Raymond James Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 9 speakers on the call.

Operator

Good morning, and welcome to Raymond James Financial Third Quarter Fiscal 2021 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. Now, I will now turn it over to Kristie Wall, Vice President of Investor Relations at Raymond James Financial. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer and Paul Shuckery, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James' Investor Relations website.

Speaker 1

Following the prepared remarks, the operator will open the line for questions. Please note certain statements made during today's call may constitute forward looking statements. These statements include, but are not limited to information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses anticipated results of litigation and regulatory developments impacts of the COVID-nineteen pandemic or general economic conditions. In addition, words such as believes, expects, Could and would, as well as any other statement that necessarily depends on future events, are intended to identify forward looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements.

Speaker 1

We urge you to consider the risks described in our most recent Form 10 ks and subsequent Forms 10 Q, 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 non GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. With that, I'm happy to turn the call over to Chairman and CEO, Paul Reilly. Paul?

Speaker 2

Good morning and thank you, Christy. I'm actually joining you today from Chicago where we've had a number of day meetings with some of our top independent advisors. So it's great See both their success during the pandemic and their excitement as we move forward. It's kind of hard to believe now. It's been over 16 months since the Pandemic and we're just starting to see the light at the end of the tunnel with the distribution of vaccines and now the spread of Delta variant reminds us that we could be dealing with this One way or another for quite some time.

Speaker 2

Fortunately, our economy has really proven to be resilient and creative, quickly adapting to these changes, Which has facilitated the recovery of our economy, the stock market over the past year. Similarly, our advisors and associates have been Just simply amazing. I'm really proud of what they've been able to do, enabling Raven James to achieve these record results for the 1st 9 months of fiscal 2021. So why don't we move on to Slide 3 with our quarterly results. The fiscal Q3 was another strong quarter with several, I guess, many records.

Speaker 2

The firm reported record net revenue of $2,700,000,000 net income of $307,000,000 in earnings per diluted share of $2.18 Excluding the losses On extinguishment of debt of $98,000,000 $7,000,000 of acquisition related expenses, adjusted quarterly net income was 3 $6,000,000 in adjusted earnings per diluted share were $2.74 both records. The increase in quarterly net revenue was largely driven by record asset management and related administrative fees and record investment banking revenues during the quarter. Adjusted net income growth was due to the aforementioned higher net revenues Along with the loan loss reserve release in the quarter compared to a provision for credit losses a year ago. Annualized return on equity for the quarter was 15.9% and the adjusted return on tangible common equity was 22.2%, Really an impressive result, especially in this near zero rate environment and given our strong capital position. Move to Slide 4 and we'll see that the quarter ended with record total client assets under administration of $1,170,000,000,000 which were up 33% on a year over year basis and 7% sequentially.

Speaker 2

We also achieved record PCG assets and fee based accounts of $617,000,000,000 a 9% sequential improvement, will benefit the 4th quarter and record financial assets under management of $191,000,000,000 We ended the quarter with record 8,413 financial advisors and that's net increases of 2 58 over the prior year period and 86 over the preceding quarter. Advisor recruiting has been robust even in this very competitive market. Over the prior four quarters, financial advisors with approximately $325,000,000 of trailing 12 production And nearly $53,000,000,000 of assets at their prior firms affiliated with Raymond James domestically. As for our net organic growth results in the Private Client Group, we generated domestic PCG net new assets of Nearly $69,000,000,000 over the 4 quarters ending in June 30, 2021, representing more than 8.5% of domestic PCG assets at the beginning of the period. And remember, this is net client fees.

Speaker 2

And this trend has accelerated throughout the 12 month period with the past two quarters reaching an annualized rate over 9%. So far this fiscal year is shaping up to be very strong in terms of advisor retention as well as attracting new advisors to the Raymond James platform through our multiple affiliation options. In fact, we are on track for a record year of advisor recruiting in fiscal 2021. We remain focused though on providing a superior platform to support advisors and their clients and also helping advisors grow their practice And it's resonating well in the market. Advisors are attracted to our leading technology solutions as well as our advisor and client Let's move on to Slide 5.

Speaker 2

The Private Client Group generated record quarterly net revenues of $1,700,000,000 And pre tax income of $195,000,000 and 11.5 percent pre tax margin reflecting significant operating leverage over the past Year. Quarterly to net revenues grew 3% over the preceding quarter, predominantly driven by higher asset management related administrative fees, reflecting higher assets and fee based accounts, which will also provide a tailwind for the 4th quarter. The Capital Markets segments generated quarterly net revenues of $446,000,000 and pretax income of $115,000,000 driven by record investment banking revenues and a continued very solid fixed income brokerage revenue performance. The strong result reflects the significant investments we've made to strengthen our platform over the last 10 years And we are continuing to make investments, including the recently completed acquisition of the consumer focused M and A advisory firm, Fonamco, and the announcement of the acquisition of Sabeel, a leading private funds placement agent secondary market to private equities. We are excited to welcome Sanaida and her team to the Raymond James family when we close Sabeel, currently expected to be in the fiscal Q4.

