Q1 2024 Raymond James Financial Inc Earnings Call
[music] first quarter earnings call. This call is being recorded and will be available for replay on the company's investor Relations website.
I'm Christy was senior Vice President of Investor Relations. Thank you for joining us today.
Speaker Change: With me on the call today are Paul Reilly Chair, and Chief Executive Officer, and Paul Shoukri, Chief Financial Officer.
Speaker Change: The presentation being reviewed today is available on Raymond James' Investor Relations website.
Operator: In the prepared remarks, the operator will open the line for questions.
Operator: Calling your attention to slide two please note that certain statements made during this call may constitute forward looking statements.
Operator: These statements include but are not limited to <unk>.
Operator: Information concerning future strategic objectives business prospects financial results industry or market conditions anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses anticipated results of litigation and regulatory developments and general economic conditions.
Operator: In addition words such as believes expects anticipates intends plans estimates projects forecasts and future or conditional verbs such as May will could should and would as well as any other statement that necessarily depends on future events are intended to identify forward looking.
Operator: Statements.
Operator: 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 website.
Operator: Now I'm happy to turn the call over to chair and CEO, Paul Reilly Paul.
Paul Reilly: Thank you Christie.
Paul Reilly: Good evening, Thank you for joining us today.
Paul Reilly: Who would have thought given all the uncertainty over the past year. We would've ended the last fiscal year with record results and generated record earnings per share and record client assets this quarter.
Paul Reilly: This is a testament to our focus on executing on our strategic priorities, which are rooted in our advisor and client focused cultures.
Paul Reilly: These priorities have remained consistent over many years.
Paul Reilly: They are to drive organic growth throughout our businesses invest in technology and service capabilities and to maintain focus on strategic M&A and effective integrations.
Paul Reilly: Through our relentless focus on these priorities, we have maintained long term success across changing market environments.
Paul Reilly: Now to review the first quarter results starting on slide four.
Paul Reilly: The firm reported quarterly net revenues of $3.01 billion, an increase of 8% over the prior year quarter, primarily due to higher asset based revenues.
Quarterly net income available to common shareholders was $497 million or a record $2.32 per diluted share.
Paul Reilly: Excluding expenses related to acquisitions adjusted net income available to common shareholders was $514 million or $2.40 per diluted share both records.
Paul Reilly: We generated strong returns for the quarter with annualized return on common equity of 19, 1% and annualized adjusted return on tangible common equity of 23, 8%.
Paul Reilly: A great result, particularly given our strong capital base.
Paul Reilly: Moving to slide five.
Paul Reilly: Assets grew to record levels this quarter, driven by strong adviser retention and recruiting results along with the strong market.
Paul Reilly: Total client assets under administration increased 9% sequentially to 1.37 trillion dollars.
Paul Reilly: Private client group assets and fee based accounts grew to $747 billion and financial assets under management reached $215 billion.
Paul Reilly: P. C. G continues to generate strong organic growth evidence this quarter with domestic net new assets of $21.6 billion, representing a 7.8% annualized growth rate on beginning of period domestic P. C G assets.
Paul Reilly: Advisers are attracted to our robust technology capabilities and client first values and through our long established multiple affiliation options. They can find the right fit for their business.
Paul Reilly: During the quarter, we recruited to our domestic independent contractor and employee channels financial advisors with approximately 60 million of trailing 12 production and 13 billion of client assets at their previous firms.
These results do not include our R. A a and custody services businesses, which also continued to have recruiting success and finished the quarter with $147 billion of assets.
Despite strong recruiting activity the financial adviser count was sequentially flat, mostly due to an elevated number of retirements, which are seasonally higher in the first quarter, but where the firm typically retains the vast majority of assets through previously established succession plans.
In addition advisors moving to our our E channel are excluded from the adviser count since they no longer carry a FINRA license with us.
Paul Reilly: Yeah.
Paul Reilly: We announced that the president of our P. C. G independent contractor Division Jodi Perry transitioned to a newly created role of National head of advisor recruiting.
Jody has generated outstanding results in every role she has held in her nearly 30 year career with Raymond James and I am confident she will continue to strengthen this key growth engine for the firm.
Jodi Perry: This key leadership appointment continues to highlight the importance and focus on advisor recruiting.
Jodi Perry: With this transition we are excited about Shannon read becoming the P. C. G independent contractor Division President and joining the firm's executive Committee.
Shannon Read: <unk>. Most recently served as senior Vice President of our Northeast Division. She has an impressive background and has been a stellar leader and an important market.
Shannon Read: Total clients domestic sweep and enhanced savings program balances ended the quarter at $58 billion up 3% over September 2023.
Shannon Read: Balances were boosted by growth in both the enhanced savings program as well as the clients sweep balances.
Bank loans increased 1% from the preceding quarter to a record $44.2 billion, although loan demand remains relatively muted given higher rates.
Shannon Read: Moving to slide six private client group generated quarterly net revenues of two point to $3 billion and pre tax income of $439 million.
Shannon Read: Year over year results were driven by higher asset management fees, reflecting 18% growth of assets in fee based accounts.
Shannon Read: The capital markets segment generated quarterly net revenues of $338 million and a pre tax income of $3 million.
Shannon Read: Investment banking revenues grew 15% compared to a year ago quarter due to higher M&A and underwriting revenues.
Shannon Read: Sequentially robust fixed income brokerage revenue growth largely offset weaker M&A, an affordable housing investment results.
While fixed income results were stronger during the quarter investment banking activity industry wide appeared to be on a gradual recovery.
Shannon Read: The uncertain market environment, along with the impact of the amortization of share based compensation granted in the preceding periods has strained the near term profitability of segment results.
Shannon Read: We remain focused on managing controllable expenses.
Shannon Read: The asset management segment generated pretax income of $93 million on net revenues of $235 million.
Shannon Read: Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation and net inflows into P. C. G fee based accounts.
Shannon Read: The bank segment generated net revenues of $441 million and pretax income of $92 million.
<unk> segment net interest margin of 2.74% declined 13 basis points compared to the preceding quarter, primarily due to a higher cost mix of deposits as enhanced savings program balances that replaced a portion of lower R. J B D P cash suite balances.
