Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2023; filed August 4, 2023. The filing reports both the three- and nine-month periods ended June 30, 2023. Amounts are in U.S. dollars unless noted.
Business context and results
Raymond James is a diversified financial services firm spanning wealth management, capital markets, asset management, banking and trust services. Its results are sensitive to financial-market activity, interest rates, client cash balances and borrower credit quality.
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net revenues | $2.907 billion | $2.718 billion | +7% |
| Pre-tax income | $486 million | $415 million | +17% |
| Net income available to common shareholders | $369 million | $299 million | +23% |
| Diluted EPS | $1.71 | $1.38 | +24% |
| Annualized return on common equity | 14.9% | 13.3% | Higher |
| Compensation ratio | 63.7% | 67.5% | Lower |
| Firmwide net interest margin | 3.33% | 1.77% | Higher |
For the nine months, net revenues were $8.566 billion (+5%), pre-tax income $1.695 billion (+21%), net income available to common shareholders $1.301 billion (+22%) and diluted EPS $5.95 (+19%). Annualized return on common equity was 17.9%, versus 16.3%.
Financial position, liquidity and capital
- Balance sheet at June 30: Total assets were $77.633 billion, down from $80.951 billion at September 30, 2022. Cash and cash equivalents were $8.375 billion; cash plus regulatory-segregated and restricted cash totaled $12.214 billion.
- Funding and debt: Bank deposits were $53.768 billion, up from $51.357 billion. Other borrowings were $1.100 billion, including $1.000 billion of FHLB advances; senior notes payable were $2.039 billion. Shareholders’ equity was $9.922 billion.
- Liquidity access: Parent-company cash was approximately $1.72 billion, including cash loaned to RJ&A. The firm had no borrowings on its renewed $750 million revolving credit facility and reported $9.67 billion of immediate FHLB credit available against pledged collateral.
- Cash flows, nine months: Operating activities used $3.948 billion, compared with $4.570 billion provided a year earlier; the company attributed much of the movement to lower brokerage client payables. Investing activities provided $68 million, versus $5.119 billion used, while financing activities provided $1.089 billion. Total cash including segregated and restricted balances decreased $2.445 billion.
- Regulatory capital: RJF reported a 11.4% Tier 1 leverage ratio and 22.0% total capital ratio and was categorized as well-capitalized. The filing says RJF and its banking subsidiaries exceeded the applicable capital conservation buffer.
Material changes versus prior periods
- Higher short-term rates drove substantially higher interest income and net interest income. Q3 net interest income was $601 million, up from $314 million; nine-month net interest income was $1.818 billion, up from $706 million.
- Capital Markets weakened: Q3 net revenues fell 28% to $276 million and the segment posted a $34 million pre-tax loss, versus $61 million income. Nine-month net revenues declined 38% and the segment recorded an $84 million pre-tax loss, primarily as investment banking activity fell.
- Private Client Group Q3 net revenues rose 11% to $2.182 billion and pre-tax income rose 64% to $411 million, with higher cash-related fees and interest income. Asset Management Q3 net revenues were down 1% to $226 million; pre-tax income was $89 million, down 4%.
- Bank Q3 net revenues rose 86% to $514 million as net interest income increased, but pre-tax income declined 11% to $66 million. Higher deposit costs and RJBDP-related intersegment fees weighed on results.
- Cash and regulatory-segregated balances shifted with lower client cash sweep balances and a higher level of bank cash held amid banking-market volatility. The Enhanced Savings Program, launched in March 2023, had $11.225 billion of balances at quarter-end.
Outlook, risks and unusual items
- Management’s Q4 outlook: It expects higher asset-management fees, reflecting sequential increases in PCG fee-based assets and financial assets under management. It expects combined net interest income and third-party RJBDP fees to decline approximately 5% from Q3, principally because of higher-cost funding and elevated bank cash balances.
- Management expects market uncertainty to continue weighing on investment banking activity and anticipates brokerage headwinds from lower cash balances at depository-institution clients. It cautions that economic deterioration or a weaker macroeconomic outlook could increase future loan-loss provisions.
- The bank loan allowance for credit losses was $456 million, or 1.04% of loans held for investment, versus $396 million and 0.91% at September 30, 2022. Q3 provision was $54 million; management cited a weaker commercial real estate outlook, particularly in the CECL model, and loan downgrades. Nonperforming loans were $127 million, up from $74 million.
- Management reported selling approximately $450 million of corporate loans during Q3 as part of credit-risk management. CRE exposures and broader economic conditions remain relevant risks.
- Q3 included $40 million of acquisition-related expenses. Nine-month results included $97 million of acquisition-related expenses and a favorable $32 million insurance settlement related to a previously settled legal matter. Elevated legal and regulatory provisions contributed to higher non-compensation expenses.
- The firm is cooperating with an SEC investigation concerning preservation of business communications sent through unapproved electronic messaging channels. For matters where a reasonably possible loss range could be estimated, the upper end was approximately $100 million above aggregate accruals; management could not estimate a range for some matters.
- Regulators proposed capital-rule changes in July 2023, including potentially eliminating the AOCI opt-out; the company was assessing potential effects. The filing also notes that the Fed raised its target rate by 25 basis points in July, after quarter-end.
- The Board had authorized up to $1.5 billion in common-stock repurchases; $750 million remained at June 30. The company repurchased $300 million in Q3 and said it expected to continue repurchases in Q4, subject to market conditions and capital needs. The quarterly common dividend was $0.42 per share.
Important facts for investors to verify
- Whether deposit-cost increases and the Enhanced Savings Program continue to compress Bank net interest income and margins, and whether management’s estimated Q4 decline materializes.
- Developments in CRE and corporate-loan credit quality, including allowance adequacy, nonperforming loans and further loan sales.
- Capital Markets recovery prospects, especially investment-banking pipeline conversion and depository-client fixed-income activity.
- Progress and potential financial consequences of the SEC records-preservation investigation and other legal or regulatory matters.
- Potential effects of proposed regulatory capital rules, including AOCI treatment, on capital ratios and future shareholder distributions.
- Cash-flow trends and liquidity composition, noting that reported operating cash flow was affected by client-payable movements and that some subsidiary cash is restricted or not freely available to the parent.