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Raymond James Financial, Inc. (NYSE: RJF) Fourth Quarter 2023 Earnings Call Transcript, October 25, 2023
Raymond James Financial, Inc. ne Assembly Earnings Expectations. Reported EPS is $2. 13 consistent with the stock, expectations were $2. 28.
Kristina Waugh: Hello and welcome to Raymond James Financial’s fourth quarter and full year 2023 earnings call. The call is being recorded lately and will be playable on the company’s investor relations website. My call is Kristie Waugh, Senior Vice President. Investor Relations, and thank you for joining us today. Here today: Paul Reilly, President and CEO; and Paul Shoukry, Chief Financial Officer. Today’s presentation will be available on our Investor Relations website. After the comments are ready, the operator will open the line for questions. In drawing your attention to the second slide, please be aware that certain statements made in this call would possibly constitute forward-looking statements.
These statements include, but are not limited to, data relating to long-term strategic objectives, business prospects, currency effects, the timing and expected benefits of our acquisitions and our point of good fortune in the integration of acquired businesses, divestitures, expected effects of litigation and regulatory developments or general economic developments. In addition, words such as may, may, anticipate, expect, continue or deny those terms or other comparable terminology, as well as any other statements that necessarily count at times in the long term, are intended to identify forward-looking statements. Please note that there can be no assurance that actual effects will not differ materially from those expressed in those statements.
A business-clad guy making an investment decision, underscoring the company’s commitment to making sound monetary decisions.
We inform you of the risks described on our most recent Form 10-K and on the following Forms 10-Q and 8-K, which are available on our investor relations website. During today’s call, we will also be using certain non-GAAP money funds. Measures to provide data applicable to our management’s view of ongoing business performance. A reconciliation of these non-GAAP measures to comparable maximum GAAP measures can be found in the appendices accompanying our presentation and press release. Now I’m going to hand it over to President and CEO Paul Reilly. Paul?
Paul Reilly: Good evening and thank you for being with us today. I’ve spent a lot of time over the last few weeks in front of our advisors. First, travel with our luckiest independent advisors for a wonderful, wonderful journey to see. the good fortune of their business and the positive nature of what they feel about the company. And then by attending our RCF conference, our RIA department and our compensation company. Again, this department now accounts for more than 10% of our personal consumer pool. And it’s wonderful to see the expansion and enthusiasm there as well. Turning now to our results, despite a challenging environment, coupled with a regional banking crisis, increased volatility and emerging interest rates, we generated record net income and profit for the last fiscal year.
This is our third consecutive year of record effects in very different market environments, achieved while staying true to our philosophy; We put customers first, act with integrity, price independence, and think long-term. These basic prices are more than words on a page, they are lived day in and day out through our advisors and associates. This determination and focus provide economic stability that challenges times and makes me feel confident about our continued good fortune in the future. Looking at the effects of the fourth quarter, starting with the fourth slide, the company reported record quarterly net sales of $3. 05 billion, a net source of revenue available to regular shareholders of $432 million or $2. 02 per diluted share. Excluding acquisition-related expenses, the adjusted net income source available to common shareholders was $457 million, or $2. 13 per diluted share.
Increased asset control and interest-like earnings resulted in a significant year-over-year expansion of earnings, with net profit expanding by as much as 8%. Quarterly effects were negatively impacted through higher provisions for legal and regulatory matters, adding an additional provision of $55 million. similar to the SEC’s sweep of the off-platform communications industry, previously disclosed. This provision resulted in a quarter-over-quarter effect of $0. 26 consistent with diluted equity. We delivered strong returns for the fiscal fourth quarter with an annualized advance. of 17. 3%, an adjusted annualized tangible equity return of 22. 2%, a strong result, especially given our strong capital base. Moving on to slide five, year-over-year expansion in consumer assets was strong, driven through biological expansion across all of our partner options, as well as market appreciation.
We ended the quarter with general consumer assets under leadership of $1. 26 trillion, CCP and accounts paid off of $683 billion, and monetary assets under control of $196 billion. By continuously focusing on retaining, supporting, and attracting high-quality monetary advisors, PCG consistently generates strong biological expansion, which was demonstrated this year with $14. 2 billion in net new domestic assets in the fiscal fourth quarter, representing a 5% annualized expansion. Assets of $73 billion reflect an annual expansion rate of 7. 7%, a leading result in the industry. During the year, we hired financial advisors from our national independent contractors and worker channels with approximately $250 million in production over the past 12 years and nearly $38 billion in consumer assets from their businesses beyond.