Shannon Read: Now I'll turn it over to Paul Shoukri for a more detailed review of our first quarter results Paul.
Paul Shoukry: Thank you Paul.
Starting on slide eight.
Paul Shoukry: Consolidated net revenues were $3.01 billion in the first quarter up 8% over the prior year and down 1% sequentially compared to the record set in the preceding quarter.
Paul Shoukry: Asset management and related administrative fees grew 13% over the prior year and declined 3% compared to the preceding quarter.
Paul Shoukry: The sequential decline was largely the result of lower fee based assets at the beginning of the quarter compared to the beginning of the preceding quarter.
Paul Shoukry: This quarter fee based assets increased 9%, which will be a strong tailwind for asset management and related administrative fees in the fiscal second quarter.
Paul Shoukry: Brokerage revenue.
Revenues of $522 million grew 8% year over year, mostly due to higher transactional activity and P. C. G.
Paul Shoukry: Sequentially brokerage revenues increased 9% the result of higher institutional fixed income brokerage revenues as client activity increased in the trading environment was more favorable.
Paul Shoukry: I'll discuss accountant service fees and net interest income shortly.
Paul Shoukry: Investment banking revenues of $181 million increased 28% year over year sequentially.
Paul Shoukry: Sequentially, the 10% decline was driven predominantly by lower M&A revenues.
Paul Shoukry: We are cautiously optimistic that the environment for M&A is improving and we continue to see a healthy investment banking pipeline and solid new business activity.
Paul Shoukry: However, there remains a lot of uncertainty and we are hopeful a gradual recovery will lead to better results over the next six to nine months.
Paul Shoukry: Other revenues of $38 million were down 30% compared to the preceding quarter.
Paul Shoukry: Primarily due to lower affordable housing investment revenues compared to the seasonally high fiscal fourth quarter.
Moving to slide nine.
Paul Shoukry: Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $58 billion up.
Paul Shoukry: Up 3% compared to the preceding quarter and representing four 8% of domestic P. C G client assets.
Paul Shoukry: Advisers continue to serve their clients effectively.
Paul Shoukry: Leveraging our competitive cash offerings.
Jodi Perry: Many clients have now taken advantage of the attractive enhanced saving program and other high yielding products.
Jodi Perry: Thus the pace of flows into this program has decelerated as we expected growing approximately $900 million or 7% this quarter.
Speaker Change: A large portion of the total cash coming into ESP has been new cash brought into the firm by advisors highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.
While we are encouraged by the modest sequential growth of client cash balances during the quarter, which.
Which was helped by seasonal tailwind in the fourth calendar quarter. We continue to expect some further yield seeking activity by clients.
Speaker Change: Through Monday of this week sweep in ESP balances are down approximately $1.5 billion for the month of January.
Speaker Change: Primarily due to quarterly fee billings of $1.35 billion.
Speaker Change: Our JBT peace Sweet balances with third party banks were $17.8 billion at quarter end.
Speaker Change: Up 12% from September 2023.
Speaker Change: The strong growth of enhanced savings program balances at Raymond James Bank has allowed for more balances to be deployed off balance sheet with third party banks.
Speaker Change: While this dynamic has negatively impacted the bank segments NIM because of the lower cost sweep balances being swept off balance sheet.
It ultimately provides clients when an attractive deposit solution, while also optimizing the firm's funding flexibility by providing a large funding cushion for when attractive growth opportunities emerge.
Speaker Change: Looking forward, we have ample funding and capital to support attractive loan growth.
Speaker Change: Turning to slide 10.
Speaker Change: Combined net interest income and RJ BD P fees from third party banks with $698 million down 2% from the preceding quarter due to lower firm wide net interest income, resulting from NIM compression.
Speaker Change: But outperforming our expectations on the last earnings call as client cash balance were more stable than we expected at that time.
Speaker Change: The bank segments net interest margin decreased 13 basis points sequentially to 2.74% for the quarter and the average yield on our JBT P balances with third party banks increased six basis points to 3.66%.
Speaker Change: While there are many variables that will impact actual results absent any changes to short term interest rates. We currently expect combined net interest income and RJ BD P fees from third party banks to be about 5% lower than the fiscal second quarter compared to the fiscal first quarter just bay.
Speaker Change: On spot balances after the fee billings this quarter and our expectation of some continued client cash sorting activity.
Speaker Change: Hopefully we can outperform this expectation again this quarter, but we believe it's prudent to err on the side of conservatism given the continued uncertainty around client cash balance trends.
Speaker Change: We remain focused on preserving flexibility and growing net interest income and RJ BD P fees over the long term, which we believe we are well positioned to do.
Moving to consolidated expenses on slide 11.
Speaker Change: Compensation expense was $1 $92 billion and the total compensation ratio for the quarter was 63, 8%.
Speaker Change: Excluding acquisition related compensation expenses, the adjusted compensation ratio was 63.4%.
Speaker Change: Looking ahead.
Speaker Change: The impact of salary increases effective on January 1st and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal second quarter.
Speaker Change: Non compensation expenses of $462 million decreased 20% sequentially.
Speaker Change: Largely due to elevated provisions for legal and regulatory matters in the preceding quarter.
Whereas this quarter was a relatively quiet quarter for legal and regulatory reserves.
Speaker Change: The bank loan provision for credit losses for the quarter declined to $12 million.
I'll discuss more related to the credit quality in the bank segment shortly.
Speaker Change: We remain focused on managing expenses, while continuing to invest in growth and ensuring high service levels for advisors and their clients.
For the fiscal year, we expect non compensation expenses, excluding provision for credit losses unexpected legal and regulatory items.
Speaker Change: Our non-GAAP adjustments to be around $1.9 billion.
Speaker Change: This implies incremental non compensation growth throughout the year as we continue to invest in growth and ensure high service levels for advisors and their clients throughout our businesses.
Speaker Change: And remember many of the non compensation expenses.
Speaker Change: Such as investment sub advisory fees represent healthy growth that follows the corresponding revenue growth.
Speaker Change: Slide 12 shows the pretax margin trend over the past five quarters.
Speaker Change: This quarter, we generated a pretax margin of 29% and an adjusted pre tax margin of 21, 7%.
Speaker Change: A strong result, given the industry wide challenges impacting capital markets.
