April we renewed our revolving credit facility and expanded it from $500 million to $750 million.
Our strong balance sheet and long standing relationships with our banking partners enabled us to upsize the five year committed corporate revolver with enhanced terms to further strengthen our contingent liquidity sources.
The ability to execute this facility in a challenging market environment is a testament to our long term conservative approach.
I know many of our bankers are listening on this call. So I'd like to thank all of you for your continued support and partnership.
We also have other significant sources of contingent funding for.
For example, just to be proactive given the market uncertainty in March we increased our <unk> borrowings in the bank segment by only $500 million from December 31 to March 31.
And given our strong cash position, we have already paid $200 million of that down in April .
That leaves us more than $9 billion.
<unk> capacity in the bank segment.
Slide 16 provides a summary of our capital actions over the past five quarters.
During the fiscal second quarter, the firm repurchased $3 75 million shares of common stock for $350 million.
At an average price of $93 per share.
As of April 26, approximately $1 $1 billion remained available under the board approved common stock repurchase authorization and.
And we currently intend on continuing our planned repurchases as we discussed previously.
Particularly as this market volatility has provided attractive opportunities for us and we don't plan on using as much capital to support balance sheet growth over the next three to six months.
Lastly on slide 17, we provide key credit metrics for the Bank segment, which includes Raymond James Bank in Tristate Capital Bank.
The credit quality loan portfolio remains healthy.
Criticized loans as a percentage of total loans held for investment ended the quarter at just zero point, 92%.
The bank loan allowance for credit losses, as a percentage of total loans held for investment ended the quarter at zero point, 94%.
The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 167% at quarter end.
We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation and supply chain constraints higher interest rates and a potential recession on our corporate loan portfolio.
I know there's been a lot of attention on commercial real estate across the industry given the challenges with property value and interest rates. So let me briefly cover our portfolio.
Across the bank segment, we have a CRE and REIT loans, approximately $8 8 billion.
Which represents 20% of our total loans.
Our office portfolio is only 17% of these real estate loans.
So our office portfolio only represents approximately three 5% of the bank segments total loans.
And based on the underwriting at origination along with the most recent appraisals the average loan to value of this office portfolio to somewhere around 60%.
Which is probably a little bit higher now given pressure on valuations in the industry, but still providing us a lot of cushion on this portfolio on average.
Overall, we have deliberately limited exposure to office real estate and we underwrote office loans with what we believe were conservative criteria, but we continue to monitor each loan closely given the industry wide challenges.
Now I'll turn the call back over to Paul Reilly to discuss our outlook.
Paul.
Thank you Paul.
And as I said at the start of the call I am pleased with our results for the first six months of fiscal 2023 at our ability to generate record earnings during what continues to be a very volatile market.
And while there is still a lot of near term economic uncertainty we are in a position of strength and I believe we are 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 5% sequential increase of assets in fee based accounts.
However, we do expect to have some headwinds from lower RJ PDP fees from third party banks, given lower average balances.
Focusing more on the long term I'm optimistic we will continue delivering industry, leading growth as current and prospective advisers are attracted to our client focused values and our leading technology and product solutions. For example, in our current advisor recruiting pipeline.
Have several commitments from teams with $5 million to $20 million of annual production.
And the capital market segment, while M&A pipelines remain healthy and engagement levels are good the pace and timing of launching on closing transactions will be challenged until market conditions stabilize.
And in the fixed income space. The depository clients are experiencing declining deposit balances and have less of cash available for investing in securities putting pressure on our brokerage activity.
However, some ridge enhances our position as this business typically benefits from elevated rate volatility and has produced excellent results since joining us.
While we expect continued industry wide challenges over the next couple of quarters.
Over the long term, we are well positioned across the capital markets business for growth given the investments we made over the past five years, which have significantly increased our productive capacity and market share.
We will continue to prudently manage expenses in these businesses as the near term revenues continue to come under pressure.
Obviously, we will take more significant actions if the industry headwinds proved to be more long term.
