Raymond James Financial, Inc. (RJF) Earnings Call Transcript & Summary

Welcome. Good morning. First, I want to welcome all of you to our Institutional Conference. Thank you for your participation and taking time, have your busy schedules to attend the conference. We're always excited to host investors and corporates from around the country, Canada and the U.K. as well. So thanks for your attendance. And of course, it's always good to have a home crowd when I'm presenting about Raymond James. So for those Raymond James Associates, thanks for carving out the time to attend this presentation as well. I want to start off the presentation well, with the forward-looking statements, of course. But also going to our values where we always start the values of the organization that was started by Bob James in 1962 and certainly reinforced by Tom James and then Paul Reilly, through their tenures. And certainly, the focus that I have as CEO and that the leadership team, we spent a good portion of all of our leadership team meetings talking about the values of the organization. This is what really makes us different in a highly competitive industry. It is so important for us to reinforce these with tangible, measurable behaviors each and every day. It starts with being client first. And every firm says that their client first, if you go on the website, every firm says, "Hey, we are client first." But I always say the proof is in the pudding. And so if you look at the financial crisis or if you look at the mini banking crisis in 2023, what put those firms under? It was nothing to do with clients. There were bets that the firm were taking on their own behalf. In 2009, it was using wholesale funding to buy what they thought were double and AAA securities that were securitized that ended up essentially becoming a liquid and the wholesale funding ran dry. 2023 was duration bets that they're taking on the balance sheet that a lot of these firms went under. The leadership team said they had no idea they were taking. The CEO and CFO were doing it on the side had nothing to do with clients. We didn't do either one of those things. And the reason wasn't because we knew that rates were going to go up to 550 basis points in a very short period of time. We were getting a lot of pressure from analysts and investors for years to make those type of bets. And the reason we didn't do it wasn't because we were brilliant is because we said our value start with being client first. What to buying long-dated securities have to do with clients? Absolutely nothing. We don't try to time the market. We don't try to make bets for the firm's on behalf. We're in the business of serving clients and making decisions for the long term. We don't care what happens over the next quarter or 2. We're making decisions for the next 5 to 10 years and beyond. That's why when we announced acquisitions, we're not big on 12- to 18-month synergy or accretion targets because that gets you so shortsighted, you lose focus on what's most important, which is preserving the culture of the organization that's joining the Raymond James family and looking at the 5- to 10-year strategic benefits. We're not worried about what happens over the next quarter or two. Integrity. Integrity, particularly in the financial services business is so important. A lot of people say integrity is what you do when no one is looking. I think that's a decent test. But really in financial services and a public company perspective, integrity is what you do when everyone is encouraging you to do something that's inconsistent with your values and rooting you on. Right now in this marketplace, you're getting rooted on if you're taking a lot of risk. Most of the firms with the highest leverage are doing -- are getting applauded because we're 16 years into a bull market. And so we have to stay consistent with our values, even though we would get applauded for taking on more risk in a 16-year bull market, at least up until recently, it's not consistent with the values of the organization, and that's what we mean by integrity. And then independence is critical. We want all of our advisers, bankers, associates to all feel like they really have a sense of ownership with the businesses that they run with the functions that they support. All of our businesses work together. Private Client Group is our biggest business, accounts for about 70% of the revenues but the private client group at Raymond James would not be what it is today without our capital markets business, without our asset manager, without the bank. All of these businesses support one another to provide a full service capability to our clients in the wealth management business and also our institutional clients. And so that -- sometimes again, 16 years into a bull market, we get questions, why don't you focus on being more of a pure play? Interestingly, pure plays have higher multiples in a bull market, right? Because in their multiples typically have a much higher range or standard deviation because when things go bad, their multiples go down even more. And for us, having a diversified and complementary business where the multiple and the valuations are much more consistent over time, and our earnings profile is much more consistent over time. Just last year, we recorded our fifth consecutive year of revenues and earnings, in very different rate cycles and very different capital market cycles, in very different market environments over those 5-year period. We couldn't find one other financial services firm that have 5 consecutive years of records in that -- in those different environments starting with COVID. And the reason for that is because of our diverse and complementary businesses really focused on serving clients with holistic financial advice. And you see in our long-term performance as well, 152 consecutive quarters of profitability. In fact, the only quarter that we weren't profitable since going public in 1983 was Black Monday in 1987, and the only reason we lost money in that quarter was because that day when everyone else closed their trading desk, Tom James said, this is when clients need us the most client focused. And so we kept the trading desk open that day because of the volatility of prices that day, we lost money. But beyond that, we've been profitable every single quarter since going public. We didn't need TARP money during the government shutdown nor did we take TARP money during the recession. And we've always strive to keep enough capital and liquidity on our balance sheet to stand on our own 2 feet. As we look forward, we've just unveiled a new value proposition in our annual report. It's called the power of personal. And this applies to all of our businesses, the wealth management business, the capital markets business, the bank and the asset manager. We, as a leadership team, have a lot of conviction that the one thing people need more now than ever before in this world of AI and technology. And we spend over $1 billion a year in technology. I'll talk about that more later. In the world of social media, and I can tell you, I call it antisocial media because my kids use social media and it's not helping them become any more social, I assure you than I was without social media what people need more than ever is a deeply personal relationship. And counterintuitively, even though people need a deeply personal relationship now more than ever and value a deeply personal relationship now more than ever, it's harder to find