Speaker Change: As a reminder, our current targets provided at our analyst and Investor Day last may.
Speaker Change: For a pretax margin of 20, plus percent and a compensation ratio of less than 65%.
Speaker Change: We still think these targets are appropriate and we will provide an update as needed at the next analyst and Investor day scheduled for May 22nd.
Speaker Change: On slide 13.
Speaker Change: At quarter end total balance sheet assets were $80.1 billion, a 2% sequential increase.
Speaker Change: Liquidity and capital remain very strong.
Speaker Change: Rgs corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target.
Speaker Change: And we remain well capitalized with a tier one leverage ratio of 12.1% and a total capital ratio of 23%.
Speaker Change: Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
Speaker Change: The effective tax rate for the quarter was 21%, reflecting a tax benefit recognized for share based compensation that vested during the period.
Speaker Change: Going forward, we still believe that 24% to 25% is an appropriate estimate to use in your models.
Speaker Change: Slide 14 provides a summary of our capital actions over the past five quarters.
Paul Reilly: During the quarter the firm repurchased one 4 million shares of common stock for $150 million at an average price of $107 per share.
Paul Reilly: As of January 24th 2020 for approximately 1.3 dollars $9 billion remained available under the board's approved common stock repurchase authorization.
Paul Reilly: Our current plan, which is subject to change is to repurchase at least $200 million of shares in the fiscal second quarter to complete the remaining repurchases associated with the dilution from the Tristate capital acquisition.
Paul Reilly: Following the second quarter, we expect to continue to offset share based compensation dilution.
Paul Reilly: And to be opportunistic with incremental repurchases.
Paul Reilly: Lastly on slide 15.
Paul Reilly: We provide key credit metrics for our bank segment.
Paul Reilly: Which includes Raymond James Bank in Tristate Capital Bank.
The credit quality of the loan portfolio was solid.
Paul Reilly: Criticized loans as a percentage of total loans held for investment.
Paul Reilly: Ended the quarter at 1.09%.
Paul Reilly: The bank loan allowance for credit losses, as a percentage of total loans held for investment ended the quarter at one point or 8%.
Paul Reilly: The bank loan loss allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 2.06% at quarter end.
Jodi Perry: We believe this represents an appropriate reserve, but we continued to closely monitor economic factors that may impact, our corporate loan portfolio, including the commercial real estate portfolio.
Jodi Perry: Within the CRE portfolio, we are prudently limited the exposure to office loans, which represent just 3% of the bank segments total loans.
Jodi Perry: Now I'll turn the call back over to Paul Reilly to discuss our outlook.
Jodi Perry: Paul.
Paul Reilly: Thank you Paul.
Paul Reilly: As I said at the start of the call I am pleased with our results for the first fiscal quarter generating record earnings per share and ending the quarter with record client assets.
Paul Reilly: And while there is still economic uncertainty I believe we are in a position of strength and 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 positively impacted by the 9% sequential increase of assets in fee based accounts.
Paul Reilly: Near term, we expect some headwinds to the interest sensitive earnings at both P. C. G. In the bank segment, given ongoing cash sorting activity and uncertain rate environment.
Paul Reilly: However, we are already seeing some of the higher yield competitor rates coming in.
Jodi Perry: Despite this I believe our effort and focus on being a destination of choice for our current and prospective advisors will continue to drive industry leading growth.
Our advisor recruiting activity remains robust, including a record number of large teams in the pipeline.
Jodi Perry: And the capital market segment, we continue to have a healthy M&A pipeline and good engagement levels, but our expectations for a gradual recovery are heavily influenced by market conditions, and we would expect activity to likely pick up over the next six to nine months.
Jodi Perry: And the fixed income business, we saw improvements in this quarter with higher activity, but the dynamics of the past year persist depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities putting pressure on our brokerage activity.
Jodi Perry: We hope that once rates and cash balances stabilize we will start to see an improvement.
Jodi Perry: Despite some of the near term challenges, we believe capital markets business is well positioned for growth once the market and rate environment become conducive.
Jodi Perry: And the asset management segment financial assets under management are starting the fiscal second quarter up 9% over the preceding quarter, which should provide a tailwind to revenues.
Jodi Perry: 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.
Jodi Perry: In addition, we expect Raymond James investment management to help drive further growth over time.
Jodi Perry: And the Bank segment, we remained focus on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand.
Jodi Perry: We have seen security based loans payoffs decelerate and are starting to experience growth.
Jodi Perry: We expect demand for these loans to recover as clients get comfortable with the current level of rates.
Jodi Perry: With little activity in the market corporate loan growth has been muted.
Jodi Perry: However, spreads have improved and with ample client cash balances and capital we are well positioned to land once activity increases and our conservative risk parameters.
Jodi Perry: In addition to our focus on organic growth across our businesses. We have also ramped up corporate development efforts.
In closing, we are well positioned entering the second fiscal quarter with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth.
Jodi Perry: As always I'd be remiss, if I did not thank our advisors and associates for their continued dedication to providing excellent service to their clients. Thank you for all you do.
Jodi Perry: That concludes our prepared remarks, operator will you. Please open the line for questions.
Jodi Perry: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Jodi Perry: Your first question comes from the line of Michael Cho from J P. Morgan Your line is open.
Michael Cho: Hi, good evening, Thanks for taking my question.
Michael Cho: For my first question I, just wanted to touch on on net new assets I'm clearly they seems to be a.
Michael Cho: Pick up in M&A and you continue to call out a robust recruiting backdrop and the question is what do you think is driving that and an acceleration now in <unk>.
Michael Cho: Do you think a more stable macro outlook could contribute port and then they acceleration from here.
Well historically like this quarter is a pretty good number.
So.
What's really driving it is still great retention.
Michael Cho: Recruiting and most of our crude at the adviser count number is a little misleading now because we're recruiting more and more large or very large teams fewer number but larger teams.
Michael Cho: This quarter, we had a lot of retirements, but the retirements.
Seasonally we do at the end of the year, but the retirements and the almost all of them have transition plans. So we keep the assets would drive the adviser count number down.