And the asset management segment financial assets under management are starting the fiscal third quarter up 5% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the fiscal third quarter.
We remain confident that 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 solid net inflows this quarter to help drive further growth through increased scale distribution.
Operational and marketing synergies and in the bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding sources.
While we will continue to support our <unk> clients when their demand for loans eventually recover we will be very prudent in growing corporate loans given market uncertainty.
We believe there will be a more attractive opportunities in the future if spreads widen to reflect the higher cost of funding and our higher premium required for credit risk across the entire banking industry.
And just as we did during uncertain market environments in the past.
We have been and will continue to be opportunistic in selling certain loans to further derisk the corporate portfolio, especially when we believe the secondary market prices do not fully reflect the downside risks.
So overall our approach in the bank segment over the next three to six months is to build as much dry powder as possible for what we believe will be a more attractive and opportunistic environment for loan growth in fiscal 2024.
In closing.
We believe we are well positioned with strong prospects for future growth and ample cash and liquidity.
Uncertain times like these are when clients need trusted advisors, the most and I want to thank our advisers and their associates for their continued perseverance and dedication to providing excellent service to their clients each and every day.
The strength and stability of our firm is a direct reflection of your commitment. So thank you all for all you do.
And with that operator that concludes my remarks, and we'll open up the line for questions.
Yeah.
Thank you Andy.
And if you would like to register for a question. That's the one followed by the four on your telephone keypad right now.
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The first question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.
Great. Good afternoon, Paul at all how are you.
Good Devin Hey, Devin.
I hopped on a minute late but.
Question, just on the net interest income outlook.
I'll make sure I understood the commentary.
So is the expectation that it's going to take a near term step back and then can grow off of whatever that new bases or Paul you're saying that you'll kind of resumed growth off of the fiscal second quarter level, and then I guess in a related I heard that you're going to operate I think with higher reserves. So just how much of a drag is that.
I guess, what would make you comfortable bringing that down.
Well at the other Paul go through the NIM, but I don't think we anticipate right now higher reserves.
We've been reserve cash may be we'll be carrying a little more cash.
Reserve, you're referring to.
I was referring to the cash reserves to cash.
They are liquid and Theres more cash back go ahead Paul.
Yes so.
Yes, we did increase the cash balances at the bank just given the volatility in March we thought it would be prudent. So we finished the quarter up I think $5 billion. So we were up $4 billion for the quarter ending the quarter at $5 billion of cash at the bank segment and so that is a drag on NIM, because youre, earning closer to.
5% on that versus the seven or so percent, we're earning on.
New loans that we're putting on the book, but we think thats prudent just given the volatility.
And in terms of the <unk>.
Outlook going forward near term, we do expect a pullback.
Net interest income.
And PDP fees when you when you look at those on a combined basis.
We plan on keeping the cash swept to third party banks at around the current level.
Because we think that $9 billion gives us a nice cushion. It also offers clients maximum FDIC insurance, which we all know is really important for clients right now.
And so by doing that even at $9 billion. Those fees are probably going to be down average balances will be down 25% sequentially and so those fees will be down too.
25%.
Great.
Roughly depending on what happens with rates and other things and then the net interest income.
We will be pressured by having higher cash balances and then.
Higher cost of funding that we raised since launching the enhanced savings program in March so all.
Net together I think that would result in probably somewhere around a 10% decline sequentially and then as we start growing balances from there then that would be probably a good jumping off point.
Got it okay, great color I guess, maybe just I don't want to follow up on the same topic and Paul you just mentioned the savings program it looks like you're having some nice success there.
You mean that its still.
Reasonably early in terms of the advisory penetration so.
Just love to maybe talk about.
Kind of the expectation for growth, there and maybe what could advisors be.
More active moving their customers cash.
They're in the near term just given that it's new and so that they could.
Your pressure.
Yes.
I guess the rate on the liability side or.
Do you have data, that's just suggesting that the majority of the yield seeking cash has already been.
Moved out of the accounts.
