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.