Michael Cho: And when people transfer to the RIAA Division, which happens every quarter, we take them out because they don't have a FINRA license. So if you look at the net assets net new assets and go over the last few years I mean, we've continued to be near the top of the market or at the top of the market is really just.
Michael Cho: The great retention and robust recruiting.
Michael Cho: We will recruit larger and larger teams a lot of those teams are there businesses are still growing significantly and its really generating net new assets and of course theres market help right as the market goes up you bring.
Michael Cho: People over the assets are higher so, but we feel pretty comfortable and as we announced we brought over at Jody Perry to really even at more robustness to our recruiting efforts, which kind.
Jodi Perry: Kind of diversified are spread out between the channels, but really bring them together to a more unified effort. We think we think we can do better than we have been doing.
Jodi Perry: Okay, great. Thanks for all that color I, just wanted to switch gears on the capital market solvable, specifically investment banking and you continue to invest in talent there.
Jodi Perry: Quite the choppy backdrop over the last 18 months and then I think you've called out a higher quality banker or higher producing bank from Raymond James.
Paul Reilly: Previous periods I mean, how should we think about something like revenue per MD going forward in a more normalized environment, if Paul backlog starts to flow through at some point.
Paul Reilly: It all back in the last peak of the last market.
Paul Reilly: <unk> 10 million per MD so.
Paul Reilly: Generate a very very high productive number.
Go back a few years, where a couple of million dollars per MD and that really is the difference there part of that's the market.
Paul Reilly: It's certainly part of that was the high quality <unk> recruited.
And the teams that joined us so.
I don't know what that number is in a good market I think we could still produce that number or better.
Paul Reilly: We continue to recruit people in.
Paul Reilly: Some of the businesses that we felt were subscale or didn't have the senior people that we wanted.
Paul Reilly: And I think the productivity is still there so.
Paul Reilly: If we had a market as robust as we did a couple of years ago, we could top that $10 million, but certainly we would be.
Much higher than the high single digits, I think at a reasonable market.
Paul Reilly: Again, the market as we've said as we see slow improvement.
Paul Reilly: But nothing that's really moving quickly up but moving up steadily.
Paul Reilly: Your next question comes from the line of Devin Ryan from JMP Securities. Your line is open.
Paul: Thanks, So much good evening, Paul and Paul.
Doug: Hey, Doug.
Doug: Bill.
First question.
Doug: If we go back to your early calendar 2023, you guys had built a fair amount of liquidity.
Bill: Maybe gave up some interest income short term and I think the view is that lending spreads could widen out and so you wanted to have some capacity and obviously there is also a reason to be conservative at that time.
Bill: But it did seem like some of the maybe the headwinds to spread revenues was more of a timing dynamic and intentional.
Bill: You know looking at today, you still have a lot of excess liquidity to grow loans. If you see attractive risk adjusted return. So I'm just curious if kind of that view still holds that you had kind of through most of calendar 2023, and then are those better spreads materializing as maybe you thought they would or are you still waiting for that and just trying to think about the interplay with that and then accelerating lending activity and did that.
Bill: Well thank you.
Bill: Yes, I think theres two pieces to that Devin is that we haven't seen spreads widen.
Devin: The problem is is the market hasnt been really robust in the area that we like to lend and we have a.
Devin: Target both in industries borrowers it's fairly conservative.
And that pipeline of new loans as you can see from other banks too has just slowed down. So we're still waiting for that kind of resurgence of activity, which we think will happen at some point.
Devin: But that's really been the we're ready to lead.
Devin: Also seeing the SPL loans in thing, which was deteriorating we're seeing that.
Devin: The payoffs are really decreasing we're seeing some growth there now too. So we're starting to see the beginning of growth in those portfolios, but certainly the market isn't giving us.
Devin: That opportunity to put on loans at the same rate.
We did.
Devin: Early 2023, or certainly 'twenty two.
Paul Shoukry: Okay. Thanks, Paul and then just to follow up on the institutional fixed income brokerage, obviously really material improvement.
Paul Reilly: In the quarter and you kind of run rating over 400 billion yen last year you did mid three hundreds in just looking at like 2023 relative to 2021 youre down over 30%.
Even though you have some rich today arguably a bigger better business. So love to just think about kind of the.
Paul Reilly: Some of the momentum that you saw in the quarter in a depository or maybe becoming more active again and just how to think about kind of what a normalization in that business looks like as it call. It a little bit over $400 million run rate that we saw in this quarter or is it something better and is this quarter kind of a good jumping off point because it is such a.
Paul Reilly: Start paying from <unk> from the prior quarter.
Yes, so it's a pretty fickle market some rich has done well the whole time.
Paul Reilly: Sure.
Paul Reilly: They traded on volatility. So if you look at volatility you could probably look at their results are really good.
Paul Reilly: Barry hedged very focused.
Paul Reilly: Trading strategy and consistently executed since day, one and their business is not been office, it's done well, our traditional depository business, which is a big part of our franchise.
Paul Reilly: They've got cash squeezed it slowed down two things were happening.
Paul Reilly: A lot of banks already had plenty of fixed rate.
Paul Reilly: <unk>.
Paul Reilly: And they weren't looking for more bonds.
We're worried about their liquidity I think what happened in December as liquidity look like it was easing some and rates look like they were going to come down and they've got much more active so I think that environment.
Paul Reilly: Which has been okay at beginning of the year, but it's too early to tell us what happens with the rates that people really think these are pick rates.
Paul Reilly: Liquidity continues.
Paul Reilly: Feel settled they'll get more active or at least be active but they are today.
Paul Reilly: But I don't see the return to two years ago until the market really gets a lot better.
Paul Reilly: A lot stable, but the guys. They performed very very well and it's just.
Paul Reilly: If rates go up it's going to be.
Paul Reilly: It's going to be a headwind if rates go down some or the view of rates going down materializes.
Paul Reilly: Or get confident and I think that will pick up.
Speaker Change: Your next question comes from the line of Dan Fannon from Jefferies. Your line is open.
Speaker Change: Thanks, Good evening I wanted to follow up on your comments around cash sorting and your expectation that you expect that to continue and curious if that's just some of the seasonal cash coming back into the market that may be built up in December.
Or what other factors you think that are going to continue to have that be an ongoing trend beyond the billing and other things you mentioned so far in January.