a firm in our industry focus on providing deeply personal relationships than it was when Bob James founded the firm in 1962. Fewer firms are focused on investing in personal relationships. It takes a long time. How could a private equity firm focus on developing a personal relationship model when their exit is 3 to 5 years? Deeply personal relationships, by definition, take longer than that to create, right? So in a world that's focused on quick returns, quick IRRs, quick ROIs, we're focused on the long term, developing those deeply personal relationship which is becoming increasingly differentiated in our industry. And again, that's true with our investment banking clients, our sales and trading clients, and also our wealth management clients. We really want to be differentiated in the industry by doubling and tripling down on what we've always done, which is developing deeply personal relationships with our clients. And our value -- our vision is very straightforward as we want to be the absolute best firm for financial professionals and their clients and that their clients is very important, not our clients as a firm, but really, again, going back to the value of independents. We want every financial professional to feel like they own their clients. Actually, in our wealth business, we put in writing in the adviser bill of rights. You own your book of business, if you leave on good standing, we'll help you move to your new firm. No other firm says out across all of their affiliation options. And even on the independent side of the business, those firms are making it harder for their advisers to have mobility. So again, the focus on independence is so critical, their clients and us treating financial professionals, whether it's our financial advisers, our bankers, our traders or salespeople like our clients. So they -- even though they have that portability, they know they're treated like free agents. They want to stay at Raymond James because we have a unique value, unique culture and a robust platform that we're investing in. So why would they want to go anywhere else? You look at our strategy over the next 5 years, which we presented to our Board and our offsite a couple of years ago, a couple of weeks ago at our annual off-site, and it really remains consistent. It's to continue gaining market share in each one of our businesses. And we're uniquely positioned in each one of our businesses where we have critical mass to be competitive. Again, $1 billion technology investments, some firms have a fraction of that technology investment that we're competing against. And there's just no way for them to keep up with the demands of AI and technology in our industry, and those become consolidation targets over time. But coupled with that critical mass, we're uniquely positioned, and we also have headroom to continue growing doing what we're doing. We don't have to reinvent who we are to find growth opportunities in each one of our businesses, we have significant room to expand just by taking market share, both throughout the U.S., the U.K., Canada, just continuing to do what we're doing and not trying to reinvent who we are or do something totally new. We're also focused on increasing collaboration. I talked about the diverse and complementary businesses and it's not about cross-selling. I don't like that term cross-selling. It's about bringing all of the products and services that we can to clients to broaden and deepen the relationship, and to enhance the relationship to serve clients and to meet them where they are. Of course, that requires investing in tools and resources across the organization, products, alternative investments, private wealth program and the wealth management space. We just announced additional capabilities over the weekend that we closed with an acquisition of a firm called GreensLedge, which enhances our securitization capability and our advisory capability there. Those are all investments that we're making to, again, broaden and deepen the platform for clients. Enhancing the infrastructure under the hood, cybersecurity matters more than ever. It's more complicated than ever. We spend over $80 million a year just in cybersecurity technology, $80 million. That's more than a lot of our competitors' entire technology budget and the infrastructure resiliency so critical as well and more complicated than ever because so many -- we're dependent on so many different vendors in the value chain and technology with cloud-based services and solutions and other vendors. So the whole ecosystem has gotten more complicated in terms of making sure that the entire system's resilience. You've seen it with cell phone providers and other cybersecurity providers externally, cloud providers. When one goes out, it has a knock-on effect across a variety of industries. All of this requires most importantly, we're in a people business. We have to hire, develop and retain the very best people. So the focus on people is first and foremost in everything that we do and talk about at Raymond James. And then, of course, the investment in technology. We announced the rollout still in pilot of our AI solution called Rai. And what Rai is a large language model, generative AI, where we've taken transcripts from service calls and created essentially an agent where people can self-serve advisers and their teams can self-serve as client related questions that actually provide more consistent, higher-quality results and it's much quicker in terms of being able to give you client-related questions at your fingertips. And so this is early stages. Eventually, we're going to expand this to all of our businesses to ask questions about not just the client-related business but also ask associate related questions. And so these are the type of investments we're making. We're doing both internally developed AI solutions, but also looking to partner with vendors that provide specialty AI solutions. And so I know there's a couple of weeks ago, a lot of concern around these AI solutions coming out in the industry and what does that mean for Raymond James and wealth managers. I would tell you that the wealth management industry needs these AI-driven solutions to help advisers better serve their clients, to help advisers get both more scale in their business, to serve more clients and more assets. At the same time, provide more bespoke and customized advice and more holistic advice than they have ever provided before. So these AI solutions actually help the wealth management business evolve and providing more sophisticated holistic advice while at the same time, doing it for a larger number of clients. And that is required in the wealth management industry. McKinsey came out with a report a year ago that said, without these technology solutions, there's going to be a massive shortage of financial advisers in the industry. If you look at the demographics of existing advisers versus new advisers getting into the business, coupled with rising demand for human financial advice. And so to solve that shortage, we need the AI solutions, which is why we're investing over $1 billion in technology and looking at all of these solutions going forward. So we're really excited about the opportunities that AI will have for the industry, not just in wealth management, but across all of our businesses going forward. So now I'll hand it over to our CFO, Butch Oorlog, who will kind of give you a financial review, and then we'll open it up for Q&A. Butch?