Yes, I would tell you.
When we look at sort of the trends it looks like a lot of sorting activity the higher yield seeking activity has occurred.
When we rolled out enhanced savings program in March it was actually to new money to the firm.
Until we expanded it in April to certain security sales of new money to the bank.
But we raised $2 $7 billion of brand new flows to the firm.
The month of March and most of it was mid March drove the banking turmoil. So we were pleased to see that those cash balances come in.
But even then we're close to $5 billion today these balances.
That represents roughly 10% of the sweep and enhanced yield savings balances, whereas most of our peers are at 50% of their balances being an enhanced yield savings. So.
Our relative cost of funds when you look at those two balances together is still very attractive even though we've been able to be more generous to clients on the sweep balances in terms of passing on rates via the sweeps as well. So we feel like we're well positioned and right now what we're really hoping to do is a lot of clients hold money market fund positions.
Preferred to have FDIC insurance and so a lot of those balances now are moving to the enhanced yield savings, which we think is really a win win for the clients and the firm.
Yeah got it okay. All very helpful. I will hop back in the queue, let others ask thanks, so much.
And the next question comes from the line of Kyle Voigt with E. B W. Please proceed with your question.
Hi, good evening.
Maybe just a first question on the leverage ratio, obviously sitting at 11, 5%.
Just curious whether you still feel that 10% target to a good level to think about as a near term target, especially with the macro environment and kind of the uncertainty.
We're facing with the macro right now.
Yes.
That's a hard one to peg with.
Despite happening today in the press even.
We're going to be more cautious until the industry sorting down in.
We see kind of a level field, we think that the 10% is a good target, but in the short term, we're probably not going to be over aggressive to it.
Especially if we're not growing the bank aggressively we don't.
Thanks.
The smart move right now we will continue to look at SPL balances in mortgage our client balances fund those folks are the priority.
We're not sure it's a good time to get into the <unk>.
Creasing, the corporate side of the lending right now just because of the market so shorter term.
I think the capital ratio is going to be over the 10%, but we're not going to change the goal, but during the volatility like we've seen with today's news and other things, we're going to be cautious to we're pretty comfortable the market settled down.
The only thing I would add to that as you know a lot of other banks have to worry about the impact of unrealized losses on their securities portfolio, and we have some of those as well obviously, but.
I think we would be north of 10%, even if we factored in all of those losses, because we kept duration relatively contained on our balance sheet. So we're in a position of strength. When you. When you look at our capital ratios and feel like we have a lot of flexibility.
Great and then just maybe a follow up question to that.
With your stock price, where it's at today obviously.
The first quarter calendar first quarter you were up.
The buyback a bit here.
Just wondering if you can kind of compare.
Valuation of your stock to maybe any opportunities that you're seeing in the M&A market and if you could expand upon some of those opportunities that youre seeing and what segments, you're seeing more opportunity in light of everything that's happened in the banking space as well that would be helpful.
Yes.
We've done a really good job of staying close to the people.
We would like to join the firm.
And those opportunities are clearly up.
And that includes the M&A in the private client space.
Again, whether they get transacted <unk> because of price or other issues or some some are more complex than others, but those conversations that kind of went away some have come back.
But.
Adjustments for the buyer and the seller are always in mind, an expectation with the market. We as we've said in here don't expect a near term increase in our.
Return and Thats, not our view not going to happen until.
We see interest rates settle when people get used to it so but.
What do you think there will be M&A opportunity, we have both the capital and liquidity to handle that our balance sheet as you know it very leveraged and we have access so we're.
As most downturns, we've been able to take advantage of the market.
Our presumption as we would be able to but again.
It all depends on buyers and sellers and opportunities and other factors in the market.
Great. Thank you very much.
And the next question comes from the line of Alex <unk> with Goldman Sachs. Please proceed with your question.
Thanks, guys. Good afternoon. So can we start with your outlook for NII. If I heard you correctly I think you guys are guiding to down 10% firm wide NII can you help with some of the underlying assumptions.