Speaker Change: You touched on them.
Daniel Thomas Fannon: In the December quarter typically have.
Daniel Thomas Fannon: Sort of a seasonal tailwind with tax loss harvesting maturities and those types of things and then throughout the year quarterly fee billings alone this quarter were.
Daniel Thomas Fannon: North of $1 $3 billion.
Daniel Thomas Fannon: Hopefully see that continue to grow.
Daniel Thomas Fannon: Throughout the year.
Paul Shoukry: Then we also have the headwind as we enter April with income taxes as well. So our rates are still high they're out there they've come in a little bit as Paul said, just with the expectation for lower rates. So we have seen some declines across the industry, but.
Paul Shoukry: Really money market funds are us the yields they are really the biggest competitor we have if you will.
Jodi Perry: Those yields are still attractive and so we still have to have attractive alternatives to bring in new cash to compete against the money market funds. So as I said in the last couple of calls I think we are much closer to the end of that cash sorting dynamic than we.
Paul Reilly: Get closer and closer I feel like every quarter, but we're not going to declare that it's over until we have several months of history to prove it out.
Paul Shoukry: And I think that people look at kind of the beta there is let's say if rates come down.
Paul Reilly: Will that spread increase quickly well.
Normal sweeps that kind of follow fed funds, but really if you look at money markets.
Paul Reilly: They're more they're buying bonds.
Paul Reilly: Next two to three weeks for them to adjust so if.
Paul Reilly: If you consider them some of the competition for rate, it's going to take a few weeks at least for that too.
Paul Reilly: Through before others.
Paul Reilly: Yes before rates start moving at the more expensive people, who are investing in higher yielding types of certificates, but it'll.
Paul Reilly: It'll be moving in the right direction of rates.
Thank you and then just as a follow up within PSEG insurance and annuity products have been.
Paul Reilly: Growing in a bigger contributor just curious with the Dol's proposal. How you think that these products might be impacted or momentum and that might be impacted by the proposal.
Paul Reilly: So first there's always been scrutiny on those products over time and.
Paul Reilly: We believe we have good products and systems too.
Paul Reilly: To manage that.
Paul Reilly: The D O L. We have put in systems.
Paul Reilly: To comply with a fairly similar law at the beginning.
Then we have to take them out as we as the industry defeated the rule.
Paul Reilly: The second interpretation of questions came out in the industry that featured the rule. So we'll have to see.
Paul Reilly: And we'll have to see what this rule.
Finishes with before we look at the impact and my guess is the industry will challenge the whole again. So we've won twice will might get might get.
Paul Reilly: I think Bob.
Paul Reilly: Substantial challenge with a lot of things that could challenge what is proposed today and so we'll have to see.
Paul Reilly: Early to speculate on that until it's finalized until we see.
It really can withstand the third court challenge.
Paul Reilly: Your next question comes from the line of Kyle Vogt from K B W. Your line is open.
Paul Reilly: Hi, good evening, sorry about that.
Paul Reilly: So first on the balance sheet, just given how much sweep cash you have sitting off balance sheet at this point at $18 billion and the excess capital you are currently running with combined with the shape of the forward curve.
Kyle Voigt: Consider beginning to grow the securities portfolio again over the next few quarters and start to lock in some yield or you still have a preference to allow that to run off.
Kyle Voigt: Yes.
Kyle Voigt: Our position on taking duration on the balance sheet has remained.
Kyle Voigt: Very consistent through different rate cycles, which certainly positioned us well. This time last year, which is really to keep more of a floating rate balance sheet and not try to time rates, one way or the other to the extent that we do take duration on the balance sheet, we really want it to be.
Kyle Voigt: To support and accommodate client needs mortgages in those tax exempt loans et cetera, and so we're really not looking to try to time, what might happen to rates I know the forward curve has been wrong more than right in the last two to three years and this misguided a lot of other firms and so we're just going to <unk>.
Kyle Voigt: <unk> flexible and.
Kyle Voigt: And really focus on accommodating clients' versus making bets for our own benefit.
Kyle Voigt: And we've heard.
Paul Reilly: A lot of people speculate over at the top rates, but we went from no rate cuts three.
Paul Reilly: <unk> of people speculating six the speculating, while maybe we won't get one for months.
We just don't want to really play that game and I think one of the keys to our consistent performances, we're not we're not making bets. We're just consistently running the business. So.
Paul Reilly: Really don't look at locking in rates like that and right out the spread on the sweep rates is very very good compelling anyways.
Paul Reilly: Yes understood.
Maybe just a question on the non comp expense guidance of $1 9 billion I think that implies a 10% increase or so in the average non comp expenses for the remaining three quarters versus the first quarter run rate.
Paul Reilly: I know there is some variable expenses that you laid out in terms of the investment advisory fees.
Paul Reilly: Just wondering if you could expand a bit on some of the other areas, where you may be ramping investments through the remainder of the year.
Paul Reilly: Yes, this quarter was pretty low almost across the board.
Paul Reilly: The technology expenses, we typically pull back on external support during the December quarter, just because it's a little bit slower.
Paul Reilly: For those vendors as well even to bring people in.
Relatively quiet quarter for conferences and trips.
Paul Reilly: And so we.
Paul Reilly: It was also relatively favorable quarter for legal and regulatory.
So I think as the year.
Paul Reilly: Year progresses.
Paul Reilly: I would expect to see growth to get to that $1 9 billion dollar sort of guidance.
Paul Reilly: A reminder, that excludes some of the non-GAAP items, which most of you exclude as well as the bank loan loss provision.
Paul Reilly: Unexpected.
Paul Reilly: Legal and regulatory reserves, because it's just it's impossible for us to.
Try to forecast those over the next three quarters and that was kind of our initial guidance was the one nine so we're just.
Paul Reilly: It is lumpy, but we.
Paul Reilly: We still think Thats a good number.
Paul Reilly: Your next question comes from the line of Brennan Hawken from UBS. Your line is open.
Paul Reilly: Good evening, Thanks for taking my questions.
Paul Reilly: Curious if you could maybe disclose what portion of your client asset basis is in retirement accounts and also when you think about recruiting typically how much of those assets tend to come in in the form of retirement accounts Iras and alike.
