Raymond James Financial, Inc. — Form 10-Q summary
Business context and period. Financial holding company providing wealth management, capital markets, asset management, banking and trust services. This unaudited report covers the fiscal second quarter and six months ended March 31, 2022; comparisons are with the periods ended March 31, 2021 unless otherwise noted. Dollar amounts are in U.S. dollars.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Total revenue | $2.711 billion, up 13% | $5.529 billion, up 18% |
| Net revenue | $2.673 billion, up 13% | $5.454 billion, up 19% |
| Pre-tax income | $433 million, down 3% | $991 million, up 17% |
| Net income | $323 million, down 9% | $769 million, up 15% |
| Diluted EPS | $1.52, down 10% | $3.61, up 14% |
| Return on equity | 15.0%, versus 19.0% | 18.1%, unchanged |
| Net interest income | $204 million, versus $163 million | $392 million, versus $328 million |
Quarterly net income was approximately 12.1% of net revenue, compared with 15.0% a year earlier; pre-tax income was approximately 16.2% of net revenue, compared with 18.8%. The filing reports a 69.3% compensation ratio for the quarter, versus 69.5%.
- Balance sheet at March 31, 2022: total assets $73.101 billion; total liabilities $64.492 billion; shareholders’ equity $8.609 billion.
- Liquidity and funding: cash and cash equivalents were $5.715 billion, while regulatory-segregated assets and restricted cash were $19.531 billion. Bank deposits were $34.685 billion. Management stated that approximately $2.23 billion of cash was held at the parent, including cash loaned to RJ&A; not all reported cash is freely available to the parent.
- Debt and financing: senior notes payable were $2.037 billion; FHLB advances outstanding were $850 million. The company also reported $856 million of other borrowings. Its $600 million of committed financing arrangements had no outstanding borrowings.
- Bank lending: net bank loans were $27.883 billion, up from $24.994 billion at September 30, 2021. The allowance for credit losses was $328 million, or 1.17% of loans held for investment. Quarterly loan-loss provision was $21 million, versus a $32 million benefit a year earlier.
- Cash flow, six months: operating activities used $1.170 billion; investing activities used $2.403 billion; financing activities provided $2.025 billion. Cash and cash equivalents, including segregated and restricted cash, declined $1.597 billion to $14.852 billion.
- Other notable items: available-for-sale securities had a $516 million gross unrealized loss at March 31, 2022, primarily associated with market interest-rate changes. Six-month other comprehensive loss was $348 million, largely reflecting those securities’ valuation changes.
Material changes and segment results
- Asset management and related administrative fees rose 25% for the quarter, mainly from higher fee-based client assets and the Charles Stanley acquisition. PCG net revenue grew 17%; pre-tax income grew 11%.
- Capital Markets quarterly net revenue declined 5% and pre-tax income declined 17%, reflecting weaker fixed-income brokerage activity and lower equity underwriting, partly offset by advisory activity. For the six months, segment net revenue rose 16% and pre-tax income 23%, aided by strong first-quarter investment banking.
- Asset Management quarterly net revenue increased 12% and pre-tax income 18%. Raymond James Bank net revenue increased 23%, but pre-tax income fell 25% as the prior-year quarter included a substantial loan-loss benefit.
- Charles Stanley was acquired on January 21, 2022 for £277 million (about $376 million); its results are included prospectively in Private Client Group. It added $164 million of goodwill and $85 million of identifiable intangible assets.
- Total assets increased 18% from September 30, 2021, driven especially by increased client cash balances and regulatory-segregated assets, Charles Stanley, and bank-loan growth. Client cash balances also increased brokerage client payables and bank deposits.
Outlook, commentary and risks
- Management expected fiscal third-quarter results to benefit from the full-quarter effect of the Federal Reserve’s March 25-basis-point rate increase and a partial-quarter effect of its May 50-basis-point increase. Based on March 31 balances, management estimated that an instantaneous 100-basis-point increase could add nearly $600 million of annual pre-tax income; this is a sensitivity estimate, not guidance, depends on assumptions, and 75 basis points had already occurred by the filing date.
- Management cited $1.26 trillion of client assets under administration, strong advisor recruiting and retention, and a robust investment banking pipeline. It also warned that equity-market declines had reduced fee-based assets, likely weighing on the next quarter’s asset-management fees; market uncertainty could pressure brokerage and investment-banking revenues. Management expected expenses to continue rising during fiscal 2022.
- The company expected TriState Capital, valued at approximately $1.1 billion, to close in fiscal third quarter 2022, subject to remaining conditions. SumRidge Partners was expected to close in fiscal fourth quarter 2022. Management said it could fund both acquisitions with cash on hand. The company did not expect share repurchases under its $1 billion authorization until after the TriState transaction.
- Credit risks include loan growth, possible future provisions, and potential deterioration in borrower or real-estate conditions. Nonperforming loans were $104 million, or 0.37% of total bank loans, versus $74 million, or 0.29%, at September 30, 2021.
- Legal and regulatory matters remain inherently uncertain. For matters where a loss range could be estimated, the upper end of reasonably possible aggregate loss was approximately $85 million above recorded accruals; management said outcomes could affect a particular future period’s results or cash flows.
- RJF and Raymond James Bank were categorized as well-capitalized. RJF’s total capital ratio was 25.0% and Tier 1 leverage ratio 11.1%. Management cited geopolitical and macroeconomic uncertainty, including the Ukraine conflict, as potential sources of market and credit risk.
Most important facts for investors to verify
- Whether client-asset and fee-based asset declines persist and affect forthcoming advisory and asset-management fees.
- How Federal Reserve rate changes, deposit pricing and cash-sweep allocations translate into realized net interest income and fees versus management’s sensitivity estimate.
- Completion, financing and integration of TriState Capital and SumRidge Partners, and the resulting effect on capital, earnings and share repurchases.
- Whether loan growth or economic conditions lead to higher credit provisions, nonperforming loans or charge-offs.
- Changes in unrealized securities losses, regulatory-segregated cash, parent-company liquidity and the estimated exposure from legal and regulatory matters.