Speaker 2

The Asset Management segment generated record net revenues of $225,000,000 and record pre tax income of $105,000,000 These results are primarily due to the growth of financial assets under management, driven by equity market appreciation and net inflows into fee based accounts in the Private Client Group, partially offset by the modest quarterly net outflows McCarollon Towers Associates, following a solid quarter of net inflows in the fiscal 2nd quarter. Turning to the bank, record net loans of $23,900,000,000 grew 13% over the prior year at 4% sequentially. This growth was primarily driven by the strong growth of Securities based loans to PCG clients of more than 50% 14%, respectively. This is a loan category where we continue to see good opportunities for growth and attractive risk adjusted returns. Raymond James Bank generated quarterly net revenues of $169,000,000 and pre tax income of $104,000,000 Quarterly net revenues declined 5% compared to a year ago quarter, primarily due to the impact of lower short term interest rates.

Speaker 2

Sequentially, quarterly net revenue grew 6% as higher asset balances offset the modest compression in the bank's Net interest margin during the quarter. Pretax income growth year over year was primarily due to the loan loss reserve release in the quarter compared to a provision for credit losses a year ago period. The credit quality of the bank's loan portfolio remains As Paul Shuguri will cover in more detail in his remarks. Looking at the fiscal year to date results on Slide 6, We generated record net revenues of $7,070,000,000 during the 1st 9 months of fiscal 2021, up 20% over the same period a year ago. And despite the losses on extinguishment of the debt this quarter, We still generated record net earnings per diluted share of $6.92 for the 1st 9 months of 2021.

Speaker 2

Adjusted net income was $1,060,000,000 up 73% from the net income In fiscal 2020. And given all the unique circumstances, I think it's also worth comparing our results so far in fiscal 20 21 to fiscal 2019, a very strong year for Raymond James. When comparing the 1st 9 months of fiscal 21 to the 1st 9 months of fiscal 2019, net revenues have grown 24%, net income has grown 27% And adjusted net income has grown 35%. Truly spectacular results, particularly given the zero interest rate environment this fiscal year. Moving to the fiscal year to date segment results on Slide 7.

Speaker 2

The Private Client Group, Capital Markets and Asset Management segments all generated record net revenues and record pre tax income during the 1st 9 months of the fiscal year. Again, these results reinforce the value of our diverse and complementary businesses. Before I turn the call over to Paul, I wanted to highlight a separate announcement we made this morning. We announced our firm's intention to make an offer for the entire issued to be issued shares of capital of a UK based Charles Stanley Group at a price of £5.15 per share Or approximately £279,000,000 the U. S.

Speaker 2

Equivalent of approximately $387,000,000 Charles Stanley is a firm we've admired for a long time and has a tremendous reputation, a 200 year heritage and a talented pool of wealth managers and professionals. The 2 firms share a common and increasingly rare client centric approach where the primary client relationship is held by the individual wealth managers. Raymond James subsidiary of the UK, RJIS, has operated in for over 20 years under strong leadership and has experienced exceptional growth. This combination with Charles Stanley would provide the opportunity for Further accelerated growth in the UK, the 2nd largest English speaking wealth management market. Charles Stanley is nearly 200 Wealth Managers and £27,100,000,000 in client assets, bringing our total UK assets to over £40,000,000,000 Additionally, Charles Stanley multiple affiliation options And greatly accelerate the growth of the RJAS newly launched employee affiliation model, while building on its market leading independent contracting and investment management services businesses.

Speaker 2

As I mentioned, The announcement today is our intention to make this offer. We expect the offer to be made in approximately a month. Regulations Issued by the UK takeover panel limit what we can further say at this point, but we will provide updates as more information is made available. Now for a more detailed review of our Q3 results, I'm going to turn it over to Paul.

Speaker 3

Paul? Thanks, Paul. I'll begin with consolidated revenues on Slide 9. Record quarterly net revenues of $2,470,000,000 grew 35% year over year and 4% sequentially. Record asset management fees grew 8% sequentially, commensurate with the sequential increase of fee based assets in the preceding quarter.

Speaker 3

Private client group assets and fee based Accounts were up 9% during the fiscal Q3, providing a tailwind for this line item for the 4th quarter. Consolidated brokerage revenues of $552,000,000 grew 14% over the prior year, but declined 7% from the record set in the preceding quarter. Institutional fixed income brokerage revenues remained solid, albeit down from the record set in the preceding quarter. Brokerage revenues in PCG were up 22% on a year over year basis, but down 6% sequentially due to lower trading volumes as well as a large placement fee in the preceding quarter. Account service fees of $161,000,000 increased 20% year over year and 1% sequentially, largely due to higher average mutual fund balances.