These effects don’t occur with our RIA and our child care business, RCS, which had another strong year in terms of hiring. Most importantly, we continue to run at a very low [regrettable] (ph) of money advisor attrition at about 1%. These points contributed to our 7. 7% annual NAN expansion. Total domestic and enhanced savings program balances ended the quarter at $56 billion, down 3% from June 2023. The Enhanced Savings Program, with its competitive rate and strong FDIC insurance coverage, continued to attract significant money this quarter, partially offsetting a decline in visitor movement balances largely due to the collection of quarterly payments and money sorting activity. Total bank lending increased 1% quarter-over-quarter to $44 billion, reflecting subdued loan demand in our target markets, driving higher rates amid macroeconomic uncertainty.
Moving on to slide six, Private Client Group generated record effects with quarterly net earnings of $2. 27 billion and a pre-tax earnings source of $477 million. Year-over-year, the effects were driven by a robust asset-based source of earnings and the advantages of earning higher interest rates on the source of earnings and interest-related expenses. Capital Markets generated quarterly net profit of $341 million and a pre-tax loss of $7 million. Revenue decreased 15% from the prior-year quarter, primarily due to the steady decline in the source of profit at the brokerage. Profits in investment banks. However, we are pleased to see sequential improvement in M&A and advisory earnings this quarter. In addition, our public finance activities intensified, with debt underwriting developing sequentially up to 32%.
The incredibly challenging market environment, particularly for investment banking, has put pressure on the short-term profitability of segment effects. And as we explained above, segment effects are negatively impacted through the amortization of prior-year stock-based payments as well as expansion investments. We remain focused on managing controllable expenses while short-term revenues are depressed. The Asset Management segment generated a pre-tax revenue source of $100 million on a net income source of $236 million. The increases in the source of net income and pre-tax revenue compared to the prior quarter were largely due to higher assets in PCG’s fee-based accounts at the start of an era of quarterly turnover and strong net flows at Raymond James Investment Management, which generated $920 million in net inflows in ingresos. net fiscal fourth quarter and $2. 2 billion in inflows during the fiscal year.
The Banking segment generated net income of $451 million and a pre-tax revenue source of $78 million. The fourth quarter NIM for the Banking segment of 2. 87% decreased through 4 foundation issuances compared to the same quarter last year and through 39 foundation issuances. compared to the previous quarter, basically due to a combination of higher deposit charges. We continue to charge various investment resources with higher fees through our enhanced savings program, and as a result, we have shifted more of the sweep investment with lower fees to third parties. Match benches. In a few minutes, Paul Shoukry will communicate more about that. While this had a negative effect on the NIM of the banking segment, the RJBDP’s superior third-party banking fees were offset. Therefore, this remains a net positive result for the company as a whole, while offering advisors an attractive deposit option. offer to your customers.
Looking at the effects of fiscal 2023 on slide seven, we generated record net earnings of $11. 6 billion and a record net source of non-unusual shareholder earnings of $1. 7 billion, up 6% and 15% respectively from last year’s records. We generated strong returns on a non-unusual equity of 17. 7% and adjusted returns on a non-unusual tangible equity of 22. 5% for the year. On slide eight, the strength of the PCG and Banking segments for the year primarily reflects the advantages of strong biological expansion. into Private Client Group, the successful integration of TriState Capital and obtaining higher short-term interest rate advantages. Compared to last year’s record levels of activity, the weaker effects of capital markets reflect the challenging environment for investment banking and the steady source of profit brokerage. earnings, despite higher gains from the acquisition of SumRidge, which we completed in June 2022.
And now, I’ll turn it over to Paul Shoukry to take a closer look at our fourth-quarter results. Paul?
Paul Shoukry: Thank you, Paul. Starting on slide 10, consolidated net earnings hit a record $3. 05 billion in the fourth quarter, up 8% from a year ago and up 5% sequentially. Associated asset leadership and control fees increased by 12% compared to the previous year. compared to the prior-year quarter and 5% sequentially due to higher assets in accounts paid at the end of the prior quarter. This quarter, paid-in assets decreased 2%, which will be a headwind to our asset control and related administrative expenses in the first quarter. Fiscal Quarter 2024. La brokerage profit was $480 million stable year-over-year and grew 4% sequentially. Year-over-year, the decline in the steady source of brokerage profits in the capital markets was offset by higher CCP brokerage gains.
I’ll talk shortly about account and service fees and the source of net interest earnings. Investment banking profits of $202 million declined 7% year-over-year. Sequentially, 34% increased primarily due to higher gains in M&A and advisory, as well as a strong quarter for public finances. We are cautiously positive about the improving M&A environment, and we continue to see a healthy investment banking portfolio and strong new business activity. However, many uncertainties remain about the speed and timing of the publication and closing of deals. given increasing market volatility and geopolitical concerns. Therefore, while we do not see a significant improvement in the next fiscal quarter, we expect greater effects over the next 6 to 12 months.
