RAYMOND JAMES FINANCIAL INC quarterly report, Q3 FY2020

Full document

Business context and reporting period

Raymond James Financial, Inc. is a diversified financial services and bank holding company, with Private Client Group (PCG), Capital Markets, Asset Management, RJ Bank and Other segments. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended June 30, 2020; comparisons are with the periods ended June 30, 2019 unless stated otherwise. Results were materially affected by COVID-19, market volatility and sharp interest-rate cuts.

Financial performance and position

  • Quarter: Total revenue was $1.876 billion and net revenue $1.834 billion, down 6% and 5%, respectively. Pre-tax income was $198 million, down 42%; net income was $172 million, down 34%; diluted EPS was $1.23, down 32%. Annualized ROE was 10.0% and ROTCE 10.9%, versus 16.1% and 17.8%.
  • Nine months: Total revenue was $6.047 billion and net revenue $5.911 billion, up 2% and 3%. Pre-tax income of $796 million fell 22%; net income of $609 million fell 21%; diluted EPS of $4.33 fell 18%. Annualized ROE was 11.9% and ROTCE 13.1%.
  • Key quarterly segment results: Capital Markets net revenue rose 29% to $323 million and pre-tax income increased to $62 million. PCG net revenue fell 8% to $1.249 billion and pre-tax income fell 35% to $91 million. RJ Bank net revenue fell 17% to $178 million and pre-tax income fell 90% to $14 million. Asset Management net revenue and pre-tax income each declined 8%, to $163 million and $60 million.
  • Credit costs and interest: The quarterly bank loan-loss provision was $81 million, versus a $5 million benefit a year earlier; nine-month provision was $188 million versus $16 million. Quarterly net interest income was $175 million, down from $248 million; after the bank loan-loss provision, it was $94 million. RJ Bank’s quarterly net interest margin declined to 2.29% from 3.37%.
  • Cash flow, nine months: Operating activities provided $2.655 billion; investing activities used $3.020 billion; financing activities provided $3.258 billion. Cash and cash equivalents, including amounts segregated for regulatory purposes, increased by $2.866 billion.
  • Balance sheet at June 30: Assets were $44.682 billion, liabilities $37.667 billion and shareholders’ equity $7.015 billion. Cash and cash equivalents were $5.632 billion, with a further $3.205 billion segregated pursuant to regulations. Bank loans, net, were $21.223 billion; the allowance for loan losses was $334 million, or 1.56% of held-for-investment loans, compared with $218 million and 1.04% at September 30, 2019.
  • Debt and capital: Senior notes payable were $2.044 billion, up from $1.550 billion following issuance of $500 million of 4.65% notes due 2030. Other borrowings were $890 million, including $875 million of FHLB advances. RJF reported a 24.8% CET1 ratio and RJ Bank 12.8%; both were classified as well-capitalized. Management cited more than $2.1 billion of parent-company liquidity, including cash loaned to RJ&A. Much of consolidated cash is client-related or otherwise restricted.

Material changes and management outlook

  • Quarterly earnings were pressured principally by the sharp increase in loan-loss provision and lower short-term interest rates. Lower rates reduced net interest income and fees on cash swept to third-party banks. Strong fixed-income client activity supported Capital Markets, partly offsetting weaker PCG and bank results.
  • Management expected COVID-19 effects to continue through the remainder of fiscal 2020. It anticipated continued pressure on net interest income and third-party RJBDP fees, and greater volatility in Capital Markets brokerage and investment banking revenues. Management said the 16% quarterly recovery in PCG fee-based assets should benefit fiscal fourth-quarter results.
  • RJ Bank management projected net interest margin of 2.1%–2.2% over the next two quarters based on then-current LIBOR rates. It expected further corporate loan sales in the fourth quarter to reduce risk and warned continued economic deterioration could require additional provisions or lead to losses above reserves.
  • The firm was evaluating compensation and non-compensation expenses for savings and efficiencies. Share repurchases were suspended from mid-March through the third quarter and resumed in the fourth quarter to offset dilution.
  • Credit conditions worsened in sectors affected by the pandemic. The firm sold approximately $355 million of corporate loans before charge-offs and discounts; $61 million of the quarter’s $73 million gross charge-offs related to loan sales. Active short-term payment deferrals covered approximately $364 million of corporate loans and $126 million of residential loans.
  • Management stated that COVID-19 increased estimation uncertainty for loan-loss allowances and private-equity valuations. Nine-month private-equity valuation losses were $40 million, primarily attributed to pandemic effects. Goodwill testing did not identify a June 30 impairment trigger, but management said it would continue monitoring conditions.
  • For legal and regulatory matters with estimable loss ranges, the upper end of reasonably possible aggregate losses was approximately $125 million above accruals; some matters could not be estimated. The firm stated it could not assure against material losses from unresolved or unasserted matters.
  • CECL was scheduled for adoption on October 1, 2020; the firm did not plan early adoption and was still assessing the impact. No specific company-wide earnings guidance was provided.

Important facts for investors to verify

  1. How pandemic-driven credit deterioration, loan sales, deferrals and the allowance for loan losses develop, particularly in RJ Bank’s corporate portfolio.
  2. Whether the projected 2.1%–2.2% RJ Bank margin and ongoing low-rate pressure on net interest income and RJBDP fees are borne out.
  3. How recovered client asset values translate into fee revenue, and whether market volatility or client cash movements affect PCG and Asset Management results.
  4. Whether Capital Markets activity remains strong as investment banking and trading revenues fluctuate with market conditions.
  5. The effect of CECL adoption, unresolved legal and regulatory matters, and any future changes in liquidity, capital ratios or funding access.