Speaker 3

Record consolidated investment banking revenues of $276,000,000 grew 99% year over year and 14% sequentially, driven by record M and A revenues and strong debt and equity underwriting results. Our investment banking pipelines remain strong, So we would be pleased if 4th quarter revenues came in around the average for the of the quarterly revenues generated over the 1st 3 quarters of the fiscal year. That would have been about $260,000,000 on average, but of course this line item is inherently difficult to predict. Other revenues of $55,000,000 were up 25% sequentially, primarily due to $24,000,000 of private equity valuation gains during the quarter, of which approximately $10,000,000 were attributable to non controlling interest, which are reflected in the other expenses. Moving to Slide 10.

Speaker 3

Clients' domestic cash sweep balances ended the quarter at $62,900,000,000 essentially flat compared to the preceding quarter and representing 6.1% of domestic PCG client assets. As we continue to experience growing cash balances and less demand from 3rd party banks during fiscal 2021, dollars 8,600,000,000 The client cash is being held in the client interest program at the broker dealer. Over time, that cash could be redeployed to our bank or third party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short term treasuries. On Slide 11, the top chart The combined net interest income and BDPs from 3rd party banks of $183,000,000 were up slightly compared to the preceding quarter as modest NIM compression was offset by growth in client cash balances and higher asset balances in Raymond James Bank. However, it's still down significantly from the peak of $329,000,000 in the Q2 of fiscal 2019, really highlighting the remarkable results we have been able to generate despite near zero short term interest rates.

Speaker 3

In the lower left portion of the slide, we show net interest margin or NIM for both RJ Bank and the firm overall. We continue to expect the bank's NIM to decline to just around or just below 1.9% over the next quarter or 2. The average yield on RJBDP balances with 3rd party banks declined 1 basis point to 29 basis points in the quarter. We believe this average yield will remain around this level for the rest of the fiscal year, but there will likely be downward pressure in this yield in Fiscal 2022, especially in the back half of the fiscal year, if banks demand for deposits don't improve from current levels. Moving to consolidated expenses on Slide 12.

Speaker 3

First, our largest expense compensation. The compensation ratio decreased sequentially from 69.5 percent to 67.2 percent largely due to record revenues in the which do not have direct compensation associated with them. Given our current revenue mix and disciplined management expenses, We remain confident we can maintain a compensation ratio lower than 70% in this near zero short term interest rate environment. And as I've said over the past few quarters, we could outperform that just as we did in the fiscal Q3 with capital markets revenues atorneartheselevels. Non compensation expenses of $425,000,000 increased 18% compared to last year's 3rd quarter and 53% sequentially, primarily driven by the $98,000,000 loss on extinguishment of debt, Acquisition related expenses, the non controlling interest of $10,000,000 and other expenses related to our private equity valuation gains and higher business development expenses.

Speaker 3

As we discussed last quarter, we successfully executed a debt offering in the fiscal third quarter to advantage of the low rate environment and significantly extend the maturities of our existing balances. We raised $750,000,000 of 30 year senior notes at 3.75 percent and utilize the proceeds and cash on hand to early redeem our next two senior notes that were maturing in 2024 in 2026, effectively resulting in the same amount of senior notes outstanding. This resulted in $98,000,000 in losses associated with the early Overall, our results show we have remained focused on managing controllable expenses, while still investing in growth across all of our businesses and ensuring high service levels for advisors and their clients. Excluding the debt extinguishment expense, we do expect non compensation expense to continue picking up over the next few quarters as hopefully travel recognition trips and conferences continue to resume And we continue to increase our investments in technology and high quality service levels for our growing business. We would eventually expect loan loss provisions associated with net loan growth as well.

Speaker 3

Slide 13 shows the pretax margin trend over the past 5 quarters. Pre tax margin was 15.6% in fiscal Q3 of 2021 and adjusted pre tax margin was 19.8%, which was boosted by record revenues, the loan loss reserve release and still relatively subdued business development expenses. At our Analyst and Investor Day in June, we outlined a pretax margin target of 15% to 16% in this near zero interest rate environment. But as we experienced during the 1st 9 months of the fiscal year, there is meaningful upside to our margins when capital markets results are strong and improving macroeconomic trends lead to releases of our allowances for credit losses. On Slide 14, at the end of the quarter, total assets were approximately $57,200,000,000 a 2 percent sequential increase reflecting solid growth of securities based loans at Raymond James Banks.