In terms of NIM firm wide and maybe how are you thinking about the ultimate amount of cash that you need to run with on the balance sheet.
And obviously it.
It'd be helpful to know what youre, assuming for interest rates for the second quarter underpinning that 10% decline.
Yes, the 10% decline Alex includes the PDP piece as well so it's kind of a combined basis as we show it in the power in the presentation.
And.
Yes.
Factors than the 25 basis point increase at the market is expecting in May.
So.
In terms of the cash so we plan on holding on the bank's balance sheet, we plan on holding more than we need for during these volatile times.
More then we hopefully need during these volatile times just to stay proof.
Prudent and as Paul said, we're being deliberate and growing corporate loans and were being actually opportunistic in selling corporate loans, so not much balance sheet growth forecasted.
And over the next at.
At least during this period of volatility and in some cases for example, we've already sold over $400 million of corporate loans that we had rated lower from a credit perspective, and we're able to get near par value for those loans, we had marks on them that were <unk>.
Higher than.
And then what the price we were able to get so.
We don't believe that the market's fully factoring in potentially the downside risk on certain loans and so just as we've done in other volatile periods, where sort of being opportunistic knowing that we're just building dry powder, both capital and hopefully funding dry powder to accelerate growth when the opportunities look more attractive.
Got you Okay. Yeah, combined combined makes a lot more sense alright, I appreciate that.
My second question was around non comp expenses and I. Appreciate that you guys think this is close to what you were budgeting for it but if we look at non comp ex provisions and backing out the $20 million of the arbitration fee. It looks like it was up almost $30 million sequentially. So maybe help us reconcile what's driving the growth.
And just given your outlook for effectively peak rates revenues in the challenging capital markets backdrop. When should we expect you guys to become a little bit more aggressive on our cost savings initiatives.
Yes. The first two quarters are always a little bit lumpy in terms of the non compensation expenses. So if you look at it kind of on a combined basis backing out the acquisition related cost and backing out to note the loan loss provision, which is how we made the guidance.
It's around I think $830 million for the first six months of the year, which actually trends lower than the $1 $7 billion guidance I provided for the non comp expenses excluding provision.
So we still we're not changing that guidance.
For the time being because none of the other than legal and regulatory which is inherently unpredictable.
We had a $20 million Arbitration award, which we were not expecting obviously this quarter.
We are most of the other line items are kind of coming in in line with what we forecasted when we provided that guidance, but of course things change between now and the the next six months of the fiscal year. Then we certainly will update that and let you all know.
I think that comparison was.
Looks bigger because of the $30 million last year.
Last quarter.
Recovery that we non-GAAP too but.
We think they are in line.
And yes legal fees certainly were higher that settlement was higher.
But that's really driving and thats kind of lumpy. We think we think the run rate and our guidance is still in the ballpark for what we can see.
Now with that being said, while it's coming in line with what we expected were also.
Given the market environment going to be very deliberate in managing all of those expenses, while still investing in growth and high service levels.
Got it.
Yep.
Okay.
And the next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.
Great. Thank you very much appreciate you taking the question. This evening, maybe stepping back and perhaps it's just too soon to tell as you think about some of the structural changes that may evolve for the banking industry on the side on the other side of the banking collapse and maybe early stage conversation with the regulators how do you see the evolution.
For regulatory capital or leverage ratios does that affect your timpson bogey and then maybe how you think about long term growth in earning assets and the.
NIM associated with that.
Well first on capital I think you are at a 10%, we're well set over what anyone as you know.
Our competitors and other things where.
We think thats still a very conservative target can't see any regulation that would make anything even close to that so we'd still have buffer there. So we're not worried about capital.
Like everything given the environment, we've been focused on liquidity, that's why we rolled out the enhanced savings program.
We're very heartened.
Even after the.
For the quarter.
We paid our $1 2 billion.
Asset management fees come out of there we have tax payments that usually go over $1 billion. Our cash balances are still study. So on the liquidity side. The question is just how much do we have to raise in the higher yielding programs, but we feel good about our liquidity and not even touching our really our <unk> advances or.
