RAYMOND JAMES FINANCIAL INC annual report, FY2019

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Business context and reporting period

Raymond James Financial, Inc. (NYSE: RJF) is a diversified financial-services and bank holding company operating primarily in the U.S., with businesses in Canada and Europe. This Form 10-K covers the fiscal year ended September 30, 2019; fiscal Q4 ended on that date.

Its five segments are Private Client Group (PCG), Capital Markets, Asset Management, Raymond James Bank (RJ Bank), and Other. PCG is the largest segment, generating $5.36 billion of fiscal 2019 net revenue.

Financial performance and position

  • Fiscal 2019: Net revenue was $7.74 billion, up 6% from $7.27 billion. Pre-tax income rose 5% to $1.375 billion; net income increased 21% to $1.034 billion. Diluted EPS was $7.17, up from $5.75. The prior year included a $105 million Tax Act-related loss.
  • Adjusted results: Excluding acquisition/disposition costs and the Canadian Capital Markets goodwill impairment, adjusted net income was $1.068 billion, up 11%; adjusted diluted EPS was $7.40, up 14%. Adjusted measures are non-GAAP.
  • Margins and returns: Pre-tax margin was approximately 17.8%, versus 18.0% in 2018. Return on equity was 16.2%, versus 14.4%; adjusted ROE was 16.7%, versus 16.0%.
  • Fiscal Q4: Net revenue was $2.023 billion, pre-tax income $354 million, net income $265 million, and diluted EPS $1.86. The comparable 2018 quarter reported $1.899 billion, $350 million, $263 million, and $1.76, respectively.
  • Revenue drivers: Annual asset management and related administrative fees rose 11% to $3.451 billion; investment banking revenue increased 19% to $596 million; interest income rose 23% to $1.281 billion. Brokerage revenue fell 8% to $1.807 billion.
  • Cash flow and liquidity: Operating cash flow was $577 million, investing cash flow was negative $1.897 billion, and financing cash flow was positive $1.373 billion. Cash and cash equivalents increased $457 million to $3.957 billion; cash plus regulatory-segregated cash totaled $5.971 billion. Management said liquid assets, operating cash generation, and financing facilities were adequate for current activity.
  • Debt and capital: Senior notes totaled $1.55 billion and other borrowings $894 million. RJF reported $2.439 billion of long-term debt and no outstanding borrowings on its $500 million committed credit facility. RJF and RJ Bank were categorized as well-capitalized; CET1 ratios were 24.8% and 13.2%, respectively.
  • Bank and credit: RJ Bank assets were $25.52 billion; net loans were $20.89 billion. Its net interest margin increased to 3.32% from 3.22%. The loan-loss allowance was $218 million, or 1.04% of loans; nonperforming loans were $43 million, up from $25 million.
  • Shareholder returns: The company repurchased 9.83 million shares for approximately $752 million and returned about $945 million through repurchases and dividends. Declared dividends were $1.36 per share, up from $1.10.

Material changes versus the prior period

  • PCG revenue grew 5%, but pre-tax income was nearly flat at $579 million. Higher fee-based account revenue and sweep-program fees offset a 10% decline in brokerage revenue.
  • Capital Markets revenue increased 12% and pre-tax income 21%, led by merger-and-acquisition advisory activity and stronger fixed-income brokerage. Results included a $15 million loss on the sale of European equities research and trading operations and a $19 million impairment of Canadian Capital Markets goodwill.
  • Asset Management revenue rose 6% and pre-tax income 8%. Fee-based PCG assets increased; total financial assets under management were $143.1 billion, versus $140.9 billion.
  • RJ Bank revenue increased 16%, but pre-tax income rose only 5%, as higher funding and sweep-servicing costs weighed on expenses. Its loan portfolio expanded, with average interest-earning assets and net interest margin increasing.
  • Compensation and benefits expense increased 6% to $5.087 billion. Non-compensation expense rose 9%, including the impairment and business-sale loss, higher growth and compliance costs, and a $31 million presentation gross-up from newly adopted revenue accounting guidance. That accounting change did not affect pre-tax or net earnings.

Outlook, commentary, risks and unusual items

  • Management said Federal Reserve rate cuts late in fiscal 2019, including a further cut in October 2019, were expected to negatively affect fiscal 2020 results. Lower rates can compress net interest spreads and reduce third-party bank sweep fees; the impact depends partly on rates paid on client cash.
  • The filing provides no specific fiscal 2020 earnings or revenue guidance. Management highlighted market conditions, interest rates, client assets and cash balances, investment banking activity, and credit trends as important drivers.
  • Key risks include market downturns and volatility, interest-rate sensitivity, credit and real-estate exposure, reliance on client cash sweep deposits, fee and trading-margin pressure, advisor recruitment and retention costs, regulation, litigation, cybersecurity and technology disruption, and the LIBOR transition.
  • Brink and Wistar class actions concerning Passport account processing fees were settled for an aggregate $15 million; final approval was granted October 25, 2019. For legal matters with estimable ranges, the upper end of reasonably possible aggregate loss was approximately $35 million above recorded accruals; other matters could not be reliably estimated.
  • Auditors issued unqualified opinions on the financial statements and internal control. The allowance for commercial and industrial and commercial real estate loans was identified as a critical audit matter because of judgment in loss assumptions and methodology.
  • Management expected adoption of lease accounting to increase reported assets by about $375 million and liabilities by about $400 million from October 1, 2019, without affecting earnings or cash flows. The new expected-credit-loss standard was scheduled for fiscal 2021; its impact remained under evaluation.

Important facts for investors to verify

  • Reconcile reported growth with non-GAAP adjusted results and the prior-year Tax Act charge; assess whether earnings growth is sustainable without these comparisons.
  • Track the effect of rate cuts on RJ Bank margins, PCG sweep fees, client deposit costs, and fiscal 2020 earnings.
  • Review the quality and concentration of RJ Bank’s growing loan book, especially the increase in nonperforming loans and the adequacy of the $218 million allowance.
  • Monitor fee-based asset growth against declining brokerage revenue, ongoing pricing pressure, and client cash sweep balances.
  • Assess parent-company liquidity and capital return capacity in light of regulatory limits on subsidiary distributions and the $750 million remaining repurchase authorization.
  • Follow settlement payments, other legal and regulatory exposures, the Canadian Capital Markets business after its goodwill impairment, and the eventual CECL adoption impact.