Speaker 3

Liquidity and capital levels are very strong, with cash at the parent of approximately $1,560,000,000 A total capital ratio of 25.5 percent and a Tier 1 leverage ratio of 12.6 percent. We have substantial amount of flexibility to be both defensive and opportunistic. The 3rd quarter effective Tax rate of 20.3 percent benefited from non taxable gains in the corporate life insurance portfolio. We would expect that tax rate to be around 21% and the fiscal Q4 assuming a flat equity market. Slide 15 provides a summary of our capital actions over the past 5 quarters.

Speaker 3

In the Q3, we repurchased 375,000 shares for $48,000,000 As of July 28, $632,000,000 remains available under the current share repurchase authorization. But as Paul Riley will discuss, our priority continues to be deploying capital to grow our businesses. Lastly, on Slide 16, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy, With most trends continuing to improve, non performing assets remained low at just 12 basis points of total assets and criticized loans declined sequentially. The bank loan loss benefit of $19,000,000 reflects an improved outlook for economic conditions and higher credit ratings on average within the corporate loan portfolio.

Speaker 3

Due to reserve releases and loan growth during For the corporate portfolio, these allowances are higher at around 2.4%. We believe we're adequately reserved, but that could change if economic conditions deteriorate. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Speaker 2

Thank you, Bob. So overall, I'm very pleased with our strong results for this quarter, which topped many records And did so in spite of the persistent challenges of the global health pandemic and near zero short term rates. As for the outlook, we remain well positioned entering the 4th fiscal quarter with records of many of our key business metrics, Strong pipelines for financial advisor recruiting and investment banking. In the Private Client Group results We'll benefit by starting the 4th quarter with a 9% increase of assets in fee based accounts. With the strong recruiting pipeline, we are on track for a record fiscal year of recruiting as prospective advisers across All of the affiliation options have continued to be attracted to our platform, including the leading technology solution, our advisor and client centric culture.

Speaker 2

These recruiting results are primarily strong given the very competitive Market for experienced advisors. In Capital Markets segment, the Investment Banking pipeline remains strong and we expect solid fixed income brokerage Results driven by demand from depository client segment. However, keep in mind, there is still an economic uncertainty due to the ongoing pandemic That could impact these results. In the Asset Management segment, if equity markets remain resilient, we expect results to be positively impacted by higher Financial assets under management. Active asset managers continue to face structural headwinds.

Speaker 2

However, we are pleased to see positive net flows on year to date basis for Caroline Tower Associates. We hope that the one benefit of increased market volatility is that it reinforces the value of our high quality asset active managers. And Raymond James Bank should continue to grow As we have ample funding and capital to grow the balance sheet, we'll continue to focus on lending the PCG clients through securities based loans and mortgages. And we will continue to be selective and deliberate in growing our corporate loan and agency backed securities portfolio. As we look further ahead, We remain focused on the long term growth.

Speaker 2

And as we've outlined at our recent Analyst and Investor Day, those key growth initiatives Include driving organic growth across all of our core businesses, continue to expand our investments in technology and sharpening our focus on strategic M and A. Today's announcement of our firm's intention to make an offer For Charles Stanley Group demonstrates our focus on these initiatives and our commitment to deploy excess capital over time. We believe this acquisition stays true to our long standing criteria for acquisitions of first, being a good cultural fit, A good strategic fit and makes financial sense for shareholders and something we can integrate. I also want to once again take a moment to thank our advisors and associates. They've been amazing at being able to provide excellent service To their clients through these difficult times, I'm very proud to be a part of this special Raymond James family.

Speaker 2

Thank you all for attending with that operator. Tommy, I'm going to turn it over to you for questions.

Operator

Thank you very much. We'll get with our first question on the line from Manan Gozalia from Morgan Stanley. Please go ahead with your question.

Speaker 4

Hi, good morning. I was wondering if you can dig in a little bit into the Charles Can you just talk us through maybe the rationale for the acquisition? Why expand in the UK versus the U. S. And maybe what the synergies are with your current business there?

Speaker 2

Again, there's not a lot we can say right now except the strategic rationale is that we believe we can grow in all of our markets We certainly have the capital to grow in the U. S, Canada, in the U. K. And believe in all three of those private wealth markets. We've been in the U.

Speaker 2

K. Market at Raymond James, RJIS for 20 years and we've had very good growth, but we're, I'd say undersized and our employee channel is really nascent. Charles Stanley brings first a culture Identical to us. It's stewarded by the Howard family for generations. I think the 4th generations in the business Has the very same value of client centric, advisor centric culture and has multi channel.

Speaker 2

So The combination gets us at £40,000,000,000 and really gives us the mass to utilize A lot of the things they've done well and to continue to grow that business and really give us the base to make a difference. So It's not saying we're not choosing it over the U. S, Canada or the UK. We believe in all three of those markets. When we find these rare opportunities to acquire a 200 year old firm that has a great brand and name and matches our culture, we're going to act.

