Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; comparisons are with the three months ended December 31, 2021 unless noted. Financial statements are unaudited. Raymond James provides wealth management, capital markets, asset management, banking and trust services.
Financial performance and condition
| Metric | Q1 FY2023 | Prior-year quarter / comparison |
|---|---|---|
| Total revenues | $3.027 billion | $2.818 billion, up 7% |
| Net revenues | $2.786 billion | $2.781 billion, essentially flat |
| Pre-tax income | $652 million | $558 million, up 17% |
| Net income available to common shareholders | $507 million | $446 million, up 14% |
| Diluted EPS | $2.30 | $2.10, up 10% |
| Annualized return on common equity | 21.3% | 21.2% |
| Annualized return on tangible common equity | 26.2% | 23.4% |
| Compensation ratio | 62.3% | 67.7% |
| Effective tax rate | 21.9% | 20.1% |
Interest income rose to $827 million from $225 million, while interest expense increased to $241 million from $37 million. Net interest income was $586 million versus $188 million. Higher short-term rates lifted interest income and cash-sweep fees, but also raised deposit costs.
Cash flow: Operating activities used $3.136 billion, compared with $2.287 billion used a year earlier; financing activities provided $221 million, compared with $1.497 billion. The operating outflow included a $3.882 billion decrease in brokerage client and other payables. Cash and cash equivalents were $6.177 billion at quarter-end; including regulatory-segregated and restricted cash, the total was $11.293 billion.
Balance sheet and liquidity: Total assets were $77.047 billion, down from $80.951 billion at September 30, 2022. Bank loans, net, were $44.066 billion; bank deposits were $51.979 billion. Other borrowings were $1.150 billion and senior notes payable were $2.038 billion. Shareholders’ equity was $9.830 billion. Management reported $2.0 billion of cash at the parent, including cash loaned to its broker-dealer subsidiary, and stated it believes available assets, operations and financing sources provide adequate liquidity.
RJF’s regulatory capital ratios remained well above well-capitalized thresholds: Tier 1 leverage was 11.3%, CET1 was 20.0%, and total capital was 21.6%. The company reported that its banking subsidiaries were also well-capitalized.
Material changes and drivers
- Net revenues were nearly unchanged as significantly higher net interest income and cash-sweep fees, plus acquisition contributions, were offset by weaker investment banking, asset-management fees and brokerage activity.
- Capital Markets net revenues fell 52% to $295 million, and the segment recorded a $16 million pre-tax loss versus $201 million of pre-tax income. Investment banking revenue declined 68% to $133 million amid difficult market conditions.
- Private Client Group net revenues rose 12% to $2.063 billion and pre-tax income rose to $434 million from $195 million. Higher cash-sweep fees and net interest income more than offset lower asset-management and brokerage revenues.
- Bank net revenues increased to $508 million from $183 million, and pre-tax income rose 33% to $136 million. Growth reflected higher rates, a larger loan and securities base, and the inclusion of TriState Capital Bank, acquired in June 2022.
- Asset Management net revenues declined 12% to $207 million and pre-tax income fell 25% to $80 million, mainly due to lower beginning-period client assets compared with the prior year.
- Total non-interest expenses declined to $2.134 billion from $2.223 billion. Lower compensation expenses were partly offset by higher non-compensation expenses, including a $14 million bank-loan credit provision versus an $11 million benefit a year earlier.
Outlook, risks and unusual items
- Management expected Q2 FY2023 to benefit from the full-quarter effect of rate increases enacted in November and December and a further 25-basis-point increase in February. It also anticipated a 5%–6% benefit to asset-management and related administrative fees versus Q1, based on higher PCG fee-based assets at December 31.
- Management expected continued declines in client cash-sweep balances as clients move deposits to higher-yielding alternatives, potentially offsetting some rate-related benefits. It warned that macroeconomic uncertainty could continue to pressure brokerage and investment banking, despite a healthy investment-banking pipeline.
- Management anticipated loan growth could bring additional credit provisions, economic deterioration could increase provisions, and inflation and investment in people and technology could raise expenses. No specific full-year earnings guidance is provided in the supplied filing text.
- The bank-loan allowance for credit losses was $408 million, or 0.92% of loans held for investment. Management said the quarter’s $14 million provision reflected a weaker macroeconomic outlook, particularly for residential mortgages, and loan growth. A modeled downside scenario would have increased the quantitative allowance estimate by approximately $170 million, before any qualitative adjustments.
- Available-for-sale securities had $1.130 billion of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $891 million. The securities portfolio’s fair value was $9.793 billion.
- A $32 million insurance settlement relating to previously settled litigation favorably affected Q1 expenses. Excluding this item and specified acquisition-related expenses, adjusted net income was $505 million and adjusted diluted EPS was $2.29; these are non-GAAP measures.
- The company was cooperating with an SEC investigation into preservation of business communications sent through unapproved electronic messaging channels. For matters where management could estimate reasonably possible losses, the upper end of aggregate losses was approximately $100 million above recorded accruals; losses on some matters could not be estimated. Management stated it did not believe the proceedings would materially adversely affect consolidated financial condition, though a future period’s results or cash flows could be affected.
Important facts for investors to verify
- Whether net interest income and cash-sweep fee growth can persist as deposit costs rise and clients continue cash sorting.
- Whether client asset levels, investment banking activity and Capital Markets profitability recover or remain pressured by market conditions.
- Trends in loan growth, criticized and nonperforming loans, credit-loss allowances, and exposure to real estate and interest-only mortgages.
- The extent and timing of any legal or regulatory losses, including the SEC records-preservation investigation and matters with unestimable potential losses.
- How the TriState Capital acquisition and ongoing investments affect expenses, returns and capital deployment, including dividends and repurchases.