RAYMOND JAMES FINANCIAL INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Paul Reilly notes it's his final earnings call as CEO, transitioning to Executive Chairman, expressing confidence in Paul Shoukry's leadership. The firm achieved strong first quarter results with record net revenues, net income, and PCG assets.
• Paul Shoukry is optimistic about fiscal 2025, highlighting solid advisor recruiting activity, continued improvement in Capital Markets performance, growth in Asset Management assets, increasing loan demand in the Bank segment, and a focus on organic growth and strategic acquisitions.

Segment Performance

• Private Client Group: Record quarterly net revenue of $2.55 billion, with pretax income of $462 million. PCG domestic fee-based assets reached $877 billion, up 17% year-over-year. Financial assets under management were nearly unchanged at $244 billion.
• Capital Markets: Generated quarterly net revenues of $480 million and pretax income of $74 million. Investment banking revenues increased 80% year-over-year, with M&A revenues growing 92% year-over-year.
• Asset Management: Achieved record pretax income of $125 million on record net revenues of $294 million, driven by higher financial assets under management due to market appreciation and net inflows into PCG fee-based accounts.
• Bank: Reported net revenues of $425 million and pretax income of $118 million. Net interest margin was 2.6%, down two basis points sequentially.

Guidance

• Fiscal second quarter asset management and related administrative fees expected to decrease by approximately 2% due to two fewer billing days.
• Optimism for Capital Markets given a healthy pipeline and more conducive market environment.
• Bank sees securities-based loan demand continuing to increase as clients become more comfortable with current rates.
• Board increased quarterly cash dividend on common shares 11% to $0.50 per share and authorized common stock repurchases of up to $1.5 billion.

Risks

• Macroeconomic conditions could impact revenue performance.
• Intense competition in recruiting high-quality financial advisors.
• Potential regulatory changes or economic factors could affect loan portfolio quality and performance.

Question and Answer

Q: Good evening, Paul, Paul, and Butch. First question just on capital, and I know you guys hit on this quite a bit in the call, but, 13% Tier 1 leverage ratio, that’s $2.5 billion above 10% ratio. You’re going to generate probably a couple $1 billion more of capital through earnings over the next year. You only need about $400 million for the dividend, so maybe call that $4 billion of excess over the next year. So, just want to think about obviously, you’re growing loans at a pretty good pace. So, can you talk about the level of loan demand, because it would seem that you can support a lot of growth there. And then just beyond that, how you would kind of rank the other priorities or most attractive priorities for capital use? And, do you think you can actually work down that Tier 1 ratio over the next year without acquisitions?

A: Thanks, Devin. Yes. Our target is still to get to that 10% ratio, which is still twice the regulatory requirement, to be well-capitalized. And so, your analysis was quite good in that we have excess capital now. Not a bad position to be in, but, we are looking at the same levers that we have always told you that we prioritize, which first and foremost is organic growth, investing in our business and our advisors, clients and associates. The recruiting pipeline is still very strong, across all of our affiliation options. And also recruiting across all of our businesses as well, investment banking and asset management and the bank. And then speaking of the bank, growing the balance sheet. The loan growth, particularly securities based loans, to Private Client Group clients, has really, rebounded and been strong over the last couple of quarters as clients get used to the new level of rates and short-term rates have declined. And so, we are seeing that growth there, which is, the loan category that we feel has the best risk adjusted returns and the most synergy, with our Private Client Group clients. And then outside of organic growth, we have been front-footed and looking for acquisitions. We can’t say much, about that topic other than, there has been a lot of activity there. And, the last thing we want to do, yes, we don’t know whether or not we will close any of them or we’ll get to the finish line. That’s we have tight filters of it has to be a good cultural fit, strategic fit, and at a price that makes sense for our shareholders. But the last thing we want to do is a large amount of buybacks, while we’re doing due diligence on, a few acquisitions and then go, have to turn around and raise capital to fund the acquisitions. And so, buybacks, which is sort of our, behind dividends, sort of the last lever that we prioritize for, capital deployment, it’s something that we can, turn up or turn down depending on what we see with the other uses that I just described. And, you saw the deceleration there in the last quarter. If those other levers, don’t drive the kind of capital consumption that we’re hoping over the next several quarters, then we will, take buybacks back up to the pace that we saw in the preceding quarter.

Q: Hi, good evening. Maybe a first question on the comp ratio. I wanted to focus on the advisor compensation as a percentage of compensable revenues. Last two quarters have been right around 74%. I think you’ve generally been in the range of 75% to 76% during that zone for the better part of the last seven years or so. I know the mix of advisors on platform has recently been shifting towards employees a bit. Just wondering if that’s having an impact on that advisor comp ratio and whether this lower level near 74% is kind of a better run rate?