Speaker 2

So we believe very strongly in it and I think it will really help our business.

Speaker 4

Great. Anything I know you can't say that much given regulations, but anything you can say on The financial details, revenues, pretax margin, maybe how much capital you're utilizing from the acquisition. Yes, I can sort of see from their disclosure that it's about $240,000,000 or so in revenues and a 10% profit margin, but I'm also assuming that there are synergies and additional investments that you are thinking about. So is there any more color you can give on that?

Speaker 2

I would just say that not a lot. I mean, you can see the public information on their current revenues and base and we do plan to invest And the technology of that business and we think combined it will be we'll be able to be at a much better place to do that. They've got a very good back office and strong technology. So but outside of the details, we really can't get into any more details right now. But we will make them available as soon as we can.

Speaker 4

Got it. And anything on the capital that you're utilizing for the acquisition?

Speaker 3

Yes, I would tell you, in our regulatory filing, we basically said that we have sufficient Cash on hand to fund the acquisition. The regulatory filing also discusses a loan note offering that would be possible. That's Fairly common in the UK, as discussed in the filing, there's it has a nominal interest rate of about 10 basis points, Which can change over time with short term rates. But obviously, with the overall cash Overall consideration of less than $400,000,000 we have $1,600,000,000 almost of cash at the parent company. As we discussed earlier on the call, we have a $1,000,000,000 target.

Speaker 3

So we have sufficient cash at the parent company to fund the acquisition without kind of any capital actions beyond that.

Speaker 4

Great. Thank you.

Operator

Thank you very much. We'll go to our next Question on the line is on the line of Bill Katz with Citigroup. Please go ahead.

Speaker 5

Okay. Thank you very much for taking the questions. So I guess maybe start with Paul, as you think about maybe both of you guys, just in terms of getting to that Tier 1 leverage ratio, How does this acquisition sort of fit in against that? And maybe stepping away from that, as you sort of commented on that the primary focus area is growth, Should we assume that the bank growth will be the primary driver to driving down that Tier one leverage ratio over time? Thank you.

Speaker 2

I think you're going to see it in all sorts of ways that you saw the announcement today. We are looking at other opportunities to And again, we can never predict these. So many of these we've known people for years before They're interested in selling. So we our strategic M and A has really sharpened and our opportunities have really sharpened. I don't know if deals will happen again, but if we can find opportunities that expand our business, that's we've said that's our priority.

Speaker 2

We also plan to grow the bank to the extent we can. Within that, we've used share repurchases when we Ken, so I think we're still going to focus on opportunities to grow our business, which includes strategic M and A And also continue to grow the bank and the level of the bank growth and our aggressiveness probably depends first on economic Opportunities, but also how much capital we're able to deploy through other opportunities. So we'll balance that out. Okay.

Speaker 5

That's helpful. And then maybe just a follow-up question. I wonder if you could unpack, Paul, your comments on the NIM About sort of maybe a little bit under the 190 over the next couple of quarters and maybe on the sweep side where you sort of called out sort of second half of next year. Can you maybe ring fence like what might be expiring or coming up for contract renewal as we sort of think about the timing next year? Thank you.

Speaker 3

Yes, Bill, we kind of just essentially reaffirming our guidance on the NIM at right around 1.9% that we provided last quarter. So over the next quarter or 2, obviously, depends somewhat on asset mix and the growth of the agency MBS portfolio, which we've essentially de Over the last quarter, just given where rates are, we would expect to come in right around that one point 9%, give or take a couple of basis points over the next quarter or 2. As far as the yield on the BDP balances with 3rd party banks, There's a significant portion of our deposits that mature contractually over the next, I would say, 6 to 12 months. Right now, the sort of market rate for new deposits, if you can even get capacity, is much lower than the 30 basis points or the 29 basis points that we're currently earning on average. But remember, if the yield on those deposits aren't attractive with those 3rd party banks.

Speaker 3

We have the capital flexibility going back to Paul's comments earlier to bring those cash balances on the balance sheet and invest in other assets. So I don't think it's as easy as the formula of just assuming that those balances Reset at a lower yield off balance sheet because depending on what we can earn off balance sheet, It may be more compelling to bring it on balance sheet and invest in other assets at the bank, securities and or loans.

Speaker 5

Okay. Thank you both.

Operator

Thank you very much. And we'll get to our next Question on the line from Steven Chubak from Wolfe Research. Go ahead. Hi, good morning.

