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

Okay. We're past start time, so we'll get going. So good morning. I'm Paul Reilly, Chairman and CEO, Raymond James, accompanied by our CFO, Paul Shoukry. I would like to thank all the companies and investors who are attending it's great to see really live Human beings for a change versus a Zoom conference. So great to be here. The forward-looking statements are on there. The Raymond James story is pretty simple. For 60 years, we've been a company focused on really serving clients. As we say, people are, and their financial well-being is our mission. And it really does is the center of everything we do. We say we put clients first. We treat our advisers as clients, and we focus on being open and honest and integrity, looking always long-term as Raymond James does and how we operate and what we do for our clients. And we value our independence just like our advisers and our associates do. We came on a mission like 10 years ago when we accidentally created a position saying we wanted to be the premier alternative to Wall Street. It wasn't a slam on Wall Street. It was saying that we wanted to be a firm that could offer all the services and capabilities you could get at a Wall Street Bank, yet still felt like a family regional firm in terms of the way they interacted with people. And I think 10 years later, we're recognize that way where we've had wire house competitors talk about us on their earnings call. They recognize us and some of the things we've done well in the industry, yet we still have that culture in connection with the regional firms, and how they interact with their people, and we interact with our associates and clients. We've grown over the years. Certainly, wasn't that long ago, we crossed $0.5 trillion and to get at $1.26 trillion is a testament both to the growth, and we've had certainly tailwinds in terms of the market. Over 8,700 advisers, and this was as of 12/31 doesn't account for the 200 advisers that joined us at Charles Stanley in January. 136 quarters of consecutive profitability, one of the hallmarks of the firm, the only money -- only quarter we lost money was the Black Monday quarter when Tom would not close the retail trading desk. And we lost a whopping $100,000 or we would have made money every single quarter, including in '09, where we had our lowest ROE since being public of 7.9% and made money every single quarter. So we're very focused, very long term. recognized by being highly capitalized, sometimes we're criticized for that, more than 2x the regulatory requirements and certainly recognized by the rating agencies, first our Fitch A rating and now Moody's gave us an A3 rating, for a firm our size to have a ratings is highly unusual, and something we're proud about. Four really diverse businesses, but they all feed on each other. I mean, the bank gets a very cheap source of deposits that has no branches and 2 ATMs, and we say no plans to double either, and our announced proposed acquisition of TriState. It has one location and no ATM. So we have very low cost source of funds for the bank. And yet, the fastest-growing parts of the bank's balance sheets are securities-based loans to clients and mortgages, which have great performance and great returns. So it's very synergistic. Our capital markets business, it's research. It's M&A business, which helps -- help monetize clients' businesses as things come up. Our asset management group, if you take out the third-party business under Carillon Towers Associates, half that business is just managing portfolios for clients. So it's very synergistic, and it's also helped us in our earnings. The bank was the highest earner for 2 years when there were some interest rate spreads. This last year where there's been low at the top bar there, it's been very small, but as rates -- as interest rates go up and spreads expand, it will be a big part of our earnings. So these synergistic businesses that help each other also help give us the stability of earnings as we grow. And growth is important. I say if you grow profitably, you have profits, if you have profits, you can invest in products and services and people, and they should help expand the business and further growth. So we've been a firm that's prided ourselves on moderate growth, not rapid growth, not crazy in our acquisitions or in our growth period. But you can see we've had very, very steady growth over the last decade, a double-digit CAGR in growth. Certainly, the last year has been good for us and the industry, but more importantly, also in our pretax profits, outside of some interest rate and other stuff that happened in 2020. You can see a strong growth in almost a 15% -- 14.5% CAGR over that same period of time in our profits. Our initiatives as we like -- our focus is still to drive organic growth. Our #1 growth mechanism has been recruiting and growing through our existing professionals, as we continue to expand the business. Our investments in technology have been significant, especially in our Private Client Group, where we're recognized to have the leading desktop in the industry rated by outside groups. So we get awards, rated by an outside firm, who has ranked us #1 in adviser technology in our whole space and certainly by the people we recruit, saying our desktop for advisers is by far, the standard in the industry. An example is mobility. We've had our advisers being able to do everything on their mobile phones, they could do on their desktop, well over 5 years, that's been rolled out now. We've had one competitor just announced they're going to roll it out over the next year. There's a big 6-year lead just on one small aspect there. And to sharpen our focus on strategic M&A. We've been more acquisitive in the last couple of years as opportunities have approached, but we're very disciplined too. We don't acquire things that don't have a cultural fit, don't have a strategic advantage that we can't integrate and that won't produce a long-term return for shareholders. So our outlook, I think, is really the same. We're focused on the growth, our culture, making sure we get good long-term returns for shareholders. And the best way probably to go into the details, just to turn it over to Paul to go over the financials. So Paul?

