Business context and reporting period
Raymond James Financial, Inc. is a financial holding company with brokerage, capital markets, asset management, banking and trust businesses, operating primarily in the U.S. and Canada. This 10-K covers the fiscal year ended September 30, 2016; fiscal Q4 ended on that date. The annual results are the main comparison below.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $5.52 billion | $5.31 billion |
| Net revenue | $5.40 billion | $5.20 billion |
| Net income attributable to RJF | $529 million | $502 million |
| Diluted EPS | $3.65 | $3.43 |
| Pre-tax income margin on net revenue | 14.8% | 15.3% |
| Net interest income | $523 million | $435 million |
| Cash flow from operations | $(518) million | $899 million |
FY 2016 operating cash flow was negative despite positive earnings, mainly reflecting growth in client-related segregated assets, receivables and advisor loans. Cash and cash equivalents at year-end were $1.65 billion; management reported approximately $810 million available to the parent without restrictions. Total assets were $31.59 billion, up 19%, and RJF-attributable equity was $4.91 billion.
Carrying value of senior notes was $1.68 billion and other borrowings were $609 million at year-end. RJF issued $800 million principal of senior notes in July and repaid $250 million of notes at maturity in April. The company reported S&P and Moody’s long-term ratings of BBB and Baa2, respectively, both with positive outlooks.
Client assets under administration reached $604.4 billion, up 26%, reflecting acquisitions, advisor recruiting and retention, and higher U.S. equity markets. RJ Bank had $16.6 billion of assets and $15.2 billion of net loans. Its allowance for loan losses was $197 million, or 1.30% of loans; nonperforming loans were $81 million, up from $53 million.
Fiscal Q4
Q4 FY 2016 revenue was $1.49 billion, net revenue $1.46 billion, net income attributable to RJF $172 million and diluted EPS $1.19. In Q4 FY 2015, the comparable amounts were $1.37 billion, $1.34 billion, $129 million and $0.88.
Material changes versus the prior year
- Net revenue rose 4% and net income attributable to RJF rose 5%; reported diluted EPS increased 6%. Non-GAAP adjusted net income, excluding acquisition-related expenses, was $556 million, up 11%, and adjusted diluted EPS was $3.84, up 12%.
- Capital Markets pre-tax income increased 30% to $139 million, supported by stronger trading and fixed-income commissions, partly offset by lower equity underwriting and M&A fees.
- RJ Bank pre-tax income increased 21% to $337 million, primarily on loan growth and higher net interest income. Its loan-loss provision rose 20% to $28 million, including energy-sector exposure and corporate loan downgrades.
- Private Client Group pre-tax income was nearly flat at $341 million despite 3% revenue growth; its margin declined to 9.4% from 9.8%. Asset Management pre-tax income fell 2% to $132 million.
- The Other segment’s pre-tax loss widened to $149 million from $65 million, reflecting lower private-equity gains, the absence of prior-year ARS sale gains, and $41 million of acquisition-related expenses.
- RJF repurchased approximately 3.2 million shares for $144.5 million under its authorization. The company declared $0.80 per share in dividends for FY 2016, up from $0.72.
Outlook, commentary, risks and unusual items
Management did not provide formal earnings guidance in the supplied filing text. It expects Alex. Brown’s client cash and margin balances to increase average interest-earning assets in FY 2017. Based on September 30, 2016 balances and stated assumptions, an additional 25-basis-point increase in short-term rates was estimated to add approximately $48 million to $60 million to annual pre-tax income; this is a sensitivity estimate, not a forecast or guarantee.
Management cited a client-first, conservative growth strategy and said acquisitions should meet strategic and cultural criteria and support shareholder value. FY 2016 acquisitions included Alex. Brown, 3Macs and Mummert. Acquisition-related expenses were $41 million. The DOL fiduciary rule was expected to increase legal, compliance and technology costs and legal risk as implementation proceeded.
Key risks include market and interest-rate sensitivity, loan credit deterioration (including energy-sector exposures), regulatory change, competition and advisor retention, cybersecurity and operational disruption, and constrained access to subsidiary liquidity. The Jay Peak litigation includes claims alleging misconduct connected to investor funds; the company disputes liability and says the possible loss beyond amounts accrued cannot be estimated. Management said litigation outcomes could materially affect results or cash flows in a particular period, even though it did not expect the proceedings overall to materially adversely affect consolidated financial condition. Regions indemnification applies to specified pre-closing Morgan Keegan matters, subject to the agreement’s terms.
Management reported that RJF and RJ Bank were well capitalized. Their reported CET1 ratios were 20.6% and 12.7%, respectively. The company also cautioned that regulatory restrictions can limit transfers of funds from subsidiaries to the parent.
Most important facts for investors to verify
- Whether the 26% increase in client assets and acquisition-related advisor growth translate into recurring revenue and stronger margins.
- How RJ Bank’s criticized, nonperforming and energy-sector loans evolve, and whether the $197 million allowance remains adequate.
- Whether the projected benefit from higher short-term rates materializes after client deposit pricing, cash balances and bank funding costs are considered.
- The integration costs, retention and financial contribution of Alex. Brown, 3Macs and Mummert, including the substantial advisor retention loans.
- Developments in Jay Peak litigation, Regions indemnification and other legal or regulatory contingencies.
- Parent-company liquidity and regulatory capital after acquisitions, loan growth, dividends and share repurchases.