Speaker 6

So I had a follow-up to Bill's earlier question. You cited the continued pressure on the bank NIM Now consistent with the trend we've seen in recent quarters, just given the very strong loan growth, particularly in the SBL channel And already low securities yields. I was hoping, Paul, that you could unpack what's the primary driver of the NIM compression from here. And relating to the 3rd party sweeps, What's the breakeven level or spread where you might look to sweep 3rd party cash more aggressively to the bank As you face that repricing or that pricing headwind in the back half of next year?

Speaker 3

Yes. I would tell you, Steve, that the Primary driver of the NIM compression, because most of the short term rates are reflected in sort of the yields of the various Asset categories, most of our asset categories are floating in nature, so they reflect the kind of rate environment that we're in. So most of the NIM dynamic going forward is really going to be driven by asset mix. So for example, this quarter, We grew securities based loans on a net basis, dollars 700,000,000 which is just truly fantastic growth, 14% sequentially, Over 50% year over year. And those have those are fully secured with marketable securities and Help strengthen the relationships between advisors and their clients in the private client group.

Speaker 3

So we love that asset. But that yield is 2 point 2% on average in the quarter, whereas the corporate loans are in the 2.5% to 2.6%, and they Have been growing. We've been resumed growth there, but not to the same extent as the SBL. So just by the change in mix to sort of the lower risk categories like securities based loans, that's going to put downward pressure on your NIM, all else being equal. As far as the breakeven analysis, I wish it was that simple.

Speaker 3

There's a lot of variables that go into that To bring it on balance sheet, obviously uses capital. And then you have to essentially take either duration and or credit risk to earn a higher yield. And so and that higher yield changes week to week depending on the latest Fed announcement. So One thing is certain, if we don't have the capacity off balance sheet or the capacity is at very low rates, then The bringing it on balance sheet certainly looks more attractive on a relative basis, and that's something that we have the capital and the appetite to do if necessary.

Speaker 6

Understood. Okay. And then for my follow-up, Paul, just on some of the non comp commentary that you provided. You noted that non comp expenses should grow as T and E picks up, ultimately a good problem to have. If I look at the non comps this quarter and I back out the non controlling interest piece, the reserve release, the clean number is about $330,000,000 It's slightly above that $1,300,000,000 annualized run rate you had spoken to in the past.

Speaker 6

Just given some of the drivers of non comp growth you cited, how should we be thinking about The pace of growth from here and maybe can you give us an updated run rate or jumping off point as we think about the non comp trajectory for the next couple of quarters?

Speaker 3

Yes, Steve. Unfortunately, still a lot of uncertainty there, business development being one prime example of that. I would Say the $1,300,000,000 jumping off rate, I want to say that our quarterly revenues at that time were somewhere around 1 point $7,000,000,000 to $1,800,000,000 I don't remember exactly when that was, but we're at $2,500,000,000 now. Just the business is a lot bigger now, and there's a lot of expenses that are directly associated with the size Our business, whether it be sub advisory fees that support the asset management business, whether it be FDIC insurance expense, which supports the bank, Branches, branch expenses, we continue to recruit more advisors. We've done a couple of acquisitions.

Speaker 3

We just announced another one. So A lot has changed since we provided that $1,300,000,000 metric, which begs the question, When are we going to provide more new guidance and a new threshold? And I would say we want to do that as soon as there's more clarity kind of on the go forward path, particularly for things like business development expense. In fiscal 2019, before the pandemic, that was running at around $200,000,000 for the year, 50,000,000 Quarter, so even this quarter's number of $31,000,000 is well below that, as an example. And then loan loss provisions as well.

Speaker 3

Obviously, that is something that's going to be volatile until there's more kind of economic certainty or clarity going forward. So As soon as there is more certainty around what these expenses will look like, we will certainly be transparent as we always are and try to provide you better guidance.

Speaker 5

Thanks. Is it okay

Speaker 6

if I squeeze in one more? Just wanted to get a view on the organic growth Obviously, the 9% that you cited is just a very impressive statistic. It looks like both you and your peers are running well above long term averages. I was hoping you could just speak to the sustainability of the organic growth as well as what you're seeing across all the different affiliation options.

Speaker 2

So part of that depends. The market's been robust and people have been growing and the client engagement So that can all change with the downturns where clients get fearful and assets often Don't grow the same in those environments. But if you look at any outlook we see in the short to mid term at all, but still very, very positive. Again, as I said, I'm here in a meeting with our advisors and they're all very positive experiencing our top advisors, Not just record growth, their businesses, but I can tell you by the questions over 2 days and watching what they're doing with their practice, They have no thoughts of slowing down either. So again, short to mid term, I think it's sustainable.

Speaker 2

The Prudent has been good across all the options, which is ironic too sometimes. We got slowed down a little bit a few quarters It's on a pace to hit a record this year even after that very slow start. So We're seeing it all across the affiliation options. The pipeline is very strong. And so I'd say for the short to Mid term, it looks very, very good.

