Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. The filing is unaudited. Raymond James is a diversified financial services firm spanning wealth management, capital markets, asset management, banking and trust services.
Financial performance
| Metric | Quarter ended Mar. 31, 2021 | Year-over-year change | Six months ended Mar. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $2.409 billion | +14% | $4.669 billion | +12% |
| Net revenue | $2.372 billion | +15% | $4.594 billion | +13% |
| Pre-tax income | $447 million | +87% | $846 million | +41% |
| Net income | $355 million | +110% | $667 million | +53% |
| Diluted EPS | $2.51 | +109% | $4.74 | +53% |
| Annualized ROE | 19.0% | 9.9% prior year | 18.1% | 13.0% prior year |
| Annualized ROTCE | 21.2% | 10.8% prior year | 20.1% | 14.2% prior year |
Quarterly compensation ratio was 69.5%, up from 68.8%; the six-month ratio was 68.5%, up from 68.0%. The bank’s net interest margin was 1.94% for the quarter and 1.98% for the six-month period, down from 3.02% and 3.12%, respectively. Management attributed the margin pressure to low short-term rates and a greater share of lower-yielding agency securities.
Segments and drivers
- Private Client Group: Quarterly net revenue rose 10% to $1.647 billion and pre-tax income rose 13% to $192 million. Higher fee-based assets and brokerage revenue were partly offset by lower sweep fees and net interest income.
- Capital Markets: Quarterly net revenue rose 49% to $433 million and pre-tax income rose to $105 million from $28 million. Growth reflected M&A, underwriting and fixed-income brokerage activity.
- Asset Management: Quarterly net revenue rose 14% to $209 million and pre-tax income rose 19% to $87 million, supported by market appreciation and fee-based inflows.
- RJ Bank: Quarterly net revenue declined 24% to $160 million, while pre-tax income rose to $111 million from $14 million. The improvement reflected a $32 million credit-loss benefit versus a $109 million provision a year earlier.
Client assets under administration reached $1.09 trillion. PCG assets in fee-based accounts were $567.6 billion, up 7% from December 31, 2020; management said this supported the next quarter’s asset-management fees. Financial assets under management totaled $178.2 billion.
Cash, balance sheet and capital
- At March 31, 2021, total assets were $56.066 billion, up 18% from September 30, 2020; total liabilities were $48.429 billion and shareholders’ equity was $7.637 billion.
- Cash and cash equivalents were $5.851 billion. The company reported approximately $1.7 billion of parent-company cash or parent cash loaned to its broker-dealer subsidiary. Management said existing liquid assets, operating cash flow and financing facilities were sufficient for current activity.
- Bank loans, net, were $22.879 billion, versus $21.195 billion at fiscal year-end. Bank deposits were $29.254 billion, up from $26.801 billion; much of the balance-sheet expansion reflected higher client cash balances.
- Six-month operating cash flow was $716 million, compared with $2.943 billion a year earlier. Investing activities used $2.437 billion and financing activities provided $2.269 billion. Operating cash flow included large movements in segregated assets and client payables, so it is not directly comparable to earnings alone.
- Senior notes payable were $2.045 billion at quarter-end. RJF and RJ Bank were categorized as well-capitalized; RJF’s CET1 ratio was 23.6% and RJ Bank’s was 13.1%.
Outlook, unusual items and risks
- Management expected near-zero short-term rates to persist through the rest of fiscal 2021, continuing to pressure net interest income and third-party bank sweep fees. It projected third-party sweep yields near 0.30%, subject to deposit demand, and expected RJ Bank’s net interest margin near 1.9% for the rest of the fiscal year.
- Management cited a strong investment-banking backlog and expected to continue share repurchases, targeting at least $200 million for fiscal 2021 to offset share-based compensation dilution. It also noted that brokerage and investment-banking revenue may be volatile and that business-development expenses may rise as travel resumes.
- In April 2021, after quarter-end, the company issued $750 million of 3.75% notes due 2051 and used proceeds plus cash to repurchase or redeem its 2024 and 2026 notes. It expected an approximately $97 million debt-extinguishment loss in fiscal Q3.
- Fiscal 2021 acquisitions included NWPS, expanding retirement-plan services, and Financo, expanding consumer and retail investment banking. Financo purchase-accounting goodwill and intangible values were provisional.
- The company adopted CECL on October 1, 2020, reducing opening retained earnings by approximately $35 million after tax. The quarter’s credit-loss benefit partly reflected improved economic-model inputs; management cautioned that loan growth or renewed market deterioration could increase future provisions. Criticized loans increased.
- COVID-19-related uncertainty, economic and market conditions, interest rates, credit quality, litigation and regulation remain risks. The filing estimated the upper end of reasonably possible aggregate legal and regulatory losses at approximately $180 million above accruals for matters where a range could be estimated; some matters had no estimable upper bound.
- Forbearance and modification requests may delay delinquency or nonaccrual recognition. Active forbearance at quarter-end included approximately $52 million of corporate loans and $5 million of residential loans; $31 million of residential loans had modification requests not yet completed or approved.
Important facts for investors to verify
- Whether fee-based asset growth and the reported investment-banking backlog translate into sustained revenue and earnings.
- How low rates, client cash allocation and funding costs affect net interest income, RJBDP fees and RJ Bank margins.
- Whether credit quality, criticized loans, forbearances and CECL assumptions lead to higher provisions or charge-offs.
- The final cost and accounting impact of the post-quarter debt refinancing, including the expected $97 million extinguishment loss.
- Potential outcomes of legal and regulatory matters and any losses beyond recorded accruals.