That $9 billion buffer. So third then becomes is when do you start investing in the in that order.
When do you start investing in the growth in assets and in the bank.
That we're just going to have to decide we're not going to be really aggressive.
Where we see opportunities, we'll take them if we see M&A opportunities we think are good.
We will act on them.
And we just don't think given the back banking market rising rate.
And these people are predicting and then <unk>.
Recessionary environment, it's the time to be very aggressive in growing corporate loans. So.
I would say, we're our growth plans are not really to expand the balance sheet much of this next quarter.
I think you asked a question about the future NIM prospects for the industry and I think the banking industry is pretty efficient. The good news is we already have a very conservative level of capital. So I think we're well as Paul said well positioned for those changes, but to the extent the capital rules do change or increase and.
Certainly that the cost of the average deposit in the industry as all the big banks were saying, even the largest banks are saying that's increasing as well then you would expect all else being equal for spreads to expand across the industry to preserve a reasonable NIM.
Britain reasonable return on equity for the industry.
So to the extent that we can be patient now and wait for more attractive opportunities at least a stable more stable environment, we think that will serve our shareholders well over the long term.
I think if you really look at the industry over the last few years.
Certainly deposits were extremely cheap and ray.
Theyre going upwards, but honestly spreads.
Werent really what you'd expected historically given the.
The types of loans folks were making so its natural in this kind of environment, where people are being careful in our cost of funds are higher but I think spreads are going to expand we believe that so.
We can't say when but we believe that will happen and that's why it will be a little more prudent.
This next quarter or two with the balance sheet as we watch what happens in the market.
We have shown also in the other times, whether we sold off COVID-19 loans or other things during those periods. We found we've shown we could expand the balance sheet pretty quickly. So we're not worried about that we're just worried about making sure we do it in the rate environment.
Understood just a quick follow up and just as a jumping off point there as you think about maybe Paul if you could just unpack.
I think I understand the difference between the sort of the bank versus the third party sweep impact, but maybe unpack, maybe where we are at a spot basis for the NIM and then as you think about this year how to think about maybe earning asset levels, because I hear a couple of different things to cautious.
Cautious loan growth, maybe some run off in our corporate loan portfolio from sales maybe some shrinkage on the investment Securities book, how to think about maybe framing where the end of year it might be in terms of here.
And associated with that.
Hard to know where we're going to be a lot can change as we've learned in the last month or two a lot can change certainly in the next six months and we're going to as Paul said, we're going to be there for our clients in the private client group business half of our loans or securities based loans and mortgages and to the extent demand picks back up over the next six months now they've been pressured.
And the higher in a rising rate environment, but.
Demand could come back of clients get used to the new normal in terms of rates and we want to be there to support them.
As Paul said, we'll also be more conservative and sort of growing.
Corporate loans at least until we have better conviction around the risk adjusted returns and growing that book.
So but in terms of the jumping off NIM and I would expect just with the higher cash balances and the.
The higher cost of funding, which again.
Our patients has served us well with the higher cost of funding as well because again like I said, we only have 10% of our sweep and enhance yield savings balances and the enhanced yield savings program. Many of our competitors are at 40 or 50%. So we have a lot of.
Our ability to grow those balances, but as we grow those balances it would it would pressure NIM. So.
We think theres, probably 20 basis points or so of pressure in the upcoming quarter, maybe up to 30 basis points again, depending on what happens with the rate increases.
Again, thats due to the higher funding sources and the elevated cash balances that we plan on holding on the balance sheet.
Thank you so much.
And the next question comes from the line of Menin Ghazaliyah with Morgan Stanley . Please proceed with your question.
Hi, good afternoon.
Hey monetary amount.
And can you take us through what happened with gas starting in March and maybe since then.
And I ask because you you noted in your press release last month that our cash balances as of March 24.
51 billion.
It looks like about $1 1 billion fill it out in the last week, if you exclude the <unk> savings.