Speaker 2

Longer term, it depends on the economic viability. The numbers for the economy growth were good this quarter. And if that

Operator

Thank you very much. We'll proceed to our next question on the line from Jerry O'Hara with Jefferies. Go right ahead.

Speaker 7

Great. Thanks for taking my questions this morning. Perhaps just kind of stepping back a little bit as it relates to the acquisition, Could you give us a little bit more sense as to your ex U. S. Kind of, I suppose, M and A strategy and where you think Maybe some of the markets that you're most under penetrated in or perhaps where those where your offering specifically would resonate best?

Operator

Thank you.

Speaker 2

Yes. So the focus depends on the business unit. The focus in the Private Client Group has been in the U. S, Canada and the U. K.

Speaker 2

We have unique offerings, I think, more or less in all those markets with the multi affiliation options, again, unique in Canada And in the U. K. So Charles Stanley was a perfect fit because there aren't many people, Just the cultural heritage, but the multi channel options. So we are focused in the private client group of Any type of opportunity in those three markets, we're not really looking to expand in other markets in the Private Well, business right now, and we just want to focus on growing and competing well in those three markets. It's broader in the M Category is the one business that we do look at global opportunities, both from a capital deployment.

Speaker 2

I The capital for most places is just an office and people versus capital is heavier in the other business It's a global business, so we will continue to look for opportunities. But again, we've been focused in North America, the UK and Europe, but we have looked at things in other places. And then the rest of the businesses have continued to be kind of North American and U. K. Focus.

Speaker 2

So we're not we don't we have plenty of capital to grow. We think we're Strong positions in the U. K. We had a very good practice, but it was small. And we think this acquisition would put us in a very competitive position We think accelerate the growth.

Speaker 2

So that's been our focus, continues to be our focus and we're not looking at other

Speaker 7

Okay, that's helpful. And then perhaps one for Paul Shuckre and forgive me as I'm still new to the story, but I think you cited 21% around the tax rate into fiscal 4Q assuming a flat equity market. Can you perhaps just Remind me a little bit about what some of the puts and takes that could kind of move that rate higher or lower as depending on I suppose backdrop?

Speaker 3

Yes, and welcome to the story. Glad to have you part of the coverage universe. Yes. One of the biggest drivers and we can get into more detail offline for the tax that impacts the tax rate quarter to quarter We have a corporate owned life insurance portfolio, which we use to sort of fund the some of our non qualified Benefits that we offer our associates. And so the way that corporate owned life insurance Portfolio, those balances work is that when the equity market appreciates, that typically results in non taxable gains in that portfolio, Which means that our effective tax rate all else being equal is lower and vice versa when the equity market goes in the other direction, It results in nondeductible losses, which means our effective tax rate, all else being equal, goes higher.

Speaker 3

So typically, the trend is when the equity markets are up, Our effective tax rate is lower and vice versa. Again, there's a lot of other factors, but that is the factor that seems to be the most Sort of volatile or impactful from quarter to quarter.

Operator

We'll get to our next question on the line from Devin Ryan with JMP Securities. Go right ahead.

Speaker 8

Hey, good morning, everyone. How are you?

Speaker 3

Hey, Devin.

Speaker 8

Hey. Sorry, I hopped on a minute late here, so apologies I'm being a bit redundant, but on the recruiting outlook, appreciate that it remains robust, but We've been hearing in the market that on the employee side, there's been kind of another maybe ratcheting up of competition Packages, are you guys seeing that? And I know you had spoken about a few quarters ago kind of increases and then you took Your offer up. So I'm curious like are we hitting another level where competition is intensifying even more so we may see more Pricing pressure or just higher packages, just kind of curious what you're seeing in the market there?

Speaker 2

Yes, I can't really say that. I think We've been so active in recruiting that we pretty get a good feel what everyone's doing. So we said a few quarters ago that People have been ramping up for a year. We had and we had to make some adjustments, but I can't if it's competitive, There are always, it seems like an outlier offer. There's always seems to be an outlying offer Here or there every time we recruit.

Speaker 2

But again, it's not how we recruit. We give a competitive package, but often not the highest and stick to it. And Again, the results have been tremendous. So I can't say it picked up a while ago and I can't say I've any difference in the last couple of quarters.

Speaker 8

Okay, terrific. And then just a follow-up on acquisitions. I know Fair amount of color here this morning. But as you think about some of the other types of acquisitions in wealth management that maybe Aren't as traditional just buying financial advisor franchise. Are there other areas that Could be interesting that you guys are looking at whether it be technology that accelerates growth in a new way or Additional product capabilities, are there other types of things that you guys are looking at that I know are maybe a bit nontraditional for Raymond James, but just kind of also Strategically aligned with the M and A opportunity.

