Raymond James Q2 2024 Earnings Call Transcript

Yeah, Alex, I appreciate that. What we said was that the target that we announced at the last Analyst Investor Day was 65%. And so that's sort of where we've been trending in the first two quarters, but that's going to -- what it does for the rest of the year is going to be largely dependent on the Capital Markets segment. That's a big driver. Typically, that would have a lower capital ratio -- comp ratio associated with it than the other segments have helped the firm's overall comp ratio, and that wasn't the case this quarter, as you can calculate. So we are pleased to be able to generate close to a 65.2% adjusted comp ratio despite the challenges in that Capital Markets segment.

In terms of the reset of the payroll taxes and the increase in salaries that's typical for the calendar first quarter of each year, I would say that probably had an impact around $30 million to $35 million in the quarter. So a meaningful impact in the quarter. Of course, the salary increases will continue throughout the year. But probably two-thirds of that or so was related to the payroll tax reset, which will decline throughout the course of the calendar year.

I think you're seeing the same trends that the teams we're hiring are larger. So we're bringing in more assets. We're on a great role in terms of assets in trailing 12. We do have head count that moves to our RIA channel. And that takes them out of head count because they're not licensed. So even with that movement, we keep the assets, but we're not keeping the head count, and we'll try to give you more granularity on Investor Day -- Analyst Day. Then you have ins and outs. So we do have some outs, in the end, take time to onboard. So the assets usually take when you see a robust quarter like the [Indecipherable] trailing 12 that take nine months to a year to get all those assets over. So our expectation is that the recruiting will continue and continues strong. And I think part of the transparencies we need to give you a little more transparency on the RIA and how to think about that. We've struggled with the measurement to give you -- so you can see through those.

Thanks, Alex.

Yeah. I mean we had tax season. We also had a record quarterly fee billing that came out of the cash balances already. And so, I look at today's report, cash sweep balances so far in April are down $1.3 billion, which is less than the impact from the fee billings. Now we had some decline in the Enhanced Savings Program so far is able to -- and again, that could have been impacted. We have tracked significant payments to the IRS with the tax season here. So -- and if you look at the last couple of quarters after the fee payments remain, cash kind of build throughout the quarter, and you saw that certainly in this past quarter where cash sweep balances ended relatively flat quarter-over-quarter, which are exceeded our expectations that we shared on the last call. So we are hopeful that balances are stabilizing, and so we'll kind of continue monitoring it from here.

Well, yeah, so I appreciate the question. We are digesting 500 pages of a regulatory rule is a little more -- even more complicated in trying to get through our earnings release, so -- and analyze it. So it's early. The early read is actually from the rule itself, is we -- there's nothing that pops out that's overly problematic. It actually maybe surprisingly so. I think the industry's concern will be two. One is that does the Department of Labor even have the authority to oversee these accounts, and that doesn't have to do with this rule, I don't think the rule itself will have a high impact. But do we want another regulator to concede the statutory authority for the regulator to oversee those accounts. And the other thing is that the rule is talking about really complying with best interest standard is or why is there an extra rule. So -- but the rule itself is I think, much more manageable than the draft will work [Phonetic]. So again, that's an early read. The devil is always in the detail, but I don't think the rule itself and what it requires to do today doesn't look to be problematic at all.

Thank you.

Yeah, if you look for the first six months, I think compared to the industry in the five's, we did pretty well. So this quarter was slower in terms of the number, typically it is a little lower but lower -- maybe a little lower than we would have thought in terms of the number itself, but the recruiting is going well, the movement to RIA, you can see that net new assets growth was pretty robust. And that asset growth was pretty robust. So I think it actually, it was -- we have quarters where things are down and quarters where things are up. And I just think it was down a little more than we anticipated from a measurement standpoint. But the recruiting, not only in what we brought in this quarter, but what we have in the pipeline, I think we have a relatively good chance of closing, I can't remember -- remains stronger. So the numbers will be impacted by the -- in terms of adviser count, how many go to RIA and then hopefully, the ones that do will choose to stay with us. So -- and we've had a pretty good record on it so far.