Savings programs.
Maybe take us through what you were hearing some assays and God knows back then.
Yeah, you know what gives you the confidence that this will slow from here.
Yes, I would say just jumping to kind of.
Where we are today for example, so we ended the quarter with sweep balances enhanced saving program balances at $52 $2 billion, you fast forward to where we are today and we're right around $52 billion in sweep and enhanced saving program balances and that.
Reflects the fee billing that we do quarterly which was over $1 two and also annual income tax payments. So we.
We feel comfortable and confident that the sorting dynamic is closer to the end than it has been to the beginning as I said on the comments the average cash per account in the sweep program now right around $15000, which is sort of a low point as far as we look back in.
And have that data. So we're confident but things are closer to the end, but we don't know how much longer obviously that dynamic will continue. Meanwhile, will continue to be offer attractive products to our clients that give them good yields and give them good FDIC coverage too.
Keep deposit balances as strong as we can.
And I think you're absolutely FAA reaction. There has been look there job was to invest idle cash and they put it in money markets and they didn't leave the system. They put it in money markets and they put it in treasuries Cds.
Cds to get yields and they said just give us the yield we like the program. So once we rolled it out we've had money flowing in and so our job is to manage just how much of it we really need.
In the system, we have a very good product and we're just going to have to balance that give an operations, we feel very comfortable at our levels right now.
And with the reserves, we have on top that we really haven't touched so.
I think it's going to be just a process of managing how much of the higher cost funds you need giving the.
The movement in the market. So one other metric that I think is pertinent.
Topic is sort of the.
Sort of.
Deposits aggregate deposit beta since rates started rising and really you have to look at it both at the sweep program and also adding the enhanced saving program balances on a spot basis that aggregate deposit betas only been for us 25% to 30%.
And we've been which is lower than the competitors that we have seen so far again, they have much higher mix of the higher cost funding at this juncture.
And that's with us being able to be more generous to our clients than most of our competitors in the sweep program. So.
To the extent that we have to raise some incremental higher cost deposits.
25% to 30% aggregate deposit beta at this point is much lower than I think we all expected at this point in the cycle. So.
We have a lot of kind of capacity and bandwidth to add higher cost funding, while still generating attractive returns.
That's helpful.
And maybe as a related question then.
Can you talk about the puts and takes on the third party banks you add some yard because we think over the next few quarters.
After the fed stops hiking rates I'm.
I'm, assuming that deposit betas will continue to rise and be a drag but I guess at the same time the demand for these deposits will also likely be strong is there some offset from the 12 enough basis points or so of spread that you make on that portfolio.
There's no doubt I mean, there is huge demand for deposits in the system. So.
You have cash.
The banks are hungry for it.
So the question is what happens with rates and you would assume that that demand you might get the spread should increase right. So yes.
So if the fed stops raising it or you have a recessionary cash returning.
Out of the markets back into the regular sweep program to deposit programs you. Thank you.
Our prediction is you would get those spreads would increase but.
We're not there at this point today, so it's really hard looking forward right now.
If we want to look forward a year or so we feel a lot more comfortable that next quarter, just because we've been in the middle of since March of a very dynamic market.
So it sounds like it's a balance.
It could be flat body bank you should also be allowed to move that beyond the second quarter.
Yeah, well you have to look at the average the average balances will be down 25%, even if we keep them flat with where they ended the quarter, so but beyond that then.
It will just depend on where the about the balances will drive it more so than the spread that we earn from the third party banks I guess is the easiest way to describe it.
Yeah, Yeah got it got it and then just a quick clarification on the office portfolio, you mentioned, an LTV of 60%.
How much of that is based on new appraisals versus valuation at the time the loan was made.
It's a little bit of both both on the to the extent that we have new appraisals thats factored into it but I mean, I think you can assume as I said in the prepared remarks that valuations are probably lower now than even.
That new appraisal date, so but the point being is we still have a reasonable cushion and underwrote those properties conservatively, but we also expect there to be some challenges of the economy.
