Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2020, the three months ended December 31, 2019. Financial results are compared with the three months ended December 31, 2018; balance-sheet amounts are compared with September 30, 2019. Amounts are in U.S. dollars.
Business context and results
Raymond James is a diversified financial services company operating through Private Client Group (PCG), Capital Markets, Asset Management, RJ Bank and Other. Results are exposed to equity and fixed-income markets, interest rates, client activity and credit conditions.
| Metric | Quarter | Prior-year quarter | Change |
|---|---|---|---|
| Total revenues | $2.060 billion | $2.004 billion | +3% |
| Net revenues | $2.009 billion | $1.931 billion | +4% |
| Pre-tax income | $359 million | $332 million | +8% |
| Net income | $268 million | $249 million | +8% |
| Diluted EPS | $1.89 | $1.69 | +12% |
| Net interest income | $246 million | $243 million | +1% |
Annualized return on equity was 16.0%, versus 15.9%; return on tangible common equity was 17.5%, versus 17.6%. Calculated from reported figures, pre-tax income was 17.9% of net revenues and net income was 13.3%.
- Revenue drivers: Asset management and related administrative fees rose 10% to $955 million, primarily reflecting higher fee-based client assets. Brokerage revenue was nearly flat at $460 million; commissions fell while principal transactions increased. Investment banking revenue rose to $141 million, with stronger underwriting offsetting lower M&A advisory revenue.
- Segment performance: PCG net revenues rose 4% to $1.414 billion, but pre-tax income fell 7% to $153 million. Capital Markets net revenues rose 6% to $268 million and pre-tax income increased to $29 million from $12 million. Asset Management net revenues rose 6% to $184 million and pre-tax income rose 14% to $73 million. RJ Bank net revenues rose 6% to $216 million and pre-tax income rose 23% to $135 million. Other recorded a $31 million pre-tax loss, compared with an $18 million loss.
Cash flow, balance sheet and capital
- Cash flow: Operating activities provided $546 million, investing activities used $502 million and financing activities provided $654 million. Cash and cash equivalents increased $152 million to $4.109 billion. Including cash segregated for regulatory purposes, period-end cash was $6.690 billion, up $719 million from the beginning of the fiscal year.
- Balance sheet: Total assets were $40.154 billion, up $1.324 billion from September 30. Bank loans, net, were $21.296 billion, up $405 million; bank deposits were $22.975 billion, up $694 million. Total liabilities were $33.251 billion and shareholders’ equity was $6.903 billion.
- Debt and liquidity: Senior notes payable were $1.550 billion and other borrowings were $899 million, including $875 million of FHLB advances. The company reported $700 million of committed financing facilities with no borrowings outstanding, and RJ Bank had $2.62 billion of immediate additional FHLB credit available. Management said available assets, operating cash flow and financing facilities were adequate for current operations.
- Bank credit: The allowance for loan losses was $216 million, or 1.01% of loans held for investment; the quarter included a $2 million loan-loss benefit, versus a $16 million provision a year earlier. Nonperforming loans were $38 million, or 0.18% of total loans, versus $43 million and 0.21% at September 30.
- Capital and shareholder returns: RJF and RJ Bank were classified as well-capitalized. RJF’s CET1 ratio was 24.8%; RJ Bank’s was 13.3%. The company declared dividends of $0.37 per share and repurchased 126,000 shares under its authorization for $11 million; $739 million remained available under that authorization.
Material changes, outlook and risks
- Management attributed revenue growth chiefly to higher fee-based assets; PCG assets under administration were $855.2 billion and assets in fee-based accounts were $444.2 billion at quarter-end. Fee-based assets increased 9% from the prior quarter, which management said would affect second-quarter fees.
- Lower short-term interest rates pressured PCG sweep fees and interest-sensitive earnings. RJ Bank’s loan and securities growth more than offset rate-related pressure on net interest income, while its net interest margin edged down to 3.23% from 3.25%.
- Management estimated an effective tax rate of approximately 25% for the remainder of fiscal 2020. The filing provides no broader earnings or revenue guidance.
- Lease-accounting adoption added $333 million of right-of-use assets and $357 million of lease liabilities on October 1, 2019; it did not affect earnings or cash flows. The company was evaluating CECL, scheduled for adoption in fiscal 2021, and did not yet quantify its impact.
- Legal and regulatory matters remain uncertain. For matters with an estimable range, the estimated upper end of reasonably possible aggregate losses was approximately $80 million above accruals; management could not estimate an upper bound for certain other matters. Management did not expect pending matters to materially affect consolidated financial condition, but results or cash flows in a particular future period could be affected.
- Other risks include market and interest-rate movements, credit deterioration or real-estate weakness, liquidity and funding conditions, regulatory requirements, and operational, cybersecurity and compliance risks. Management noted no material cyber losses to date, but gave no assurance against future losses.
Important facts for investors to verify
- Whether fee-based asset growth and market levels persist and translate into recurring fee revenue.
- How further interest-rate changes affect PCG sweep economics, RJ Bank margins and consolidated earnings.
- Credit quality and concentrations in RJ Bank’s $21.3 billion held-for-investment loan portfolio, including criticized loans and interest-only residential mortgages.
- Updates to legal contingencies, the $80 million estimated excess-loss range, and the eventual effect of CECL adoption.
- Capital, liquidity and funding conditions, including deposit trends, FHLB capacity, debt ratings and remaining share-repurchase authorization.