Speaker 8

It feels like there's maybe even more to do than Historically, there has been some. I'm curious what you guys are seeing on that front as well.

Speaker 2

Yes, I would say, Devin, there's absolutely we're looking at a lot of things. And One of the categories is firms that are offer new services or products that Or extensions of what we do and then WPS is probably an example of that. But also looking at technology Firms that utilize technologies that really kind of propel the businesses we're in. And we've been very active in that too. So it's It takes a lot of time because you have to find them and then really understand how that technology works and fits and how it will really benefit our businesses, It would be complementary or maybe great to find something that automated or revolutionized part of the business, but those are Harder to find, but we're looking a lot at what I call technology backed or technology firms in our spaces We think we could utilize the technology to be a strategic client advantage and to make us more efficient and So the answer is yes.

Speaker 2

We've been looking very hard at a number of opportunities. And again, we've On the M and A focus, much more focused over the last year or 2 on those types of opportunities.

Speaker 8

Okay, great. And if I can just squeeze one more in here. On the fixed income brokerage business in the Capital Markets segment, obviously, It's been a very good environment for that business. Is there any way to give us any more context around kind of the growth of that Franchise, so revenues have been expanding very good fiscal 2020, good start to fiscal 2021. And I think We had questions around the sustainability or kind of what normalized looks like.

Speaker 8

And I know that's not necessarily easy to answer, but Is there any frameworks around kind of how that business has scaled? So the pie is expanding or the bar has moved higher because It's just a bigger business say than it was 2 or 3 years ago.

Speaker 2

Yes, sir. It's been an unusual environment where both fixed income and equities You've been going back in history, you can't find many windows like that. But They've expanded both in products, in the debt capital markets business over the last few years and other areas. And we still continue to look And areas of fixed income and our sales and trading business where we have strong client basis, but not offering certain products And I really don't want to go into what those are, but we continue to look and round those out. And That's been part of the growth too besides the robust markets.

Speaker 2

And they didn't have a record quarter, but they had a very strong quarter and chasing When you're chasing records all the time, you don't always set a record, but we're really pleased with what they've done and the franchise has continued to grow and prosper. So yes, We think in all of our businesses there are investment opportunities and some are harder to find than others, but we continue to look. And I think there is room to grow.

Speaker 8

Okay, terrific. Thanks very much.

Operator

Thank you. And we'll proceed with our final question for today. It is another follow-up question from the line of Bill Katz from Citigroup. Please go ahead.

Speaker 5

Okay. Thank you so much for taking the extra question. Just circling back to the Investment Bank, so your momentum seems very strong. I think your commentary on qualitatively around the outlook Also, it's very strong. Can you unpack that a little bit more just in terms of just like the environment versus some of the added capabilities that you've had?

Speaker 5

Also, I think at your Investor Day recently, you mentioned sort of getting to the aspirational goal of $1,000,000,000 on the equity centric side. It seems like you might already be there just given the pacing here, but how to think about maybe the incremental opportunity from here versus maybe some of the cyclical Benefit we're getting from the robust market backdrop? Thank you.

Speaker 2

Yes. So it's been a very strong Market, certainly both for us and our competitors and the environment of low debt costs and high EPS multiples and a lot of privately Held firms or invested firms in their portfolios of trade, so the backdrop has been very, very strong. But In addition to that, as Jim Bunn said, well, we're doing well, but the market's well. But I said, you're not giving yourself enough Credit for positioning for that growth. So not only has he been great at recruiting and building the teams, but we continue to do that.

Speaker 2

So you see Fonamco, Just joined us, which has already scored a few deals of good size in a very short period of time with us. And so they're not Their run rate is really not online. We're very excited about Sabeel and think that's a great growth business. And there are a few other verticals that we're not well positioned in that we're looking to do the same things. And so It's partly a market story, but giving that team credit, it's also been a market positioning and share gain, which they have made.

Speaker 2

And Some could argue we're undersized for our size. That may be true, but they're certainly building and doing a great job and I think Continue to plan to do that. The market has just been a big added bonus to their plan.

Speaker 5

Thank you very much for the extra time.

Speaker 2

Thank you.

Operator

Thank you very much. Actually, we have no further questions on the line. Mr. Riley, I will turn it back to you for those closing remarks.

Speaker 2

Great. So thank you all for joining us. Obviously a strong quarter, Good markets. And I think given that there's not any shocks to the system, we feel good about this quarter. And we'll give you more information as we can So once we can and we will give you more information, but we're very excited about the opportunity.

Speaker 2

Thanks for joining us and We'll talk to you soon.

Operator

Thank you very much. And this does conclude the conference call for today. We thank you for your participation as we disconnect your lines. Have a good day, everyone.

Powered by Quartr
Earnings Conference Call
Raymond James Q3 2021
00:00 / 00:00