<unk> continues to soften, particularly for real estate and then that percentage to the extent you have REIT loans, where our even our experience always know nine was the diverse.
Diverse portfolios came through pretty well and then when you have a single property loans you are more idiosyncratic and so you just have to watch, but our our total mix of commercial offices.
Relatively low for any bank so.
Great I appreciate it thanks for taking my questions.
Next month.
And the next question comes from the line of Jim Mitchell with Seaport Global. Please proceed with your question.
Hey, good evening.
Hey, just maybe circling back on the <unk> savings program, maybe a clarification. Paul are you are you, saying in March you had restrictions that required net new money and now those restrictions are off and if that's the case how do you how do you dial that back if you want to is it just price or just want to make sure I understood what.
Youre, saying on the enhanced savings product.
Yeah, there are restrictions or where are we open it up for sales of certain securities for people that wanted to move from money markets back into cash.
The reason they are in the money markets was the spreads. So we've opened that up and we have two choices we can say.
We've given time limits, if we need more we can spend the time limits.
Or if we want us.
Cut it off we can cut it off or you can always do that with rate modifying the secrets one level. So.
We have all those options and were just watching the balances we're comfortable at these cash balances, we're actually comfortable lower.
Raymond James we always seem to be accused of having excess capital and excess balances.
So, we'll just dial it back or stop it or if.
If we open it up to other securities type that you really need it and then Theres treasuries Cds. There's other things that have stayed on the system seeking yield. So we have a lot of flexibility. It just depends how much we need.
Okay. So is this strategy from here.
If and when we start to see sweet balances stabilize and it sounds like at least the outflows are slowing a little bit in April we'll see if that continues but if that does stabilize do you sort of is this a level of deposits that.
Comfortable with you you would sort of stop or slow the enhanced savings if you could stabilize all in cash levels. At these current levels does this the defense spending level that you think about.
Yes, we think we're at a level even when we were at the end of the quarter. When we dropped below 50, we were fine but.
Well, we'll keep it until we have extra in this environment, we'd rather if more flows and we will keep it for a while you can always again lower rate and habits blowout.
Other yielding instruments, but.
Yes, we're not you're not trying to get it back into the seventies. That's for sure we had excess too much cash then but there is no place to put it.
But I think somewhere in the $50 level will try to.
We would start slowing it down.
Right.
Okay, great. Thanks for the clarification.
Yeah.
And the next question comes from the line of Brennan Hawken with UBS. Please proceed with your question.
Good afternoon, Thanks for taking my questions.
One just it sounded like from pulse <unk> comments on the comp ratio that.
You know unless we see some kind of substantial change in capital markets environment that the.
The comp ratio, probably this is probably a reasonable zone to think about until that and flex and number one is that right and then if we do see a recovery in.
Capital markets revenue, you know what kind of order of magnitude would you expect.
Feed through.
And pull down that comp ratio.
Yes, I mean, it's a mix.
It was complicated because its revenue mix matters. When you talk about our comp ratio. So we expect <unk> revenues to be up given the higher fees assets in fee based accounts.
But that has the higher compensation ratio associated with it than our <unk>.
NII does.
Obviously and so.
But again to the extent capital markets revenues rebounded to healthier levels, not even record levels, but that they were enjoying in the last couple of years, but just healthy levels, then that would be.
That would result, all else being equal and an improvement to the comp ratio. So again, it's just hard given the revenue mix I think 63% roughly for US historically has been very low.
And that's been helped by the.
The high levels of interest income in BD P fees that are not directly compatible to.
To the producers but.
You know I think the.
The revenue mix going forward will dictate.
What what the result will be I think anywhere close to 63 again, our guidance was 66% or lower just a year ago, a little bit more than a year ago.
And that would have been historically, a pretty attractive place to be.
I'm, not saying, that's where we're going to get to but if we can stay anywhere close to this range, we'd be pleased with that.
Got it.
Okay, Yeah that makes sense with the 10% decline.
And RJ PPP.