Yeah. So we have done a lot of adjusting in terms of the cost and lowering the cost in that business, but we've also done some hiring. So the business is very leveraged to the upside of revenue comes up. I mean so the margin two years ago is 50% or something. I mean so now it's not. So I mean there's leverage for the revenue to grow to really help with that margin. So the question is just the market. And we're open always to bring in talent all. I think we showed in '09 and the worst part is when you were hiring when other people weren't really paid off for our growth for the whole next decade. And so that is the blessing of a really strong capital position. As said, we have the opportunity even in tough markets to hire, carry and really position talent to bring us forward. We've done some fixed public finance hiring that we're already seeing payoff from in the last -- this quarter and this coming quarter that if you looked at just the results of public finance, you wouldn't have done it, but we're, again, great believers in the business on the platform. And if there's great talent out there, we're willing to take a long-term investment and liquidity and capitalize the board to do that.

Thank you.

Yeah. I think maybe the only thing we can really point to is the margins peaking out in the mid-20s. I think it's 25%, 26%. And in '21, '22 [Phonetic] in that time period. And so, there's a lot of upside to the margins from where we are today. And just remember, this quarter was impacted by $20 million of deferred comp amortization from those record years as well, which will run off over the course of the next 12 to 18 months because those are three-year deferrals typically. So there's a lot of upside. We have a very strong franchise now in Investment Banking, the pipelines and the leading activity levels are good. Closings are difficult to predict just in this market environment. But we think there's a lot of upside to go to the top and bottom line in our Capital Markets segment.

And if we did, we would be doing -- we've been taking a lot of different actions. And we've taken so far. I think we've prudently cut expenses and making sure that we have the right people on the field, but we think we have a great team as the market recovers, we believe they'll do very well.

Yeah. I think our capital philosophy hasn't changed in that. We would love to add to the business, invest in the business first. And certainly, our recruiting an ongoing large investment, which is certainly, I don't think anyone thinks of that investment. We're looking for M&A opportunities and are active in the market but can't predict the timing. And we're not -- certainly, we've committed to buy dilution back and be opportunistic, but we don't want the capital levels, we think that these levels are high, and we want to manage them in. So we will be meeting with the Board. And I think by the Analyst and Investor Day, we may have better insight to how we may do that.

But to the profitability, we're not trying to hoard capital [Indecipherable] we will always be higher probably than most firms. But this is a pretty robust level. We acknowledge that. I think our commitment, for those on this call, I think we do a buyback that averaged $120 plus, you wouldn't have thought we would have done that even a quarter or two ago. So we are trying to manage the level.

Yeah, we could go into a long -- I mean that's a hard question to answer quickly. I mean there's -- our primary geographies are North America and in Europe that we look for the best opportunities in each business. The opportunities are different, in our Private Client Group, it's really North America, the U.K. Our M&A group is much broader, we're on the continent, not really in Asia, but not against M&A capability more than we have today in Asset Management, it's a particular product. We can go on and on and on. So it's -- we think in all the areas of the firm, there are areas that we can grow that strategically help us through acquisition, but that would be a lot longer than -- a lot more detailed in that general question.

So each business has different needs. In M&A., we think there are areas that we could expand. The Private Client Group, we think our geographies. We've done well in the Northeast but could do more, and we're really focused on growing in the West, more robustly. So the answer is a lot of areas, if we could find the right opportunities and make a reasonable return for shareholders. [Indecipherable]

Yeah. As you know, loan growth has been sensitive not only for us, but the really entire banking industry since rates started rising over the last 12 to 16 months. And a lot of that is due to just the higher rate environment and a lot of corporations and investors coming into this environment flush with cash. We are optimistic about loan growth going forward. We don't know exactly when that inflection point will hit, but we do think that there's a demand building up both for companies who will eventually get back engaged in M&A and other investing activities as well as Private Client Group investors.

So one of the reasons that we are maintaining strong capital and funding positions and a lot of flexibility is to be in a position of strength when that loan growth does resume because it is just a matter of, in our minds, just a matter of timing for when that loan growth recovers. And so, we're well positioned for it. We don't know when that will come back, but we're optimistic about the growth going forward.

