Business context and reporting period
Raymond James Financial, Inc. is a diversified financial-services and bank holding company. This unaudited Form 10-Q covers its fiscal first quarter ended December 31, 2021; comparisons are with the three months ended December 31, 2020 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Quarter / period-end | Comparable / prior period |
|---|---|---|
| Total revenue | $2.818 billion | $2.260 billion; up 25% |
| Net revenue | $2.781 billion | $2.222 billion; up 25% |
| Pre-tax income | $558 million | $399 million; up 40% |
| Net income | $446 million | $312 million; up 43% |
| Diluted EPS | $2.10 | $1.48 |
| Annualized ROE / ROTCE | 21.2% / 23.4% | 17.2% / 19.0% |
| Net interest income | $188 million | $165 million; up 14% |
| Firmwide net interest margin | 1.29% | 1.45% |
| Cash and cash equivalents | $8.216 billion at Dec. 31 | $7.201 billion at Sept. 30 |
| Total assets / shareholders’ equity | $68.461 billion / $8.652 billion | $61.891 billion / $8.303 billion at Sept. 30 |
| Bank loans, net | $26.132 billion | $24.994 billion at Sept. 30 |
Operating cash flow was negative $2.287 billion, compared with positive $1.921 billion a year earlier. The current-quarter outflow largely reflected growth in regulatory-segregated assets as client cash balances rose; financing cash flow was positive $1.497 billion, including a $1.597 billion increase in bank deposits. Investing cash flow was negative $1.555 billion, including $1.137 billion of net bank-loan growth and $824 million of available-for-sale security purchases.
At quarter-end, bank deposits were $34.092 billion, other borrowings $856 million, and senior notes payable $2.037 billion. Parent-company cash was approximately $1.4 billion, including cash loaned to RJ&A; $385 million had been set aside for the Charles Stanley acquisition. The company reported substantial liquidity and said it believed existing assets, operating cash generation and financing facilities supported its needs.
Compensation expense was $1.884 billion; the compensation ratio was 67.7%, versus 67.5%. The bank-loan allowance was $308 million, or 1.18% of held-for-investment loans, down from $320 million and 1.27% at September 30. A $11 million credit-loss benefit was recorded, versus a $14 million provision a year earlier. RJF’s CET1 ratio was 25.9%, total capital ratio 27.0%, and Tier 1 leverage ratio 12.1%; RJF and Raymond James Bank were categorized as well-capitalized.
Material changes and business drivers
- Growth was led by asset management and investment banking. Asset management and related administrative fees increased 30% to $1.382 billion; investment banking revenue rose 63% to $425 million, driven by M&A advisory activity and equity underwriting.
- By segment, net revenue and pre-tax income were: Private Client Group (PCG) $1.839 billion and $195 million; Capital Markets $614 million and $201 million; Asset Management $236 million and $107 million; Raymond James Bank $183 million and $102 million. Other reported a $47 million pre-tax loss, compared with $24 million.
- PCG assets under administration were $1.200 trillion; assets in fee-based accounts were $677.8 billion. Total domestic client cash sweep balances were $73.5 billion. Management cited market appreciation, fee-based account growth, client activity and advisor recruiting as supportive factors.
- Capital Markets investment banking pipeline was described as strong. Fixed-income brokerage revenue fell 8% from a strong prior-year quarter, although management expected it to remain solid in fiscal Q2.
- Bank loans increased $1.138 billion from September 30, particularly securities-based loans, residential mortgages and corporate loans. Total assets rose 11%, largely reflecting client cash balances and increased regulatory-segregated assets.
- Available-for-sale securities were $8.547 billion, with $119 million of gross unrealized losses, primarily attributed by management to interest-rate movements. The portfolio was mainly agency mortgage-backed securities and was not assigned a credit-loss allowance.
Outlook, risks, contingencies and unusual items
No specific earnings or revenue guidance was provided. Management said it expected fiscal 2022 expenses to increase as travel and events resume and the firm invests in people and technology. It cited $1.26 trillion of client assets under administration as of December 2021, strong advisor recruiting and a robust investment-banking pipeline. Management also said assets in fee-based accounts at quarter-end were expected to support PCG revenue in fiscal Q2.
Management estimated that an instantaneous 100-basis-point increase in short-term rates, assuming static December 31 balances, could add approximately $570 million in annual pre-tax income, about 65% through net interest income and 35% through account and service fees. This is a sensitivity estimate, not guidance; the filing cautions that actual results may differ materially. Management highlighted inflation, supply-chain constraints, labor shortages, economic-policy uncertainty and COVID-19 variants as potential sources of volatility. Higher loan growth may require future credit-loss provisions; economic deterioration could also increase losses. Results are sensitive to market levels, interest rates, client cash allocation, investment-banking activity and credit conditions.
Raymond James completed its $372 million Charles Stanley acquisition on January 21, 2022, after quarter-end. Its proposed approximately $1.1 billion TriState Capital acquisition remained subject to shareholder and regulatory approvals and other closing conditions, with closing expected later in fiscal 2022. The company had loaned TriState Capital $125 million under a note in December 2021. A $1 billion share-repurchase authorization was approved in December; management said it did not expect repurchases before the TriState transaction closes. The quarterly dividend was increased 31% to $0.34 per share.
Legal and regulatory matters remain difficult to predict. For matters where management could estimate a range, the upper end of reasonably possible aggregate loss was approximately $90 million above recorded accruals; other matters could not be reasonably estimated. Management believed pending matters would not materially affect consolidated financial condition, but acknowledged possible material effects on future-period results or cash flows. Other disclosed risks include market, credit, liquidity, operational, model and compliance risk; regulatory changes; and the possibility of credit-rating downgrades. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue and earnings growth persist if equity-market appreciation, M&A activity or underwriting activity moderates.
- How client cash balances and allocations among sweep programs affect fee income, funding costs and the unusually large operating cash-flow movements.
- Whether higher rates deliver the estimated earnings benefit, given deposit pricing, asset yields and the assumptions behind management’s sensitivity analysis.
- Credit quality and allowance adequacy as the loan book grows, including exposure to commercial real estate, interest-only mortgages and criticized corporate loans.
- Integration, funding, regulatory approval and expected returns for Charles Stanley and the proposed TriState Capital acquisition.
- Developments in legal and regulatory matters, including the estimated $90 million excess-loss range for matters that could be quantified.
- Capital deployment after the TriState transaction, including the timing of share repurchases and the sustainability of the increased dividend.