Thanks, Paul, and thanks to all of you for joining our conference this week. It's great to see people in person again. So I appreciate it. As far as the finance perspective goes, there's really 4 key messages that I want to leave you all with today. The first being we've had since our founding consistent capital priorities focused on growth. We are a growth-oriented firm. We plan on continue being a growth-oriented firm going forward. So when you look at our capital prioritization framework, as Paul alluded to earlier, when talking about the strategic priorities. First and foremost, we're focused on using the capital to invest in organic growth. And that starts with retaining our existing advisers and producers that's really the foundation to our growth. We've had less than 1% regrettable attrition of financial advisers as far as back as we can remember. And that's by far the strongest retention across the industry. And off that foundation, we can add to it by recruiting new financial advisers, new investment bankers, new sales professionals across the organization. We believe that organic growth drives the best risk-adjusted returns for our shareholders over time. To the extent that we find acquisitions that make sense. That's our second priority. We have very disciplined filters before doing an acquisition. First and foremost, it has to be a strong cultural fit. We have to know we're in a people business. And unless there's a good cultural fit, no matter how good the business is, it's not going to work in the long term. And also that will be a good strategic fit, and at a price where we think it could generate good risk-adjusted returns for our shareholders over a long period of time. And as Paul said, we've really sharpened our focus on M&A over the past few years. Then we have a dividend target. It used to be 15% to 25%. A few years ago, we increased it to 20% to 30% of earnings. We didn't cut our dividend during the financial crisis, not a lot of financial services firms can say that. We pride ourselves on having a consistent dividend payout range. And so that's really important for us. We're actually at the low end of the range now, just given the strength of our earnings, but that's something that we continue to look at in December. Many of you may recall, we increased our dividend by 31% to $0.34 per share per quarter. So -- and then finally, to the extent that we can't use the capital to grow the business, or for the dividend, then we look at repurchases, mostly on an opportunistic basis. Although a few years ago, we have gotten more consistent and repurchasing shares to offset share-based compensation dilution. But beyond that, we're really opportunistic with repurchases as sort of the last priority in the capital prioritization framework. This slide shows just our consistent approach to capital management with the dividends and repurchases. You see in 2019 when there's good opportunities to repurchase shares, and we're not able to deploy the capital and growth initiatives, we did buy back $750 million worth of shares in 2019 at an average price of $51. So again, just reinforcing our opportunistic nature and our willingness to buy back shares when it makes sense for shareholders. Second message here is just a track record of generating operating leverage. Really, our focus every year and through cycles, and we've done it, if you look at a 1-, 3-, 5- or 10-year basis, or even a 50-year basis, is growing revenues faster than we grow expenses. Again, we are a growth firm. But the only way you can grow responsibly is over time is if you make sure you grow revenues at a faster rate than growing expenses. And we've consistently done that through cycles. You saw last year, Paul alluded to the 2020 year, where rates were cut overnight in March of 2020, we lost 40% of our run rate earnings almost overnight with the short-term rates being cut to near zero. And then we also had to build up our loan loss reserves just given the deterioration of the macroeconomic conditions in 2020. Since then, we've released a lot of those reserves as the macroeconomic conditions are -- have improved. But astonishingly, we were able to generate record earnings last year in 2021 without the help of interest rates. And that was broad-based strength. We had record revenues and record earnings in our Private Client Group segment, in our Capital Markets segment, driven by strong performance, record performance on both the equity side and the fixed income side of the business and record revenues and earnings in the Asset Management segment, not to pick on Steve Raney, who's here in the audience. The only segment that didn't generate record results was the bank, but that was because of interest rates. Interest rates being near 0, really compressed the net interest margin. And therefore, the -- but they had great results and great loan growth last year as well. Current message is we're really well positioned for higher short-term rates. We have around $75 billion of client cash balances, and you see with a rise of 100 basis points in short-term rates, we expect about $570 million of upside to our annual pretax earnings. So that's about 25% to 30% accretion. So as Paul talks about our outlook going forward, yes, we may have headwinds in certain parts of our business, but the beauty of our diversified business model is that we're really well positioned for all parts of the cycle as things might be negatively impacted by rising rates. Other parts of our business, Private Client Group and the bank will certainly see a nice tailwind with increase in short-term interest rates. Strong balance sheet is the final message here, really the cornerstone of our financial management strategy is we want to have a strong balance sheet, not only to be defensive during those tail-risk scenarios, but also to be opportunistic. Sometimes the best opportunities come to us when the economy is down, certainly, the Morgan Keegan acquisition in 2012 was a perfect example of that, where we had the balance sheet strength, the capital and the cash to be able to execute the deal, whereas a lot of the higher bidders were eventually thrown out of the transaction because they couldn't get the financing to close on the transaction, and that was obviously transformational for us at the time. So we want to be defensive and opportunistic with our balance sheet, and that's why we keep such high levels of capital and cash. And as you can see, by various outside stakeholders like the rating agencies, they're acknowledging our strong balance sheet as well. Fitch launching with us with A- rating last year, and then recently, Moody's upgrading our rating to A3, really a testament to our strong balance sheet and our strong performance across all of our businesses last year. And you can see where our capital position is relative to our peers. We always strive to have amongst the most conservative capital position and our competitive sort of the competitive spectrum that we play in. With that being said, we've acknowledged that we have too much capital even beyond where we would like to manage to. So we establish a 10% Tier 1 leverage ratio target. And some of the things that we've announced just since establishing this target and publicly communicating this target last year will really help us get there over time. For example, the TriState Capital acquisition that we announced, still pending all the regulatory approvals. The Fed did approve the deal in a very rapid manner, but we still have approvals from and other conditions, including approvals from the state of Pennsylvania, FINRA, et cetera. So I'm not sure exactly when that closed. And actually, our capital should build between now and closing because we're really not allowed to repurchase shares given the public nature of the deal until that transaction closes. So, those are the message I'd like to leave you with, and now I'll open it up for questions for Paul or me. Thanks. Questions?