Just that the competition is still robust. I mean, that the adviser movement, especially of large team, has been -- our focus [Phonetic] has been big. I think private equity investment into the RIA space has caused more movement to into outside of the independent broker-dealers and employee broker-dealers. So that's kind of a new factor in force. So part of the reason why a decade ago, we started investing -- to have our RIA channels, so we could be competitive. So yeah, I mean, I can't remember a time where there has been a lot of competition, but we still see wire house movement in our favor.

I think that you're seeing more people not reporting adviser count for that reason. But we see a lot of activity. But it's competitive. There are a lot of people out there competing and at the end of the day, it's not just money. I think what people think the highest bidder is good. If you look at our -- we just saw the latest industry source, we're still lower than most firms by a fair margin in our transition assistance, but it's clearly up from a couple of years ago, so reflecting the competition. So it's competitive, but we believe our platform is what lands people on our culture. And so, so far, it's continuing. But it's not easy. It's hard work.

In the market, there's certainly a lot of movers and movements of the smaller teams that want to become RIAs and big teams that have the infrastructure to the RIA. So the movement is really kind of across the board, larger teams. One of the positives and challenges of RIAs is that you can affiliate with a firm, but have multi-custodians. So I think that if you look at that large RIAs and some of the big custodial firms, they still move assets sometimes. So you don't have to have a firm affiliate with you to be an asset gainer too. So the dynamic of that, it's a much more dynamic industry in that way. It's kind of all or none in the registered rep side. And it's a fight for wallet on the RIA side.

I think we're in the ballpark of flexibility. The question just is that question. If you see something where it could be bigger, but you can't just wait, wait and wait with total capital. We've drifted up once, if I remember right, Paul, 14% or something. And people are saying, what are you doing? But we had three deals that we executed in one year that brought it down. So it has been building back up. So if it was smooth and we could forecast it to be really, right? But if M&A kind of fits deals sometimes come almost out of the blue or someone just decides they're going to sell. And so that's why if we average up sometimes it's -- we feel like the market will be -- we'll have opportunities that we can foreshadow, but that doesn't mean we're right. It's one thing to enter into a discussion. It's another thing for a seller to agree its time and pick out and to close. So that's the challenge. But many of the deals that we have closed, are those we could execute and we could -- we were -- not only were they attractive to us, but there was a certainty of closing both financially and that we had enough cash on hand that [Indecipherable] that we in the financing because we're not leveraged as an [Indecipherable] that we can close very, very quickly. So yeah, I wish I could give you a science to that, there's a little more heart to it. We would love to be as clear as we can on this. But if we have the magic formula. We would let you know early [Technical Issues] to sell in terms of [Technical Issues].

It was flattish for us as you point out sequentially as it was, I think the rest of the industry, at least those who reported thus far. So I'm not sure you necessarily need to wait for rates to decrease. It's just maybe a stabilization of rate even as borrowers get used to sort of the new norm. So I think that's really what we're seeing as we've transitioned from historically low rates to where our current levels at an unprecedented pace. It's just a lot of people are still getting used to and companies are still getting used to this level of rates.

Thanks, Kyle.

Thank you.

I think our focus internally is first to our existing advisers, both technology and capabilities to make sure they're spending as much time as they can with their clients and acquiring new clients. It makes the advisers happy. It means our clients are happy, that's the cheapest growth for us. So our focus and a development platform to other advisers who want to come in. So the tools we put out, the technology we put out, the back-office modernization, all of that is to help adviser productivity and that does drive a lot of our growth in what we do and keeps advisers here. This is a market -- and frankly, the market has been this way for a while. We're -- any adviser [Phonetic] could leave and get a lot of money for their book and start somewhere else, but they stay here because of that. So that's a big focus of ours. That's where we pay a lot of attention. Number one is on retention. And I think part of our growth rates have been driven by our retention rates too and our recruiting. So I'm not sure if there's more of the question, but that's kind of focus. Number one is to make the existing advisers happy and productive.

