Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; comparison is with the three months ended December 31, 2016. Unaudited consolidated results. Dollar figures below are in millions unless noted.
Financial performance
- Revenue: Total revenue was $1,765.6, up 15%; net revenue after interest expense was $1,726.2, up 16%.
- Profit: Pre-tax income including noncontrolling interests rose 50% to $311.7. Net income attributable to Raymond James fell 19% to $118.8, and diluted EPS declined to $0.80 from $1.00. Results included an estimated $117.2 discrete tax charge related to the Tax Act.
- Adjusted results (non-GAAP): Excluding the Tax Act charge and acquisition-related expenses, adjusted net income was $238.8 versus $176.9, and adjusted diluted EPS was $1.61 versus $1.21.
- Margins and expenses: Pre-tax income excluding noncontrolling interests was $311.2, about 18.0% of net revenue, compared with $206.4, about 13.8%, a year earlier. Non-interest expenses increased 10% to $1,414.5, mainly from compensation and growth-related staffing; prior-year expenses included $30 million for the Jay Peak matter.
- Cash flow: Operating activities provided $325.6, investing activities used $1,073.9, and financing activities provided $979.2. Cash and cash equivalents ended at $3,897.5, up $227.9 from September 30, 2017.
- Balance sheet and liquidity: Total assets were $36,084.9 and total equity was $5,803.0 at December 31. Management said approximately $1.44 billion of cash was available without restrictions. Bank loans, net, were $17,697.3; bank deposits were $18,725.5.
- Borrowings: Other borrowings totaled $1,532.8 and senior notes payable were $1,549.0. The $300 million drawn on the revolving credit facility at quarter-end was repaid in January 2018. Senior long-term debt ratings were BBB+ and Baa1, both with stable outlooks.
- Credit and capital: RJ Bank’s allowance for loan losses was $191.3, or 1.08% of loans; nonperforming assets were $41.6, or 0.19% of bank assets. Raymond James and RJ Bank were reported as well capitalized and above fully phased-in capital conservation buffer requirements.
Material changes and business drivers
- Private Client Group net revenue increased 19% to $1,233.1 and pre-tax income rose to $155.1, supported by higher commissions, fee-based assets, and client cash-related fees.
- Capital Markets net revenue declined 7% to $216.7 and pre-tax income fell 78% to $4.8. Lower equity and fixed-income commissions reflected reduced trading volumes amid low market volatility; M&A advisory fees improved.
- Asset Management net revenue grew 32% to $150.6 and pre-tax income rose 37% to $57.4. Results benefited from market appreciation and the Scout Group acquisition, completed in November 2017.
- RJ Bank net revenue increased 20% to $165.2 and pre-tax income rose 10% to $114.2, driven by loan and securities growth and a slightly higher net interest margin. The bank’s net interest margin was 3.08%, versus 3.06%.
- Client assets under administration reached $727.2 billion, up 18% year over year. PCG assets under administration were $692.1 billion; fee-based account assets were $316.7 billion.
- The Scout acquisition used $159.2 million net of cash acquired and added $69.2 million of goodwill and $92.3 million of identifiable intangible assets.
Outlook, risks and unusual items
- Tax outlook: Management estimated an effective tax rate of approximately 28% for the remainder of fiscal 2018 and approximately 24% for fiscal 2019. These are estimates based on its current interpretation of the Tax Act and may change. The quarter’s 61.7% effective tax rate included the estimated $117.2 million discrete tax impact.
- Interest rates: Management said prior short-term rate increases benefited net interest income and RJBDP fees, but higher rates paid on client cash balances could reduce those benefits or cause RJBDP fees to decline.
- Credit and market risks: Results depend on economic conditions, equity and fixed-income markets, volatility, lending markets, and credit trends. A downturn, falling real-estate values, or sector-specific problems could increase loan losses. The bank’s interest-rate sensitivity analysis projected net interest income down 18.78% under an instantaneous 100-basis-point rate decline.
- Legal contingencies: For matters where management could estimate reasonably possible losses, the upper end of aggregate potential loss was approximately $70 million above reserves, excluding matters subject to Regions indemnification. Management believed litigation outcomes would not materially affect consolidated financial condition, but could materially affect results or cash flows in a future period.
- Other commitments: RJ Bank had $5.8 billion of open consumer credit lines, $1.7 billion of commercial lines, and $521.7 million of unfunded loan commitments; many commitments may not be drawn. RJF’s maximum exposure under a low-income housing guarantee was $17 million.
- No specific earnings guidance is provided in the filing. Management described continued growth priorities and noted that forward-looking outcomes remain subject to market, economic, regulatory, and other uncertainties.
Important facts for investors to verify
- How the Tax Act’s estimated $117.2 million charge, deferred-tax remeasurement, and transition-tax estimate are finalized, and how actual effective tax rates compare with management’s estimates.
- Whether revenue and earnings growth persist after separating the Scout acquisition, market appreciation, interest-rate effects, and prior-year Jay Peak expenses.
- Capital Markets’ sensitivity to market volatility and trading activity, and whether the quarter’s lower commissions reverse.
- RJ Bank loan growth, credit quality, allowance adequacy, and sensitivity to interest-rate movements and deposit-rate competition.
- Liquidity and funding conditions, including client cash balances, deposit growth, financing availability, and debt-rating developments.
- Changes in litigation exposures and the timing or amount of possible losses beyond recorded reserves.