Paul Reilly: Yes, we will.
Paul Reilly: I'll provide more of that breakout.
Paul Reilly: Our analyst Investor day in May when we went through this in 2016 last time, we disclose this metric it was about a third of the assets were in Iras in retirement accounts, but.
Paul Reilly: We haven't provided any real disclosure on that since then so we will plan on doing that at the analyst Investor Day.
Paul Reilly: Okay. Thanks for that Paul.
Paul Reilly: And then when you think about.
Paul Reilly: M&A had a nice jump here this quarter.
Paul Shoukry: Was there a bank activity.
Within the bank channel here in the quarter that might have caused some of the significant quarter over quarter changes and generally what's your outlook for growth coming from that channel in the near term.
Paul Shoukry: There wasn't anything lumpy in the bank channel.
Paul Shoukry: That tends to be Lumpier, one just because of the.
With advisors Theres, many many so they average out with the banks.
Paul Shoukry: We don't expect anything lumpy, it's part of our growth platform in <unk>.
Paul Shoukry: I think our M&A has continued to be very very solid so we we'd.
Paul Shoukry: We like the trajectory.
Speaker Change: I think a very strong number boat.
Speaker Change: Given the environment and giving our competitors this quarter end and still believe we have opportunity to keep.
Speaker Change: Forecast the number but I think we could be run it right at the top of M&A.
Speaker Change: Okay. Thanks for taking my questions.
Speaker Change: Thanks, Brian.
Speaker Change: Our next question comes from the line of Bill Katz from TD Cowen Your line is open.
Speaker Change: Okay. Thank you very much good evening and I. Appreciate you taking the questions maybe to mix up the topics a little I was wondering if you could circle back to capital return.
William Katz: Just given the fact that you have a very strong capital position, you mentioned sort of mixed dynamics on the loan side or lending side.
Why not pick up the pace of capital return to buyback and then maybe as a sub sector to that subsection of that what was your incrementals thinking of inorganic opportunities at this point and what might you be looking at thank you.
William Katz: So we think first we were a little late into the quarter, because we had a self imposed blackout, giving.
William Katz: We said given that.
William Katz: That accrual for our off platform our communications, so we get a little late jump.
William Katz: And so we werent in a rush.
William Katz: Yes.
William Katz: We had a good period in that market. So we didn't try to catch up but we're committed to next quarter, the $200 million, which I think will catch us up on the Tri state commitment.
William Katz: Continue on our dilution.
William Katz: As we go forward to be opportunistic we are trying to balance as we've said we've put.
Speaker Change: New head of corporate development, we're seeing a lot of opportunities in the market.
We want to make sure that.
Speaker Change: Just like.
Speaker Change: <unk>.
Okay timing two years ago, 3%, you're ever going to spend the cash when it got over 12% and we did.
Six acquisitions of 18 months, right and got our ratio down to 10% So and the reason we could do them as we have the capital on the balance sheet.
Speaker Change: And we think there are opportunities the problem is you never know.
Speaker Change: There are actionable you can talk a lot.
Speaker Change: But we're certainly out of the market marking.
And so we just try to balance those two.
Speaker Change: Good news is we have strong earnings so we understand we'll keep adding capital base, but we are just trying to balance the two of them. We think $200 million is a good target.
Speaker Change: If we can get.
Speaker Change: If we get to the point, where we don't think there.
Speaker Change: Accretive acquisitions that it would be.
Speaker Change: Accretive to the positioning of the firm not just the earnings.
Speaker Change: We will buy back stock, we're not trying to hoard capital.
Our.
Speaker Change: Our issues at least half of them are Roe.
Speaker Change: And.
Speaker Change: CSR base. So we're not trying to hoard capital just for fun. We just think it's the right thing to do in looking at potential opportunities.
Speaker Change: Okay, and just a follow up maybe talking about margins for a moment appreciate though we'll look forward to the the <unk>.
Investor day in the spring, but just conceptually, though to the extent that the investment banking backdrop, what to pick up how do we think about the incremental margin in both the segments and how that might translate down to the holding company at this point in time, obviously youre running about breakeven if.
Speaker Change: If you will I'm just trying to think through the puts and takes of some pressure on NII offset by maybe a little bit more counter cyclical pickup in the bank and then how that might filter down to profitability. Thank you.
William Katz: Yes, Bill I think the capital market segment, where they were operating at record levels over the last couple of years.
William Katz: Two years ago.
William Katz: I think hit a maximum margin a record margin of around 26%.
William Katz: So that just shows you the upside potential for that segment now that was both the equity side and the fixed income side of the business running on all cylinders, which is somewhat atypical across the industry just given the countercyclical nature of some of those businesses, but.
William Katz: There's a lot of upside from.
William Katz: Just breaking even this quarter in capital markets too.
William Katz: What the potential is and that we proved it proved out a couple of years ago and that obviously would help the overall margin of the firm, we're still saying, it's at 20% plus margin target for the firm at this juncture.
William Katz: We will update that as appropriate that analysts investor day in may but.
William Katz: We have a diversified business. So there's always puts and takes and we don't try to do is sell you on a story that just adds to the incremental margin of everything happening to the plus side without factoring in potential offsets and so we think that's a more balanced approach but.
William Katz: Obviously, all else being equal if we had the same exact sort of performance from the other businesses with the upside potential of capital markets that would be accretive to the margins overall for the firm, but we're just reluctant to guide that now given all the uncertainty, particularly around cash sorting dynamics, which is a huge driver of margin the cash balance.
Isn't where interest rates are is the big driver of margins for the firms. So.
Paul Reilly: Going to be conservative there until things stabilize.
Paul Reilly: Your next question comes from the line of Steven <unk> from Wolfe Research. Your line is open.
Paul Shoukry: Hi, Good evening, Paul and Paul.
Paul: Wanted to start off with a question on deposit betas and pricing flags amid Reg Cox.
Paul: Just one of the challenges that we collectively are grappling with is that your mix of deposits is quite different than peers, you have a lower concentration of higher beta savings deposits that should carry very high deposit betas with rate cuts at the same time. Your current payout on your sweep deposits is actually much more competitive than your peer set.
Paul Reilly: I was hoping you could frame separately, what your expectation is for deposit pricing flags on the ESP piece versus the sweep deposits within the bank channel.