There's two pieces to that. There's are we underpenetrated compared to wire houses in terms of loans to clients, you would say yes, but our other thing is we take a position with advisers, your job is to do the right thing for your clients. And if our loans are -- if you like, our mortgage loans, use them, if you don't, it's -- something is better else for your clients, use it. So our job is to provide competitive products. And the adviser's job is to figure out what's appropriate for their clients to use. So we do not put quotas. We do not put incentives. Some people have product incentives for their top trips, some of the managers have quotas to try to hit, we have none of that. We just want advisers to do what's best for the business. And then we try to develop selling products and services that they can educate, that they could use to help the client. So our numbers industry-wide are lower, but we understand why because we're not pushing it. We're -- we do it through education, not through trying to use incentives to get them to do it.

So now you can talk about from a capital allocation standpoint, that might be different from our side, what loans we'd like to grow. The good news is for us is we like the Private Client Group loans, the SBLs, mortgages, the other things that they have not only SBLs have our best risk-adjusted return or secured and they're good for clients and they're flexible for clients. So we're matched up that way. So our challenges are more where do we want to go on whether it's the commercial banking section or how much do we want to invest in securities, other that are more of a financial decision and long-term investments. So they're -- so penetration is a good question. We are lower, but we don't try to force it. We want our advisers to do it if it's the right thing for their clients.

I would say a lot of the shift in cash balances from on balance sheet to third-party banks that really occurred in the last couple of quarters. So the NIM going forward is going to be more driven by, one, the absolute level of rates and what happens with short-term rates going forward and also to the asset mix, to the extent we're a little heavy right now on the bank balance sheet and cash balances. Going back to the comments I made earlier about wanting to be in a position of strength when loan demand recovers. So that brings down the NIM all else being equal, but it's at least a push, if not a modest positive to NII, net interest income and earnings. But in the meantime, it does drag down the NIM a bit as we hold more cash balances than we think we would need on a run rate basis. So as far as the jumping off point, I think it is a relatively stable number from where we were this quarter. We're not shifting proactively shifting cash balances off balance sheet to third-party banks like we were doing over the last couple of quarters. So I think that's all fairly well reflected this quarter.

I mean we have been consistently investing in all of our businesses. First and foremost, the largest business by far is our Private Client Group business. And we don't anticipate that changing. So that's where the vast majority of our investment dollars go. But we also invest heavily in growth in the Capital Markets, Asset Management and the Bank businesses. They're all great businesses. If you look at the last three years and even the first half of this fiscal year, being able to generate record revenues and earnings in a very different market environment has -- a testament and a reflection of having a diversified business model. So we're going to continue to invest in very high service levels, continue to invest in technology to enhance the service levels and create more efficiencies for advisers so they can spend more time with clients, as Paul was touching on earlier. So kind of maybe a long-winded way of saying there's not going to be a dramatic change because everything is really working very well and has been since our founding in 1962, and for [Phonetic] being focused on essentially the same businesses that we're focused on today. And so that's sort of the kind of plan going forward.

Yeah. With a couple of quarters ago, the rates came down quite, the yields came down quite a bit and gave depositories a repositioning opportunity. And on the call last quarter, I think we talked about that repositioning opportunity being somewhat episodic in nature. And throughout the course of this quarter, rates actually went up again. And so underlying factors that Paul discussed on the call in his prepared remarks to us that depositories are still struggling to grow deposit balances or deposit balance is flat. And so, they're going to be prudent and slow to reinvest in securities in this environment. So -- and that's the largest part of our Fixed Income business. So we continue to expect some headwinds there until deposit balances start growing again and banks feel more confident investing in their securities portfolio. Meanwhile, [Indecipherable] has been nice in that it has diversified the fixed-income revenue streams with its corporate trading technology-enabled capability. And so -- but that business drives some volatility in this past quarter, spread and the rate volatility wasn't as significant. So they didn't have sort of the uplift that they had in preceding quarters.

Thanks, Devin.

Great. We appreciate you all coming on and good quarter already on to the next quarter. And I think we've got some good tailwinds. So we look forward to it. And sure, I look forward to hearing all these generational comments about how old I am now, and how ready Paul is, but he is ready. So I think you're going to see a lot of good things from Raymond James. So, thanks for joining us today.