Raymond James Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Financial holding company providing brokerage, investment banking, asset management, banking and trust services. This fiscal 2020 second-quarter report covers the three and six months ended March 31, 2020; financial statements are unaudited. The comparable periods are the three and six months ended March 31, 2019.
Financial performance and position
- Quarter: Revenue was $2.111 billion, up 9% year over year; net revenue was $2.068 billion, up 11%. Pre-tax income was $239 million, down 31%; net income was $169 million, down 35%; diluted EPS was $1.20, down 34%. Annualized ROE was 9.9%, versus 16.7%.
- Six months: Revenue was $4.171 billion and net revenue $4.077 billion, up 6% and 8%, respectively. Pre-tax income was $598 million, down 12%; net income was $437 million, down 14%; diluted EPS was $3.09, down 12%. Annualized ROE was 13.0%, versus 16.2%.
- Key revenue and cost drivers: Quarter asset-management and related administrative fees rose 28% to $1.006 billion; brokerage revenue rose 17% to $515 million. Interest income declined to $285 million from $324 million, while interest expense fell to $43 million from $75 million. The bank loan-loss provision rose to $109 million from $5 million. Compensation and benefits expense increased 16% to $1.422 billion.
- Cash flow: For the six months, operating cash flow was $2.943 billion, investing cash flow was negative $2.090 billion, and financing cash flow was positive $7.951 billion. The $8.722 billion increase in cash and regulatory-segregated cash was substantially driven by client cash deposits and related balance-sheet movements.
- Liquidity and balance sheet: March 31 cash and cash equivalents were $10.648 billion, plus $4.045 billion segregated under regulations. Total assets were $49.809 billion, up from $38.830 billion at September 30, 2019; bank loans, net were $21.788 billion. Bank deposits were $30.023 billion. Shareholders’ equity was $6.834 billion.
- Debt and capital: Senior notes payable were $2.044 billion, including $500 million of 4.65% notes due 2030 issued in March; other borrowings were $891 million. RJF and RJ Bank were categorized as well-capitalized. RJF CET1 was 24.1% and RJ Bank CET1 was 12.7% at quarter end.
- Bank credit metrics: The allowance for loan losses was $324 million, or 1.47% of the held-for-investment loan portfolio, compared with $218 million, or 1.04%, at September 30. Nonperforming loans were $24 million, or 0.11% of total bank loans.
Material changes versus comparable periods
- COVID-19 market disruption drove volatile trading activity, higher brokerage revenue and increased client cash balances, but also a sharp increase in credit-loss provisioning and private-equity valuation losses.
- Lower short-term interest rates reduced interest yields, RJBDP fees from third-party banks and net interest income. For the quarter, consolidated net interest income was $242 million, versus $249 million a year earlier.
- Private Client Group and Asset Management grew quarter net revenue 18% and 14%, respectively. Capital Markets net revenue rose 5%, but pre-tax income declined 32%. RJ Bank pre-tax income fell 90%, principally due to loan-loss provisioning.
- Client assets fell late in the quarter: PCG assets in fee-based accounts declined 14% during the quarter to $383.5 billion; financial assets under management declined 15% to $128.2 billion.
- The company repurchased approximately 2.5 million shares for $202 million during the quarter, then suspended repurchases from mid-March amid market uncertainty.
Outlook, commentary and risks
- Management expected COVID-19 and related economic measures to have a more significant effect on the remainder of fiscal 2020 than on the reported quarter. It cautioned that the scale and duration of impacts were highly uncertain.
- Management expected the lower market values at March 31 to reduce fee-based and asset-management revenues in the third fiscal quarter. It expected RJBDP third-party-bank average yield to decline to approximately 0.30% beginning in the third quarter, and RJ Bank net interest margin to decline to approximately 2.5% over the next two quarters.
- Management said continued market deterioration could prompt further loan-loss provisions, investment losses and impairment risk. It also anticipated potential near-term weakness in mergers and acquisitions and underwriting; brokerage revenue could decline if volatility subsided.
- COVID-19-related credit stress was a key risk, particularly for affected industries. Payment deferral requests, based on outstanding principal at the end of April, covered approximately 3% of corporate loans and 2% of residential loans. Management reported short-term payment modifications that were not classified as troubled debt restructurings.
- Operations continued with nearly all employees working remotely, without significant reported technology or operational disruption through the quarter. The filing highlights heightened cyber and third-party service-provider risks.
- For legal and regulatory matters with estimable loss ranges, the upper end of reasonably possible aggregate losses was approximately $80 million above recorded accruals. Management said it could not estimate a range for certain other matters.
- Management reported nearly $2 billion of parent-company cash and substantial liquidity. Subsequent to quarter end, approximately $4 billion of RJ Bank cash was moved into third-party-bank capacity within the RJBDP.
Most important facts for investors to verify
- Whether COVID-19 credit deterioration leads to additional provisions, charge-offs or materially different loan-loss assumptions.
- How lower market levels and client asset movements affect upcoming fee revenue and reported assets under administration.
- Whether the expected decline in RJBDP yield and RJ Bank net interest margin materializes, and the resulting effect on earnings.
- Changes in investment-banking activity, trading conditions and private-equity valuations, including the impact of noncontrolling interests.
- Liquidity and capital trends, client deposit flows, debt costs, and the status of suspended share repurchases and legal contingencies.