Paul: Yes, I mean, we.
Paul: <unk>.
William Katz: ESP balances.
William Katz: We'd expect the correlation.
William Katz: Movement of those rates to be much more aligned with what happens with fed funds effective and I think thats, what advisers and clients expect not only at Raymond James but across the industry as well for those higher yielding products.
William Katz: Say, it's different in terms of mix of deposits than others in the industry, but you also have to remember with the Tri State acquisition and we have 18 built they have $18 billion of deposits now, which are higher cost deposits and likely higher beta deposits to both on the upside and on the downside of rates. So it gives us.
William Katz: More similar.
Sensitivity than just looking at sort of <unk> related deposits, which we feel good about.
William Katz: And then as you point out the PDP the sweep deposits we were much more generous in most of our competitors on the way up which.
Paul Shoukry: It gives us more cushion on the way down as well with those deposits. So as Paul said, it's going to be a competitive dynamics something that we'll look at those.
Paul: Let's move, but we feel really good about the position we're in right now.
Paul Reilly: That's great color, Paul and for my follow up it's related to what Bill had just asked but I was hoping to pin you down with it.
Paul: An explicit number in terms of how to think about incremental margins because.
The offset from lower rates is clearly expected to come from the capital market side of the business. The concern is that NII is non compensable, but if we actually look at what you guys did during the period of robust capital markets activity you cited the 25% plus type margins the incremental margins were.
Paul Shoukry: Close to 50% during that period. So just wanted to get a sense. If we do have a more meaningful ramp in capital markets activity is it 50% incremental margin a reasonable assumption consistent with what we saw during the Covid period.
Paul Reilly: Yes, I mean I guess.
Paul Reilly: What I would say is if you kind of look at the revenues now versus the revenues of the peak of capital markets.
Paul Shoukry: Being breakeven now versus getting a 26% margin.
Paul Shoukry: The peak of capital markets, I mean, it's pretty linear.
Paul Shoukry: There is a lot of incremental margin as you.
Paul Shoukry: Revenues from the current base to where we were at that point in time. So it also depends on frankly, the mix of revenues and capital markets. How much comes from M&A versus underwriting versus fixed income.
Paul Shoukry: All of those businesses have different incremental margins too. So we can make up of simplistic number for modeling purposes, but Frank frankly, I think it would be false precision and we also know that the dynamics that may help the capital markets business may be dynamics that.
Paul Shoukry: May positively or negatively impact our other businesses. So.
Paul Shoukry: With generating a 20% plus margin.
Paul Shoukry: And generating record earnings in the last three years and very different market environments.
Paul Shoukry: It was something that really reinforces the value of having our diversified business model and being able to generate a return return adjusted returns on tangible common equity.
Paul Shoukry: Over 20%, 23% this quarter.
Paul Shoukry: On our strong capital basis without the support of capital markets is something we're really happy about.
Paul Shoukry: Your next question comes from the line of Jim Mitchell from Seaport Global Your line is open.
Jim Mitchell: Hey, good evening, maybe just a quick question on the brokerage sweep SKU.
Jim Mitchell: Your yield went up net yield went up again, you've had pricing power how long do you think the pricing power can last I mean deposits in the industry if seemingly.
Cable is for banks does that start to erode some of that pricing power. What's your what's your outlook on the sweep pricing.
Jim Mitchell: Yes, we're still seeing a lot of demand for these deposits.
Jim Mitchell: Across.
Jim Mitchell: Thanks that we deal with so we still think that there is pricing power, but in fairness the <unk>.
Jim Mitchell: Rising power, we're talking about this five basis points to 10 basis points, which on the balances of $17 billion is meaningful but it pales in comparison to what's happening with the base rates, nowadays, so and what might happen going down or up. So we still think there is pricing power. There is a lot of demand for these deposits.
Jim Mitchell: But we're hopeful that over the next year or two we are using more of these deposits to grow the balance sheet and support clients with loan activity.
Paul Reilly: Which is which generates higher yields and returns for the firm overall.
Paul Reilly: Great makes sense and then maybe as a follow up on just sort of the large team pipeline sort of had a record I think you highlighted that last quarter as well.
Paul Reilly: How much of that is what is your win rate among the large teams do you feel like it's getting better.
Paul Shoukry: And how much is in the pipeline versus actually.
Paul Shoukry: In the door I guess, when I think about just as you.
Paul Shoukry: Win new mandates and new clients, new clients and Fas.
I don't know if I have those exact numbers I will say, we didn't see 10.
Paul Shoukry: $10 million teams a year or two to go now, we say $20 million to $30 million teams that are.
Paul Shoukry: The batting average is pretty good, but there's a lot of competition.
Paul Shoukry: We're not the highest payer.
Paul Shoukry: But we still are.
Paul Shoukry: We're still doing really really well, yes, we have a lot in the door, but right now when we say in the pipeline. They are non committed we're in the middle of.
Paul Shoukry: We're right there that can neck.
So I think we have a pretty good read on who will come in or not or who are who are close are you to stay at it so but it's a large number and were actually.
Paul Shoukry: Honestly, a little surprised I think it's.
It's both the growth of our firm and our platform the high net worth.
Paul Shoukry: Initiatives that we've had and what we've built really since Alex Brown has joined us with their help.
Paul Reilly: Being a place for people and the high methanol Ultra high net worth feel very comfortable and then our technology and our systems and culture. It's all combined to add or add it to a place where frankly, if you'd asked us a couple of years ago, We would say, yes, we would.
Paul Reilly: I've told you would expect it to 2000 $30 million of teams multiple teams.
William Katz: At one time.
William Katz: Our job is to get them in the door right. So the good ones.
William Katz: So that's what we work hard on.
Your next question comes from the line of Mark Mclaughlin from Bank of America. Your line is open.
William Katz: Good evening guys. Thanks for taking my question for.
William Katz: For my first one I was curious.
Mark Mclaughlin: How do you view your use of transition assistance and loans to financial advisers I know some of your competitors use that a lot in terms of generating growth. How do you view your competitivity in that space.
Mark Mclaughlin: Yes first everyone uses them. So if you want to.