Other revenue of $54 million decreased 33% compared to the prior year quarter, primarily due to declining income from housing investments. The pipeline of projects for this business remains strong, however, several closings have been postponed until fiscal 2024 due to emerging interest rates. On slide 11, domestic consumer balances and enhanced savings systems ended the quarter at $56. 4 billion, down 3% from the previous quarter and accounting for 5. 1% of CCP’s domestic consumer assets. Advisors continue to serve their consumers effectively, leveraging our competitive liquidity offerings. . The enhanced savings program increased deposits by approximately $2. 4 billion this quarter. A giant portion of the total money coming into ESP has been made up of new budget coming into the business through advisors, underscoring the appeal of this product and Raymond James standing out as a source of strength and stability.
As many eligible consumers have now benefited from this product, the velocity of flows into the naturally enhanced savings program has slowed. As of Monday of this week, scan and ESP balances decreased by approximately $620 million for the month of October, as the ESP expanded. Balances were more than offset by quarterly payment invoicing, as expected. We continue to think that we are closer to the end of the dynamics of species classification than the beginning. However, until rates stabilize, we wouldn’t be surprised to see a new end to consumer rankings. yield. Transfer balances with external banks amounted to $15. 9 billion at the end of the quarter, giving us a significant investment cushion when interesting expansion opportunities arise. The strong expansion of Enhanced Savings Program balances at Raymond James Bank allowed for more balance sheet imbalances to unfold.
While this dynamic has negatively impacted the banking segment’s NIM due to the geography of lower-cost movement balances removed from the balance sheet, in the end it provides consumers with an interesting deposit solution while maximizing the company’s investment flexibility. They have sufficient equity financing for attractive loan growth. For slide 12, the combined net interest income source and RJBDP fees for outside banks was $711 million, almost unchanged from the previous quarter, as a sequential reduction in the company-wide net interest source. of revenues was offset by higher RJBDP expenses from third-party banks. If you recall, in our last earnings call, we expected a 5% sequential decline in the interest income source. Therefore, we are satisfied with the better-than-expected result, which is partly due to higher-than-expected returns in monetary money. markets. RJBDP Third Party Balances.
Bank net interest income decreased sequentially by 39 foundation issuances to 2. 87% for the quarter, while the average return on RJBDP balances with third-party banks increased by 23 foundation issuances to 3. 6%. While there are many variables that will have an effect on actual results, in the absence of any replacement in short-term interest rates, we currently expect the combined source of net interest income and RJBDP fees from third-party banks to decline approximately 5% in the fiscal first quarter compared to the fiscal fourth quarter. . And that’s only based on cash balances after fees are charged this quarter. As has been the case for the previous two quarters, this outlook may become cautious once again if monetary balances stabilize around existing levels and/or if bank assets grow. more than expected for the remainder of the quarter.
But as we’ve said, rather than focusing on maximizing the NIM in the near term, we’re focusing more on preserving flexibility and expanding the source of net interest income on RJBDP rates over the long term, which we think is well-positioned to accomplish this. As many of you will probably remember, we still expected the industry to overtake the main source of interest income early on in an emerging rate environment and then revel in some normalization of the interest income source as clients redistribute their money to higher-yielding alternatives. . Moving on to consolidated expenses on slide 13, payment expenses were $1. 89 billion and the overall payment ratio for the quarter was 62%. The adjusted payout ratio was 61. 4% during the quarter, which we are very pleased with, especially given the challenging money market. surroundings.
Non-compensation expenses totaled $576 million, up 1% sequentially. As mentioned by Paul Reilly previously, the fiscal fourth quarter included an additional provision of $55 million similar to the SEC’s previously disclosed wave of industry off-platform communications, which impacted the quarter by a consistent $0. 26. with diluted participation. Combined with the provision for the fiscal third quarter, we are confident that we are now fully focused on this matter. PCL for the quarter was $36 million more than $2 million from the year-ago quarter and decreased $18 million from the prior quarter. I’ll be back to credit quality in the banking segment shortly. In summary, while there has been some noise with the main provisions for legal and regulatory issues this year, non-compensatory expenses and provisions for credit losses have been adjusted.
And those legal and regulatory provisions were very close to our annual expectations of $1. 7 billion. This reinforces the fact that we remain focused on the management of public funds as we proceed to invest in expansion, ensuring the highest level of service for advisors and their clients. Slide 14 shows the evolution of the pre-tax margin over the last five quarters. In the current quarter, we generated a pre-tax margin of 19. 2% and an adjusted pre-tax margin of 20. 3%, a strong result given the demanding industry-wide situations affecting capital markets under the aforementioned legal and regulatory provisions. On slide 15, at the end of the quarter, total assets were $78. 4 billion, a sequential increase of 1%. Liquidity and capital remain very strong. Parent company RJF’s money ended the quarter at $2. 1 billion, well above our target of $1. 2 billion.