So one more.
On Kashagan and deposit dynamics I'm, sorry, it's Ben.
Real dead horse to beat here, but.
You gave the trends quarter to date in the enhanced program, which is really helpful. Could you also speak to overall trends in cash quarter to date and then.
If if what we're seeing in the enhanced program would be.
Selling out of the.
Purchase money fund into the deposit program.
Wouldn't then we see you moving in the direction of the peers you know Paul I think you commented a few times on how Youre at 10 and peers are at 50 does that mean youre going to converge to that level.
Or would you be pulling on some of those price and other levers that you referenced before to prevent that from happening. Thanks.
The number one thing.
The banking business.
I think maybe people forgot over the last decade liquidity and protecting stable deposits. So that's number one so that's it really depends on the deposit level and to the extent.
Given kind of a general target too on the deposit levels. You just you have to compete with the rate and.
To grow them.
Market conditions change and we don't know when that will happen. So yes, if the market keeps doing that my guesses ours will go up over 10 in theirs will go up over 50.
Good.
Posit III price and you read to price you are repricing more.
Going to be a trend for everybody it will be industry wide idiosyncratic.
For one institution for some reason.
They need a lot more it's going to go up higher so a lot of that is market dynamic I think the biggest thing people forget when we limited kind.
Kind of the money, we put into banks for many years at 50% and when Tri State joined we upped. It we have less leverage you know about 70% of our deposits go roughly to our banks, we are competitors at 90 and.
If you are up and it's not a criticism there, but if you are at 90, you got to be more aggressive for funding we have more of a buffer. So we'll just watch it and play it by year end.
Watch it closely and do what we have to do to make sure we maintain the liquidity and the outcome will be how much of higher cost deposits. We have to have but we're not we're not doing it just to raise costs were only going to do that if we need it.
And the only other thing all of that I'll add to that is we have over $40 billion of purchased money market funds are our clients have over $40 billion purchase money market funds on the platform.
So all the cash.
Really stayed within the system to the extent that we.
Earn very little on those purchased money market funds as a firm.
So to the extent that our clients prefer to have the FDIC insurance.
The attractive rate that we would be willing to offer that we are offering today then it could really be a win win for the client and for the firm because now that cash even though its higher cost funding relative to our sweeps can give.
Give us generate more economics than it.
Paying in the purchase money market funds. So you kind of have to look at the holistic picture to determine whether or not it's really a win win.
As Paul said earlier, we always strive to look for those win win opportunities for both clients advisers and the firm.
And part of the comfort we've had it's just our nature. When you looked at Raymond James Bank history to have about 95% of the deposits are insured.
Went way out of our way and paid money and programs to make sure. They are insured just as a matter of course, we werent worried about.
We werent worried about uninsured deposits of two years ago, where deposits were flush, but typical for us we just looked down range and say, okay for the premium it's worth it to have.
For clients to be protected and I think it keeps our funding sources more stable.
Okay. Thanks for that color. That's helpful. And then also for the added points on your philosophy.
Could you touch on the point about overall cash trends quarter to date beyond just the enhanced.
Yes, as I said as I said.
Our today right around where we ended the quarter, we're right around $52 billion.
Sweep and enhanced saving program balances I think.
Enhanced saving program balances are over $4 $5 billion and again to be flat in the month of April with the tax payments and quarterly fee billing.
We think is a good result in <unk>.
Hopefully portends well for the dynamic going forward.
Sorry, I missed that thanks for hitting on it.
For me again.
No worries.
And there are no further questions at this time I will now turn the presentation back to this.
Yeah. Good. Thank you all for joining us and I know, you're all busy given all.
Of all the dynamics in the market. So obviously.
Uncertain market, but again I think the conservative way, we run the firm really puts us in good shape, we were at our conference with 4000 advisors here and there.
Pretty excited so it's nice to be here, thanks for joining us and we'll talk to you all soon.
That does conclude today's conference. We thank you for your participation and ask you. Please disconnect your lines.
Okay.
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