Raymond James Financial, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Raymond James is a diversified U.S.-based financial services firm with Private Client Group, Capital Markets, Asset Management, RJ Bank and Other segments.
Financial results and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenues | $7.990 billion | $7.740 billion |
| Pre-tax income | $1.052 billion | $1.375 billion |
| Net income | $818 million | $1.034 billion |
| Diluted EPS | $5.83 | $7.17 |
| ROE / ROTCE | 11.9% / 13.0% | 16.2% / 17.8% |
| Net interest income | $822 million | $998 million |
| Operating cash flow | $4.054 billion | $577 million |
Net revenues increased 3%, while pre-tax income fell 23% and net income fell 21%. Asset management fees and Capital Markets activity supported revenue, but lower rates, increased credit provisions, higher compensation costs and private-equity valuation losses weighed on earnings. Management’s non-GAAP adjusted net income was $858 million and adjusted diluted EPS was $6.11, excluding specified items; these measures are not substitutes for GAAP results.
Operating cash flow was $4.054 billion; investing cash outflow was $4.985 billion and financing cash inflow was $4.593 billion. Cash and cash equivalents were $5.390 billion, with a further $4.244 billion segregated for regulatory purposes. Total assets were $47.482 billion, up 22%; total liabilities were $40.306 billion. Senior notes payable were $2.045 billion and other borrowings were $888 million. The company reported more than $2 billion of cash at the parent, including funds loaned to RJ&A, and stated it had substantial liquidity. About $3.30 billion of subsidiary net assets were restricted from transfer to the parent without regulatory approval.
At September 30, RJF and RJ Bank were categorized as well-capitalized. RJF’s CET1 ratio was 24.2% and RJ Bank’s was 13.0%. RJ Bank’s net interest margin declined to 2.63% from 3.32%; its allowance for loan losses rose to $354 million, or 1.65% of held-for-investment loans.
Segments and material changes
- Private Client Group: Revenue of $5.552 billion, up 4%; pre-tax income of $539 million, down 7%. Fee-based AUA rose to $475.3 billion; total AUA was $883.3 billion. Third-party RJBDP fees fell 46% to $150 million as rate cuts offset higher sweep balances.
- Capital Markets: Revenue of $1.291 billion, up 19%; pre-tax income of $225 million, up 105%. Higher fixed-income brokerage and underwriting revenue more than offset lower M&A advisory revenue.
- Asset Management: Revenue of $715 million, up 3%; pre-tax income of $284 million, up 12%. Financial AUM was $153.1 billion; AMS inflows and market appreciation offset Carillon Tower Advisers’ net outflows.
- RJ Bank: Revenue of $765 million, down 10%; pre-tax income of $196 million, down 62%. Lower rates reduced net interest income, while the loan-loss provision rose to $233 million from $22 million.
- Other: Pre-tax loss widened to $192 million from $82 million, reflecting workforce-reduction costs, private-equity valuation losses, lower corporate cash interest income and higher debt interest expense.
FY2020 included $46 million in workforce-reduction expenses, a $7 million loss on the pending sale of certain France-based entities, and $28 million of private-equity valuation losses, partly offset in expenses by $20 million attributable to noncontrolling interests. The prior year included a $19 million Canadian Capital Markets goodwill impairment and a $15 million loss on the sale of European equities operations. Fourth-quarter FY2020 net revenues were $2.079 billion, pre-tax income $256 million, net income $209 million and diluted EPS $1.50.
Outlook, risks and contingencies
- Management expected the full-year effect of the Federal Reserve’s 150-basis-point March 2020 rate reduction to weigh on FY2021 net interest income and RJBDP fees. It estimated FY2021 third-party RJBDP average yield at approximately 0.30% and RJ Bank net interest margin at approximately 2%, based on then-current rates.
- Management said Capital Markets pipelines were solid but warned that transaction closings could be affected by economic deterioration. Additional bank loan provisions remained possible; the timing of business-development spending depended on the pandemic. No specific consolidated earnings guidance was provided.
- COVID-19 could continue to affect markets, client activity, interest revenue, credit quality, staffing and operations. The company identified exposure to vulnerable sectors including airlines, restaurants, gaming, entertainment/leisure and energy, as well as potential commercial real-estate stress.
- RJ Bank sold approximately $695 million of corporate loans in vulnerable industries during FY2020. Active short-term payment deferrals at year-end covered approximately $189 million of corporate loans and $77 million of residential loans; deferrals may postpone delinquency or loss recognition.
- For legal and regulatory matters with an estimable range, management put the upper end of reasonably possible aggregate loss at approximately $120 million above recorded accruals; some matters could not be estimated. Management did not expect litigation and regulatory matters to materially affect consolidated financial condition, but period-specific results or cash flows could be affected.
- CECL was adopted on October 1, 2020; management estimated an allowance increase of approximately $40–$50 million and a retained-earnings reduction of approximately $30–$40 million, net of tax. The company did not use the optional regulatory-capital transition relief.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for C&I and commercial real-estate loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether loan-loss reserves and deferred-loan exposures adequately reflect the ongoing effects of COVID-19, including sector concentrations and loan sales.
- How sustained low interest rates affect RJ Bank’s margin, client cash-sweep economics and consolidated earnings.
- Whether growth in fee-based assets and Capital Markets activity can offset weaker banking earnings and compensation expense.
- Liquidity available to the parent after considering subsidiary capital rules and the $3.30 billion of restricted subsidiary net assets.
- The realization and valuation of private-equity investments, the France disposition, and legal/regulatory contingencies.
- Actual FY2021 performance against management’s rate-sensitive estimates and the expected CECL adoption impact.