The Tier 1 leverage ratio of 11. 9% and overall capital ratio of 22. 8% are more than double the regulatory needs to be well capitalized. The Tier 1 leverage ratio of 11. 9% reflects about $1. 5 billion of excess capital above our conservative target of 10. %, which would still be double the regulatory needs to be well capitalized. Our capital levels continue to provide significant flexibility to remain opportunistic and invest in growth. We also have significant conditional funding resources. We have a $750 million revolving credit facility and approximately $9. 5 billion of FHLB capacity in the banking sector. Slide 16 provides a summary of our capital movements over the past five quarters. During the year, the Company repurchased 8. 35 million shares of common stock for $788. million, at an average value of $94 consistent with the stock.
As of October 25, 2023, approximately $750 million remained available under the non-unusual percentage repurchase authority approved through the Board. While we did not complete any redemptions in the fourth quarter, due to self-imposed restrictions, as a precautionary measure, given our wisdom on the aforementioned topic from the SEC and off-platform, we remain committed to our planned redemptions to offset the dilution of the TriState equity acquisition and stock-based redemption as discussed above. Finally, on slide 17, we provide key credit signals for our banking business, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is strong. Loans criticized as a percentage of total loans held for investment ended the quarter at 1. 17%.
Provision for bank loan losses as a percentage of total loans held for investment ended the quarter at 1. 07%. Bank provision for credit losses on commercial loans, as a percentage of total commercial loans held for investment, was 2. 03% at the end of the quarter. We believe that this constitutes an appropriate reserve. But we continue to closely monitor any effects of inflation, supply chain constraints, emerging interest rates, and a potential recession on our commercial loan portfolio. Given the challenges facing the entire industry, we continue to closely monitor the advertising real estate portfolio and, in particular, the workplace portfolio. We have cautiously limited exposure to workplace loans, which make up only 3% of overall banking segment lending.
I will now give the floor to Paul Reilly to talk about our perspectives. Paul?
Paul Reilly: Thank you, Paul. As I said at the beginning of the call, I am pleased with our effects for fiscal 2023 and our ability to generate record profits even in challenging market conditions. This year’s record impact underlines once again the strength of our diversified and complementary activities. And while near-term economic uncertainty persists, I believe we are in a strong position and well-positioned to drive long-term expansion across all of our businesses. In Private Clients, the effects of the next quarter will be negatively impacted through a 2% sequential decline in assets and commission-based accounts. In the near term, we expect some headwinds to PCG’s earnings and the banking segment, given continued money sorting activity.
However, I am confident that we will continue to generate industry-leading expansion as existing and potential advisors are attracted to our customer-centric values and industry-leading product and generation solutions. Our advisor recruitment activity has particularly accelerated over the past two months. with a record number of giant groups in the works. In the capital markets segment, as we saw this quarter, there are signs of improvement in investment banking, and we continue to have a healthy M&A portfolio and smart degrees of engagement. There are still reasons to be positive, we expect the speed and timing of transactions to be strongly influenced by market situations and we expect activity to likely pick up over the next six to twelve months. And in constant revenue, last year the momentum continues.
Custodial clients are seeing their deposit balances shrink and they have less money to invest in securities, which is putting pressure on our brokerage business. We hope that once rates and money balances stabilize, we can start to see improvement. In some challenging short-term situations, we, the capital markets business, are well placed to grow given the investments we have made over the past five years, which have particularly increased our production capacity and market share. In the asset management segment, monetary assets under control started the fiscal quarter down 2% compared to the previous quarter, which is expected to reduce revenue. We remain confident that strong asset expansion and fee-based accounts at Private Client Group will drive long-term expansion. in monetary assets under control.
In addition, we expect Raymond James Investment Management to help drive expansion through enhanced synergies in scale, distribution, operations and marketing. In Banking, we remain focused on consolidating the balance sheet with diversified investment resources and prudent asset expansion to meet consumer needs. We have noticed that repayments on securities loans are slowing down and starting to grow. We expect those loans to recover as consumers become more familiar with the current level of rates. With little activity in the market, however, spreads have improved and, with ample liquidity held through external banks and ample capital, we are well positioned to lend once activity picks up.
In conclusion, as we approach fiscal 2024, our strong competitive positioning across our businesses, as well as our abundant capital and liquidity, position us well to drive long-term growth. I would like to thank our advisors and affiliates for their continued perseverance and determination to provide the right service to their clients every day, especially in times of doubt when clients are looking for reliable recommendations. Thank you for all you do. That concludes our ready-made comments. Operator, could you open the line for questions?
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