Raymond James Financial, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2024. Comparisons are with the three and six months ended March 31, 2023, except balance-sheet comparisons, which are with September 30, 2023. Amounts are in U.S. dollars.
Business context and results
Raymond James is a diversified financial services firm spanning private client services, capital markets, asset management, banking and other activities. Results are sensitive to equity and fixed-income markets, interest rates, client cash balances, investment-banking activity and credit conditions.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Total revenues | $3.638bn | $3.157bn | $7.158bn | $6.184bn |
| Net revenues | $3.118bn | $2.873bn | $6.131bn | $5.659bn |
| Pre-tax income | $609m | $557m | $1.239bn | $1.209bn |
| Net income available to common shareholders | $474m | $425m | $971m | $932m |
| Diluted EPS | $2.22 | $1.93 | $4.54 | $4.23 |
| Net interest income | $529m | $631m | $1.075bn | $1.217bn |
Quarterly net revenues increased 9%, common net income 12% and diluted EPS 15%. For the six-month period, net revenues increased 8%, common net income 4% and diluted EPS 7%. Q2 annualized return on common equity was 17.5% versus 17.3%; return on tangible common equity was 21.0% versus 21.3% (the latter is a non-GAAP measure). The compensation ratio rose to 65.5% from 63.3% in Q2 and to 64.7% from 62.8% year to date.
Financial position, cash flow and capital
- At March 31, total assets were $81.232bn, total liabilities $70.253bn and shareholders’ equity $10.979bn. Cash and cash equivalents were $10.001bn; cash including segregated and restricted balances was $13.706bn.
- Bank loans, net, were $44.099bn, with an allowance for credit losses of $471m, or 1.06% of loans held for investment. Bank deposits were $54.843bn.
- Senior notes payable were $2.039bn and other borrowings $1.299bn; collateralized financings were $955m. The firm also had $200m outstanding under uncommitted lines and no borrowings under its $750m committed credit facility.
- For six months, operating cash flow was $934m, versus cash used of $3.760bn a year earlier; investing activities used $109m and financing activities provided $266m. Operating cash flow was affected by changes in brokerage receivables/payables and other working-capital items.
- RJF’s Tier 1 leverage ratio was 12.3%, CET1 ratio 21.8% and total capital ratio 23.3%; RJF and its two banks were reported as well-capitalized. Parent-level corporate cash was approximately $2.03bn. Immediate FHLB credit availability was $9.52bn based on pledged collateral.
- Six-month common and preferred dividends paid were $193m. The firm repurchased 3.10m shares for $357m during the six months; $1.19bn remained under the authorization at quarter-end. Subsequent April repurchases brought fiscal-year-to-date repurchases to $400m.
Drivers and changes versus prior periods
- Higher fee-based client assets supported asset-management and related administrative fees, up 16% in Q2. PCG assets under administration were $1.389tn; assets in fee-based accounts were $798.8bn. Market appreciation and recruiting contributed to growth.
- Capital Markets investment-banking revenue rose 18% in Q2, including stronger M&A/advisory and debt underwriting. The segment still recorded a $17m pre-tax loss, improved from a $34m loss.
- Bank segment net interest income fell 22% in Q2 and 18% year to date as increased deposit costs outweighed higher interest income. Bank net interest margin declined to 2.66% from 3.63% in Q2; firmwide net interest margin was 2.91% versus 3.59%.
- Higher-cost Enhanced Savings Program and certificate-of-deposit balances replaced some lower-cost client sweep deposits. Q2 interest expense increased to $520m from $284m, while total net interest income fell to $529m from $631m.
- Non-compensation expense was lower in Q2, partly reflecting a $32m net legal and regulatory reserve release; the prior-year quarter included an unfavorable arbitration award. The six-month comparison also includes a $32m insurance settlement received in the prior-year period.
Outlook, risks and contingencies
- Management expects Q3 FY2024 to benefit from higher asset-management fees, supported by sequential increases in PCG fee-based assets and financial assets under management. Recruiting activity and its investment-banking pipeline were described as strong, though timing of deal closings remains uncertain.
- Management expects combined net interest income and third-party RJBDP fees for the rest of FY2024 to depend on short-term rates, client cash stability and loan growth. Fixed-income brokerage headwinds from lower or declining cash balances at depository-institution clients are expected to persist until rates and balances stabilize. No specific full-year earnings guidance was provided.
- Management described current loan-credit metrics as solid but warned that economic deterioration could increase future provisions. Nonperforming loans rose to $187m, or 0.42% of loans, from $128m, or 0.29%, at September 30. Office CRE is an area of focus: 40% of office real-estate loans were scheduled to mature in 2024–2025; 11% were criticized and 5% nonperforming at quarter-end.
- A downside macroeconomic scenario would increase the modeled quantitative allowance for bank-loan credit losses by approximately $210m, before any qualitative adjustments; management cautioned actual outcomes could differ materially.
- The firm reached a settlement in principle with the SEC over electronic communications record-preservation matters, including a proposed $50m civil penalty accrued at quarter-end. Definitive documentation and SEC approval remained outstanding. For other legal and regulatory matters with estimable loss ranges, the estimated upper end was approximately $30m above accrued amounts; other exposures could not be estimated.
- Available-for-sale securities had a $9.031bn fair value and $931m of gross unrealized losses at quarter-end, largely reflecting rate-sensitive securities. The firm’s regulatory capital calculations exclude certain AOCI effects under its elected opt-out; proposed regulatory capital-rule changes could affect future ratios if applicable.
- Other noted risks include interest-rate sensitivity, deposit funding and liquidity, market and counterparty risks, and operational/cybersecurity risks. The T+1 settlement transition was expected to add operational risk, but management did not expect a material financial impact.
Investor verification priorities
- Track deposit mix, deposit pricing, client sweep and ESP balances, and whether net interest income stabilizes.
- Review office CRE maturities, criticized and nonperforming exposures, charge-offs, and allowance adequacy as economic assumptions change.
- Confirm final SEC settlement terms and approval, and monitor legal reserve releases versus future provisions.
- Assess the persistence of fee growth against market levels, net new assets, recruiting, and investment-banking deal closings.
- Monitor capital and liquidity, including share repurchases and dividends, AFS securities/AOCI, and potential regulatory capital-rule changes.