A: Yes. Hard to look at one or two quarters and call that a new run rate. I think if you look at the entire fiscal year for 2024, it was right around 74.5% or something like that. So, that’s probably what I would point to. It bounces around from quarter-to-quarter. But over a long period of time, there’s the mix dynamic that you’re describing. But there’s also as you grow the production, there is sort of a more fixed base that grows as you recruit advisors that, amortizes over time of the transition assistance. And so, there is some scale advantage there as you grow, the production relative to the transition assistance that you kind of could see some modest benefit in. Now, we’re still recruiting heavily so that transition assistance will still come on and grow as well. But the revenue has been growing with the S&P 500 and the recruiting results, 17% for fee-based assets year-over-year. The transition assistance amortization is not growing that fast.

Q: Thank you very much, for taking the questions. And Paul and Paul, again, congrats to both of you guys. Just in terms of the front-footed comment that sort of caught my ear, you’ve said it twice now on this call, is the significant amount of capital as you discussed. Wondering when you can sort of prioritize where you’re most interested in growing the platform. Maybe if you could talk either at the segment level or geographically. I’d be curious to sort of where you think you need to sort of further scale?

A: Yes. I would say, again, our priorities have been pretty consistent. The Private Client Group business is our biggest business. And so, that is sort of our top priority both in terms of organic deployment and also our pursuits on acquisitions. But, that’s also a very difficult from an acquisition perspective space to find a good strategic fit, cultural fit, and also a value that makes sense for shareholders, especially with private equity firms being so aggressive in the space right now. So, but that’s our top priority. And then the capital markets continuing to look at M&A firms to strengthen our platform form various verticals. Those have been more kind of team hires and lift niche, acquisitions and lift outs. And so, those have been very accretive for us over the past several of years, and also looking at asset managers. But, again, on the asset management front, most of the deals that we look at, that are shown to us are not necessarily showing us good organic growth profiles. And, that’s something that we would be looking for on the asset management front. So, really looking across all of our businesses, we have a lot of headroom to continue growing and expanding our market share and expanding the solutions that we provide to clients, in each one of our businesses. And so, those are sort of aligned with the priorities that we have from an acquisition perspective.

Q: Hi. Good afternoon. Thanks for taking my calls or my questions. So, curious on the average yield on RJBDP, third party bank, down about 22 basis points this quarter. I wanted to confirm, number one, the revenue side of that is really primarily moves with the policy rate, and so therefore, the offset partial offset would be the deposit beta that you have tied to those balances. Should we continue to think that that deposit beta offset will remain roughly at the level you’ve experienced so far? And maybe if you do let us know what the beta’s been on ESP and the Fed cuts.

A: Yes. I mean, I think that’s a reasonable assumption going forward, and we’ll, of course, next quarter have the full impact of the rate, the two rate cuts, in this quarter. And so, I think the deposit beta has been averaging around 35% on the sweep balances, but much higher than that on the highest yielding products like ESP, closer to 100%. And that’s what we anticipated was sort of that the deposit beta would look similar for the various products on the way, down as it did as on the way up for rates.

Q: Hey. Good afternoon. Maybe just on NII, it sounds like based on the guidance for the next quarter that your NIM is seemingly pretty stable. We have loan growth picking up, deposit growth looking like it’s turning and starting to get a little better and you still have asset repricing. So, with only about one or two cuts in the forward curve, is it fair to think the trajectory on NII could start to get a little better beyond next quarter? I mean, just think trying to think through full year ‘25 and what maybe the quarterly trajectory looks like.

A: Yes, Jim. That’s absolutely right. That’s our hope as well. But we have two fewer billable days, this upcoming quarter. So, that’s the headwind. But beyond that is, assuming rates stabilize and NIM stabilizes, we grow assets. We think that can be a tailwind for NII. And that’s the goal is for it to be a tailwind to NII going forward.

Q: Hi. Congrats, Paul and Paul. And yes, look forward to, obviously, engaging with Paul in the new role, certainly. So just quick question for me on sweep cash trends. They were quite resilient in the quarter for you and industry peers. Your growth did lag, however, some of the public peers. I was hoping you could speak to any actions or changes in promotions, which may have impacted the cash growth. And with NII poised to stabilize at some point this year, what you’re underwriting for sweep cash balance growth in the year ahead?

A: Yes. And I think, you know, we look at quarter-to-quarter trends, but, if you look at year-over-year trends, I think you’ll see different trends there. So, our cash balances and our cash programs, we always put clients first in the offering. And we have a very competitive offering, both in the suite program, the enhanced savings program, some of the special rates we offer for new money and also the purchase money market fund platform. And first and foremost when we make decisions around any of those cash programs, we’re thinking about what’s best for clients. And that served us very well over a long period of time. And the sorting dynamic has certainly gotten into the later innings, especially as rates have started to come down. And when outside of quarter-to-quarter blips that you’re highlighting, which may have some noise in it. If you look over a long period of time, we’ve been very consistent that as you know, Stephen, about being, about providing transparent and sort of consistent guidance around what we thought was going to happen to cash balances. And we have performed just as well, if not better, than the rest of the industry since the start despite, what maybe some others were saying about what would happen.