Mark Mclaughlin: If you want to recruit with zero transition assistance could lock come in you might bring some people, but not much I mean.
Mark Mclaughlin: Pfizer's feel there's value to their practices.
And what a fair return on those so that is part of recruiting for all of the firms.
Mark Mclaughlin: Not so much in the RA channel, but certainly.
Mark Mclaughlin: And they employ in the independent channel we've consistently.
Since my time than before.
Mark Mclaughlin: Have not been the highest on purpose.
Mark Mclaughlin: We what we've always said, it's part of self selection that we want people to come because they believe it's the right place not for the highest Chuck.
Mark Mclaughlin: Now having said that in last two years transition assistance has gone up.
Mark Mclaughlin: So we've had to make adjustments but.
Mark Mclaughlin: Or.
Mark Mclaughlin: We're rarely ever the highest offer I mean, we rarely matched the highest offer and we still have a very good batting average so.
Mark Mclaughlin: But it's part of the business.
Your next question comes from the line of Alex <unk> from Goldman Sachs. Your line is open.
Alexander Blostein: Hey, good evening guys. Thanks for taking the question.
Paul I was wondering if you could just expand a little bit on the comment you made earlier to Bill's point around building excess capital position and the fact that the last time, you guys were over 12% tier one leverage.
And did a significant number of deals so maybe articulate a little bit about what the M&A pipeline look like for the business today and what areas within Raymond James look most interesting from an inorganic perspective. Thanks.
Paul: Yeah, well honestly theres lot of opportunities in all of our business segments, we've been.
Paul Reilly: We think there is inorganic opportunities.
Paul Reilly: The challenge is you just don't know.
Paul Reilly: Some are on the market.
Many we keep in touch with them.
Paul Reilly: I would say it's a good time for you to look at teaming with us versus competing with us.
Paul Reilly: And.
Paul Reilly: I think during the last year with everything going on discussions are up now when you can close those are when they're actionable or.
Paul Reilly: Frankly.
Paul Reilly: In this market.
Paul Reilly: Does suffer a little bit from what our own M&A business does that.
Paul Reilly: Sellers' price expectations adjusts much slower than the buyers there so.
Paul Reilly: Just taken in our industry with cash sorting right. We've always said conservatively, we would expect cash sorting to continue which it has over the last year and many people were saying well cash sorting is over and this should be this should be the EBITDA you value us on.
Paul Reilly: So we just say no we don't think so.
Paul Reilly: So part of that sometimes solves over timing or part of that people said it well.
Paul Reilly: At this valuation, we're not going to sell and that happens with all the segments, but the number of dialogues are up.
Paul Reilly: The interest I mean sustained dialogues.
Paul Reilly: In sum we walked from some they walked from some we just say hey, maybe it's not the right timing pricewise.
Paul Reilly: That was no different to that dynamic a few years ago, and then all of a sudden.
Paul Reilly: Four we are after for a while until we came out of the blue almost though we found all close so.
Paul Reilly: We can't predict that timing.
Paul Reilly: And don't want to even try because.
Paul Reilly: There is nothing concrete to predict it but when there is enough activity you want to make sure you have enough capital.
Time does come that you can execute.
Our next question comes from the line of Michael Cyprus from Morgan Stanley. Your line is open.
Paul Reilly: Hi, good evening. Thanks for taking the question I wanted to come back to some of your comments on the recruiting backdrop I was hoping you might be able to elaborate a bit on the competitive environment today versus say six or 12 months ago for recruiting and how you might expect that to evolve if rates come down over the next year or two.
Paul Reilly: Recruiting.
Paul Reilly: So my 15th year I think in this role I mean since I've been here everybody told me recruiting was going to slow down.
And it's just picked up.
Paul Reilly: The aging advisor there'll be no more advisors left and we see.
Paul Reilly: C teams.
And therefore, it is a bigger books than we've ever seen before so I think that recruiting potential is going to stay there.
Paul Reilly: I think we have a unique value proposition given our.
Paul Reilly: Size on one hand and our.
Paul Reilly: Our a ratings across the three rating agencies, our capital on the other hand.
Paul Reilly: Allowing independence and freedom advisers to on their books. So they can leave us they want to leave.
Paul Reilly: Technology platform and well, what we think is second to none.
Paul Reilly: What the industry Awards would say so you've got to keep competing.
Paul Reilly: It hasnt slowed down yet probably the biggest change the competitive landscape has been.
Paul Reilly: Our roll ups that PE prices.
Paul Reilly: We can't quite figure out and Thats a bet on aggregating.
Paul Reilly: Being able to go to market some point, even though those private multiples are much higher than the public multiples.
Paul Reilly: So thats a new competitor, who has kind of led price now people are selling their firms versus.
Paul Reilly: Having people still kind of owning their businesses. So that's the newest dynamic.
Paul Reilly: In an area, which is I call it a new competitor, but again thats the advisers choice right.
Paul Reilly: How do they want to practice, if they want to own their business.
Paul Reilly: <unk> got all the support with leading technology for a great place if they want to sell their business.
Paul Reilly: At a pretty high multiple.
So roll ups, who are trying to aggregate.
Paul Reilly: Monetize later.
Paul Reilly: Certainly a viable market option that wasn't really there are three years.
Paul Reilly: There are no further questions at this time, Mr. Paul Reilly I turn the call back over to you for some final closing remarks.
Great I just wanted to thank you all for attending I think we're in great shape with.
Paul Reilly: Certainly a good tailwind with that asset number being up 9% the markets may be a surprise us all continued to be robust, but if they continue or are in great shape there.
Paul Reilly: The cash dynamic will sort itself at some time, if the forward curve right at all even if it's delayed that'll ultimately.
Paul Reilly: Be a tailwind.
When that happens, but right now.
Paul Reilly: We just as you know were conservative so we always look at it is.
Paul Reilly: Paul about <unk>, 5% decline in the last few quarters, we haven't quite hit that yet can you get it again, but we don't know so we try to be conservative.
Paul Reilly: If rates do moderate or come in we'll get some tailwind there for the industry. So thanks for joining and we'll talk to you again.
Paul Reilly: This concludes today's conference call. Thank you for your participation you may now disconnect.
Paul Reilly: Please wait the conference will begin shortly.
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