RAYMOND JAMES FINANCIAL INC quarterly report, Q2 FY2019

Raymond James Financial, Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended March 31, 2019. The quarter’s year-over-year comparison is with the three months ended March 31, 2018; balance-sheet comparisons are primarily with September 30, 2018. Raymond James provides wealth management, capital markets, banking and asset management services.

Financial results and key metrics

MetricQuarter ended March 31, 2019Six months ended March 31, 2019
Net revenues$1.859 billion, up 3%$3.790 billion, up 7%
Pre-tax income, excluding noncontrolling interests$347 million, up 5%$679 million, up 6%
Net income attributable to Raymond James$261 million, up 7%$510 million, up 41%
Diluted earnings per share$1.81, up 11%$3.51, up 44%
Annualized return on equity16.7%, flat year over year16.2%, versus 12.6%

The quarter’s $1.934 billion of total revenues less $75 million of interest expense produced $1.859 billion of net revenues. The income statement reports $335 million of income before taxes including noncontrolling interests; management’s $347 million pre-tax figure excludes them. Six-month adjusted net income was $525 million and adjusted diluted EPS was $3.61, excluding a $15 million European-equities business disposal loss. The prior-year comparison included a $117 million Tax Act-related loss; excluding specified items, adjusted net income rose 9% and adjusted diluted EPS rose 11%.

  • Revenue drivers: Quarterly investment banking revenue increased to $163 million from $116 million, led by merger-and-acquisition advisory activity. Interest income rose to $324 million from $249 million, while securities commissions fell to $349 million from $425 million. For the six months, asset management fees, investment banking and net interest income increased; brokerage revenue declined.
  • Costs and margins: Quarterly non-interest expenses were $1.524 billion, up 3%; six-month expenses were $3.125 billion, up 8%. Higher compensation, staffing and regulatory-support costs were significant factors. RJ Bank’s quarterly net interest margin increased to 3.35% from 3.21%; higher deposit costs partly offset improved asset yields.
  • Cash flow: Six-month operating cash flow was $20 million, versus $606 million in the comparable period; investing cash use was $910 million and financing cash provided was $1.099 billion. The cash-flow comparison reflects adoption of restricted-cash presentation guidance, which reclassified $381 million of prior-year operating cash flow.
  • Balance sheet and funding: At March 31, total assets were $38.176 billion, total liabilities $31.741 billion and total equity $6.435 billion. Cash and cash equivalents were $3.831 billion, with an additional $2.288 billion segregated for regulatory purposes. Bank loans, net, were $20.135 billion; bank deposits were $21.618 billion, up $1.676 billion since fiscal year-end. Senior notes were $1.550 billion and other borrowings $896 million, including $875 million of FHLB advances.
  • Credit and capital: RJ Bank’s allowance for loan losses was $218 million, or 1.08% of held-for-investment loans; nonperforming loans rose to $56 million from $25 million at September 30, 2018. Raymond James and RJ Bank were described as well capitalized, with CET1 ratios of 24.3% and 12.8%, respectively.
  • Shareholder returns: The company repurchased 6.7 million shares for $505 million during the six months and declared dividends of $0.68 per share. $458 million remained under the repurchase authorization at March 31.

Material changes, outlook and risks

  • Capital Markets and RJ Bank were major sources of growth: six-month segment net revenues increased 19% and 21%, respectively. Capital Markets benefited from M&A fees; RJ Bank benefited from loan growth and higher interest rates. Private Client Group pre-tax income declined 5% for the six months as lower brokerage revenue and higher expenses offset revenue growth.
  • Management estimated a fiscal 2019 effective tax rate of approximately 25%–26%. The filing provides no specific earnings or revenue guidance. Management noted that falling short-term rates, higher rates paid on client cash, or lower client cash balances could pressure earnings. Client domestic cash-sweep balances declined during the quarter as clients shifted toward other investments and for seasonal tax-related reasons.
  • Loan loss provision was $21 million for the six months, versus $9 million a year earlier, reflecting certain credit downgrades. Nonperforming loans increased, notably in commercial and industrial and commercial real estate lending. Management cited economic, real-estate and industry-sector deterioration as potential sources of higher losses.
  • The company estimated the upper end of reasonably possible aggregate legal and regulatory losses at approximately $110 million in excess of reserves. Two Passport Account fee class actions reached agreements in principle to settle after quarter-end; settlement amounts were accrued, but court approval and final settlement documentation remained outstanding.
  • Other notable items: a $15 million loss on the sale of European equities research, sales and trading operations; tax-credit-fund losses largely offset by noncontrolling interests; and revenue-accounting changes that increased certain revenues and expenses presented gross, with no effect on pre-tax or net income. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting.

Important facts for investors to verify

  • Whether fee-based asset growth and market performance sustain management-fee revenue, and whether brokerage commission declines continue.
  • Whether bank deposit pricing, client sweep balances and interest rates support or weaken net interest income and RJBDP fees.
  • Loan portfolio performance, especially the rise in nonperforming commercial loans, and whether the $218 million allowance remains adequate.
  • Final terms and court approval of the two class-action settlements, and developments in the broader legal and regulatory matters.
  • Repurchase pace and liquidity: operating cash flow was low relative to the prior-year period, while lending growth and securities purchases used cash.