Raymond James Financial, Inc. — Form 10-Q
Business context and period: Diversified financial services and bank holding company providing wealth management, capital markets, asset management, banking and trust services. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted.
Financial results
| Metric | Quarter ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenues | $2.471 billion, up 35% | $7.065 billion, up 20% |
| Pre-tax income | $385 million, up 94% | $1.231 billion, up 55% |
| Net income | $307 million, up 78% | $974 million, up 60% |
| Diluted EPS | $2.18, up 77% | $6.92, up 60% |
| Adjusted net income / diluted EPS | $386 million / $2.74 | $1.055 billion / $7.50 |
| Annualized ROE | 15.9% (19.9% adjusted) | 17.4% (18.7% adjusted) |
| Annualized ROTCE | 17.7% (22.2% adjusted) | 19.3% (20.8% adjusted) |
| Compensation ratio | 67.2%, versus 69.6% | 68.1%, versus 68.5% |
Adjusted measures are non-GAAP and exclude debt-extinguishment losses and acquisition-related expenses. The quarter included $98 million of debt-extinguishment losses and $7 million of acquisition-related expenses. The effective tax rate was 20.3% for the quarter and 20.9% year to date.
Revenue drivers and segments
- Quarterly growth was led by asset management fees, up 47%, and investment banking revenue, up 101%; brokerage revenue rose 14%. Fee growth reflected higher fee-based client assets, while investment banking benefited from M&A and underwriting activity.
- Private Client Group quarterly net revenues rose 36% to $1.696 billion and pre-tax income rose 114% to $195 million. Client assets under administration were $1.17 trillion; PCG fee-based assets increased 9% during the quarter.
- Capital Markets quarterly net revenues rose 38% to $446 million and pre-tax income rose 85% to $115 million. Management reported a strong investment banking backlog.
- Asset Management quarterly net revenues rose 38% to $225 million and pre-tax income rose 75% to $105 million. Financial assets under management were $191.0 billion, up from $145.4 billion a year earlier.
- Raymond James Bank quarterly net revenues declined 5% to $169 million, but pre-tax income rose to $104 million from $14 million, principally because credit-loss expense shifted to a benefit.
Cash flow, balance sheet and capital
- At June 30, total assets were $57.16 billion, up 20% from September 30, 2020; total liabilities were $49.24 billion and shareholders’ equity was $7.92 billion.
- Cash and cash equivalents were $5.982 billion, including approximately $1.6 billion at the parent or parent cash loaned to RJ&A. An additional $5.882 billion of cash was segregated pursuant to regulations. Management said existing liquid assets, operating cash generation and financing sources were adequate for current operations.
- For the nine months, operating cash flow was $2.124 billion, investing cash outflow was $3.157 billion and financing cash inflow was $3.149 billion. Operating cash flow included substantial movements in segregated assets and client payables.
- Bank loans, net were $23.896 billion, up from $21.195 billion; bank deposits were $30.340 billion, up from $26.801 billion. Growth in client cash balances drove much of the increase in deposits and brokerage client payables.
- Senior notes payable were $2.037 billion. The company issued $750 million of 3.75% notes due 2051 and used proceeds and cash to repurchase and redeem $750 million par value of 2024 and 2026 notes. The transactions resulted in the $98 million charge.
- RJF and Raymond James Bank were categorized as well-capitalized and exceeded regulatory capital requirements. RJF’s CET1 ratio was 24.4%; the bank’s was 13.5%. The firm repurchased 982,750 shares for approximately $118 million year to date and had $632 million remaining under its repurchase authorization at quarter-end. Quarterly dividends declared were $0.39 per share.
Outlook, risks and unusual items
- Management expected near-zero short-term rates to continue through the remainder of fiscal 2021 and into fiscal 2022, pressuring net interest income and third-party bank sweep fees. The bank projected a fiscal fourth-quarter net interest margin of approximately 1.90%, versus 1.92% in the third quarter; the firm expected a third-party RJBDP yield of about 0.29% for the rest of fiscal 2021, with possible decline in fiscal 2022.
- Management described the firm as well-positioned entering the fourth quarter, citing strong capital, more than $1 trillion in client assets and a strong investment banking backlog. It cautioned that revenue volatility, COVID-19 uncertainty including the Delta variant, and possible future credit provisions could affect results. Expenses may rise as travel resumes and the firm invests in technology and growth.
- Management expected a roughly 21% effective tax rate in fiscal fourth-quarter 2021. It anticipated continued opportunistic capital deployment through growth, repurchases and acquisitions.
- NWPS and Financo were acquired during fiscal 2021. Cebile was expected to close in fiscal fourth-quarter 2021, subject to conditions. A proposed offer for U.K.-based Charles Stanley, announced July 29, 2021, was expected to close in fiscal first-quarter 2022, subject to approvals.
- Credit quality benefited from improved economic forecasts: the bank-loan allowance declined to $322 million, and the quarter included a $19 million provision benefit. Management warned that renewed economic deterioration, loan growth or sector-specific weakness could increase provisions. Active forbearance included approximately $34 million of corporate and $8 million of residential loans.
- Legal and regulatory proceedings are described as inherent business risks. For matters where a loss range could be estimated, the upper end of reasonably possible aggregate losses was approximately $175 million above accruals; management could not estimate an upper bound for some matters. The filing stated that outcomes could affect results or cash flows in a particular future period.
- Other notable exposures include interest-rate, market, credit, liquidity, operational, model and compliance risks; private equity investments subject to uncertain realization timing and regulatory holding limits; and pending LIBOR transition work. The firm reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How durable the elevated fee-based asset levels, client inflows and investment banking backlog prove to be, and the sensitivity of revenues to market declines or reduced transaction activity.
- Whether near-zero rates continue to compress bank margins and sweep-fee income, and whether the stated fourth-quarter margin and sweep-yield expectations are achieved.
- Credit performance and allowance assumptions under CECL, especially in commercial real estate and pandemic-affected sectors, as forbearance arrangements expire.
- The cash, financing and integration costs, approvals and expected closing dates for Cebile and the proposed Charles Stanley transaction.
- The composition and availability of reported liquidity, including regulatory restrictions on subsidiary cash, and the potential cash-flow effect of client balance movements.
- Potential outcomes of legal and regulatory matters, including the disclosed estimated loss exposure above accruals, and the costs of regulatory changes and LIBOR transition.