Thanks, Paul. Anchored by those values that Paul just described, pleased to be able to provide the update that we had in our most recent fiscal year, we were able to achieve our fifth consecutive year of record levels of net revenues and record levels of pretax profit both on a GAAP and a non-GAAP basis. And that consistent performance is really anchored in those values that we've talked about. I'm going to take a moment and talk about -- highlight 3 aspects of our characteristics anchoring that performance. And the first is our track record of increasing operating leverage. We've been able to increase operating leverage consistently, and we're going to talk about how we're focused and how we think about doing that. We're going to talk about our strong balance sheet, the characteristics of our strong balance sheet. And we're going to talk about our consistent capital priorities that are focused on growth. Specifically, the way we think about generating operating leverage, we strive to grow revenues at a higher rate than we increase expenses. And simply put, and we do that across our diverse and complementary businesses. As you can see on this slide, we have been able to do that over the last 5 years with a compound annual growth rate growth of 12%, growth in revenues. In terms of our expenses, our expenses are variable. A very significant portion of our expenses are variable, and therefore, flex with the revenues. So over that, that provides us a lot of flexibility to be able to adjust in different market environments. And as you see on this slide, we've been able to achieve a 21% increase in pretax income over that same 5-year period that we had the 12% increase in growth. So solid performance in our ability to generate positive operating leverage. And as we look forward, we mentioned the $1 billion of technology investment that we're going to spend, that we budgeted, have spent and continue to spend. We believe that we're going to continue to gain efficiencies through those investments that enable both our top line growth as well as give us efficiencies and economies of scale. Scale does matter in this business. And we believe that we have further opportunities to continue to leverage our scale as we continue to grow. In terms of financial strength for our most recent December 31, '25 reporting period, our total capital ratio is in excess of 24%. That is more than 2x the regulatory minimum level to be considered well capitalized. In terms of dollar value, that represents $2.4 billion of excess Tier 1 capital which we have available to us to deploy in our growth, in our business. It takes both capital and liquidity to put that into action. And in terms of liquidity, we have $2.1 billion of excess liquidity at December 31. That's excess over our $1.2 billion target level of liquidity. So we have capital and liquidity on hand and ready to invest in terms of -- as opportunities and invest in our growth strategies going forward. We also have a relatively low level of of debt on our balance sheet, coupled with investment-grade credit ratings from each of the 3 credit rating agencies. So we're well positioned to access the debt markets to the extent that, that becomes opportunistic to fuel our growth. In terms of our capital deployment priorities, our first strategic priority in deploying capital in terms of fueling our organic growth. Organic growth for us in the terms of our PCG business can take the form of TA loans to financial advisers to grow our adviser practice and our capital markets business, it can take the form of bringing on additional teams and talent to expand our service capabilities to our institutional clients. As well as in our banks, it can take the form of funding loan growth as opportunities arise, which in the most recent fiscal year, our loan balances increased 12% as evidence of our deployment of our balance sheet organically to support our bank loan growth. Our second pillar of capital priorities is our acquisitions. In terms of acquisitions, our criteria is long-standing. The first criteria is it has to be a cultural fit. Secondly, a target has to improve, has to be improved, both us and that target. So the way we think about it is 1 plus 1 needs to equal more than 2. And the way that, that happens is that target has to make us better, and we have to make them better. And then our third element in our strategic acquisition deployment is in terms of value. So if and only if, and when and only when, a target checks those first 2 boxes, then we're going to evaluate the economics to make sure that we can make that investment consistent with the long-term goals and returns for our shareholders. Our next level of capital deployment priorities in terms of common stock dividends. We have a target dividend payout ratio of 20% to 30%. We operate within that target. And as an example, in the most recent quarter, we increased our common stock dividend 8%, which was consistent with our growth in earnings. And finally, the last pillar is share repurchases. We're committed to repurchase shares to offset compensation-related dilution, and then to be opportunistic with share repurchases in order to keep Tier 1 capital from growing in excess of those levels that I cited earlier. On this slide, you'll just see our demonstration of how we have performed by putting the acquisition of strategy to work over the past since 1999. A couple of takeaways on this slide, including the fact that we've been able to leverage the people from many of the acquisitions that are reflected on this slide in terms of talent development, and it evidences that cultural fit that we hold ourselves accountable to that results in us being able to bring those leaders on and have those leaders make us better and remain with us going forward. This slide depicts the last pillar of the capital deployment. And you can see that over the past 5 years, we've deployed nearly $4.7 billion in aggregate and returns of capital to our shareholders between dividends and share repurchases. So based on our pillars of values, we've been able to achieve those results over the long run. With that, we'll open it up for questions.

