RAYMOND JAMES FINANCIAL INC quarterly report, Q1 FY2021

Raymond James Financial, Inc. — Q1 FY2021 Form 10-Q

Reporting period: Three months ended December 31, 2020; year-over-year comparisons are to the three months ended December 31, 2019. Raymond James is a diversified financial services firm with brokerage, investment banking, asset management, banking and trust businesses. Figures are unaudited and in U.S. dollars.

Financial performance and position

Metric	Q1 FY2021	Prior-year quarter	Change
Total revenue	$2.260 billion	$2.060 billion	+10%
Net revenue	$2.222 billion	$2.009 billion	+11%
Pre-tax income	$399 million	$359 million	+11%
Net income	$312 million	$268 million	+16%
Diluted EPS	$2.23	$1.89	+18%
Annualized ROE / ROTCE	17.2% / 19.0%	16.0% / 17.5%	Higher
Operating cash flow	$1.904 billion	$546 million	Higher

Asset management fees rose 12% to $1.067 billion; investment banking revenue rose 85% to $261 million; brokerage revenue rose 15% to $528 million. Interest income fell 32% to $203 million.
Net interest income declined to $165 million from $246 million. The compensation ratio increased to 67.5% from 67.2%. The effective tax rate was 21.8%, versus 25.3% a year earlier.
At December 31, total assets were $53.657 billion, liabilities $46.219 billion and shareholders’ equity $7.438 billion. Bank loans, net, were $21.957 billion; bank deposits were $27.790 billion.
Cash and cash equivalents were $5.377 billion; cash and cash equivalents including amounts segregated for regulatory purposes were $11.396 billion. Management reported approximately $1.8 billion of parent-company liquidity, including cash loaned to a subsidiary.
Senior notes payable were $2.045 billion and other borrowings were $862 million. RJF and RJ Bank were categorized as well-capitalized; RJF’s CET1 ratio was 23.4% and RJ Bank’s was 13.1%.

Changes versus the prior comparable period

Capital Markets was the strongest growth contributor: net revenue increased 69% to $452 million and pre-tax income rose to $129 million from $29 million, on stronger M&A, underwriting and fixed-income brokerage activity.
Private Client Group net revenue increased 4% to $1.467 billion, but pre-tax income declined 8% to $140 million. Asset-management fees grew, while lower short-term rates reduced sweep-program fees and net interest income.
Asset Management net revenue increased 6% to $195 million and pre-tax income increased 14% to $83 million. RJ Bank net revenue fell 23% to $167 million and pre-tax income fell 47% to $71 million, primarily due to lower interest rates and higher credit-loss provision.
Consolidated net interest margin declined to 1.45% from 2.78%; RJ Bank’s margin declined to 2.02% from 3.23%.
Operating cash flow was boosted by a $4.953 billion increase in brokerage client and other payables, while cash used for investing was $1.123 billion, including $704 million of net growth in bank loans, $218 million for NWPS and purchases of securities.

Outlook, management commentary and risks

Management said results were strong and the firm entered Q2 with more than $1 trillion in client assets under administration. It expected lower short-term rates to remain a headwind through FY2021 and did not expect rates to return to early-FY2020 levels during the fiscal year.
Management expected RJ Bank’s net interest margin to decline a further 5–10 basis points during the remainder of FY2021. It expected near-term fixed-income brokerage revenue to remain strong, while noting investment banking and brokerage results could be volatile and current revenue levels may not be sustained.
COVID-19 and economic uncertainty could affect markets, activity, credit quality and business-development expenses. Further market deterioration could require additional loan-loss provisions. At quarter-end, nonperforming loans were $28 million; active payment deferrals covered approximately $90 million of corporate and $49 million of residential loans.
Adoption of CECL on October 1, 2020 increased the opening allowance for credit losses by approximately $45 million and reduced opening retained earnings by approximately $35 million after tax. The quarter’s bank-loan provision was $14 million, compared with a $2 million benefit in the prior-year quarter.
In December, the company completed its acquisition of NWPS, adding provisional goodwill of $139 million and identifiable intangibles of $96 million. It expected to complete the Financo acquisition in March or April 2021, subject to closing conditions.
The board raised the quarterly dividend 5% to $0.39 per share and authorized up to $750 million in repurchases; $740 million remained available at quarter-end. Management expected repurchases to offset share-based compensation dilution.
For legal and regulatory matters with estimable exposure, the upper end of reasonably possible aggregate losses was approximately $180 million above recorded accruals. Management said it could not estimate the range for certain matters; outcomes could affect results or cash flows in a particular period.
Management identified interest-rate, market, credit, liquidity, operational, model and compliance risks. It also noted uncertainty in fair-value estimates and credit-loss allowances, including reliance on judgment during the pandemic. No specific legal proceeding was listed under Part II, Item 1.

Important facts for investors to verify

Whether Capital Markets’ exceptional growth and elevated investment-banking activity persist, and whether Q1 revenue levels are sustainable.
How prolonged low rates affect net interest income, RJBDP fees and RJ Bank’s margin, and whether the projected additional 5–10 basis-point bank margin decline occurs.
Whether CECL assumptions, pandemic-related payment deferrals and commercial real estate conditions lead to further provisions or charge-offs.
The final purchase accounting for NWPS, completion and terms of the Financo acquisition, and the company’s use of repurchase authorization and capital.
The eventual resolution and financial impact of legal and regulatory matters, including exposure beyond the disclosed estimated loss range.