Thanks, Butch. Any questions from the group? One in the back there. I'm not sure if we have a microphone or I'll just repeat it for you.

Do you have any concerns that people might have over private credit and how have -- how might any fall out in private credit world impact Raymond James?

Yes. So the question around private credit and some of the rumors, I would say, so far, the issues that we've seen in private credit were actually much less credit related and much more isolated to fraud events in particular companies or that sort of thing. And so I know there's some concerns in certain industries that private credit lends to. And I would say, thus far, those concerns are haven't materialized into real credit issues as far as we could see them in the private credit space. So at Raymond James, we've always been very conservative around offering those type of products. We do offer them on a limited basis to firms that we do operational and financial due diligence on but we've always been more cautious around offering, whether it's private credit or more broadly speaking, alternatives because, especially where we are in the cycle, the world is -- does go up and down, the economy and the markets go up and down. And so we want to make sure that we're balanced in offering the various type of products that Private Client Group advisers and clients want access to. So we've always been conservative about that. We're monitoring private credit very carefully. I think the biggest risk for private credit near term is much less of a credit risk and much more of a funding dynamic in terms of redemptions or ability to raise more funding. And again, we haven't seen any statistics on that yet, but certainly, if the headlines keep coming out around potential cracks and concerns around private credit, that could in itself create concerns and risk, and funding issues for the space. So that's something that we'll monitor very closely going forward. Any other questions?

Distinguish between collaboration and cross-sell?

So the question was distinguished between collaboration and cross-selling. So one very explicit difference is cross-selling usually comes with requirements, where we tell advisers or branch managers or regional managers or leadership in the businesses that in order to get a certain level of compensation, you have to sell a certain number of products or refer a certain number of products. And we've seen that certainly cause a lot of explicit tangible issues in the industry and a lot of intangible issues in the industry. We have 0 cross-selling requirements. There's not one financial adviser that will tell you that they're -- out of our 9,000 or so advisers that will tell you that they have a cross-selling requirement to hit a deferred comp program goal. We're very unique. That sounds like common sense, that's actually pretty unique in the wealth management space. Same with regional management. Same with the leadership team. While I encourage Jim Bunn sitting there, he's the President of our Capital Markets group. While he's very motivated and encouraged about using all the resources in the firm to provide the very best service and product and advice to the institutional clients, his compensation is not impacted at all by a certain number of products being sold from the other divisions. That's not a part of the formula. In fact, we make it almost more difficult for our asset management products, as an example, to be sold internally to our own wealth management clients. Because we take that separation very seriously. We want to make sure that we're focused on quality versus cross-selling. So when I say all these things, we take it for granted at Raymond James and it sounds like common sense, but it's very unique in the industry for all of those facts that I just described to be true. And that's really the difference between cross-selling and collaboration. Collaboration is about, hey, what can we do to broaden and deepen the relationship with clients that adds value to clients and not what's the quota that we need to hit to get to our financial goals for a firm. It's a very different construct and mindset. Maybe time for one more, if there's another question out there? All right. Well, if not, then again, I want to end where I started, which is by thanking all of you for your participation and time at this conference. Always great to see everybody. Enjoy the rest of the week.