[Technical Difficulty]

So first, I appreciate the comments and I'm going to ask you for permission to replay your comments, so we can put it.

I just going to say for the public website, he said we are a gem in the industry, and I was wondering how we can tell more people about it.

So first, we are a humble firm by our nature, right? We don't go brag, but we certainly try to get the story out in the equity market. So our conservative nature is, I think some people just see us as conservative yet. We look at the long-term performance and even the ROE at the tip of a bull run in a market, we're competing with everyone else and still have the capital net, and we're amongst the fastest growing. So it's hard to -- we seem to get compared, certainly, a lot of time hedge funds look us is not a good bet because -- which is okay because we are a longer-term bet. And some analysts will compare us to companies that they are good companies and solid, but in different spaces. So Schwab is a very good business, but it's a different business in a lot of ways or other firms. So it always confuses our story. People like to focus on the capital, which I think is should be a positive and a negative. The fact that we have capital, we continue to fuel our growth with it. On the other hand, people say, if we leverage it up, our returns would be higher, but they're already still pretty good. So we keep trying to find that balance and deliver long-term results, which I think we've done well, but honestly, as you all know as investors is we get -- everyone gets measured over a shorter and shorter and shorter period of time. So we try to just make sure we're giving solid returns, and we're positioning the business to be better every year in the future. And sometimes that conflicts with the short-term nature, and that's the hardest part of the story. I think we go to all the conferences, we try to get out, but it's just hard to do.

[indiscernible] segment what are the main changes you've seen over the next 5, to [ 10 years ] is kind of the biggest trend?

It's funny. I just presented to our Board. We actually got the board on a 4-day retreat on site, which was nice because we haven't done that in a few years. And I put up our kind of our 2011 goals, and Tom James, I started with my presentation because many of them were on the board in 2011, what we said the strategy was just to remind them where we've come. And Tom sent me his 2020 strategy, I mean, a 2000 strategy. And some of the issues were the same in the industry. It's -- back then, the online firms are going to put the brokerage business out of business, and it didn't work out that well for E*TRADE and Ameritrade and Scottrade and all those firms, they took a share. Then robos were going to take us out of the business, right? And they've had great growth, but [ Robinhood's ] average client is $3,000. So they take their share. But at the end of the day, what we're seeing, oh, millennials would never use individual managers, right? They would do all online. Today, 75% of millennials with over $100,000 investable assets are using advice. So there's always change, right? There's always new competitors. There's people say the new RIA craze and the roll ups will be a threat. And, there are some very good firms, but when people are paying 4 to 6x revenue, you ask in a more normalized interest rate and equity environment, where does that end? And we just -- we analyze it, we look at it and we try to look long term. So -- we have an RIA channel, which is our fastest growing as a percentage, but it isn't the biggest driver of our profits today, but we're playing for the future also. So -- so the wild card is always regulation. It seems like the amount of change, and it's from different places. For a while, it was the DOL and now the DOLs come back after being quiet. FINRA has always been there. The SEC has gotten very active with a lot of proposals that affect everyone in the room. And so those changes come across suddenly, but they're for all players. So I think in a lot of ways, all the change we talk about now is quicker. It's more technology enabled. But if I look back over my 10 years in this role, or looking back at Tom's strategy the 10 years before that, it's the same forces, maybe a little more pace, and the same trends, honestly, that have been going on. So our focus has been making sure we have an environment where professionals want to stay that our clients get treated really well there, and we help advisers serve their clients, and just stick to the course and use technology like we have in the Private Client Group to be a differentiator. At the off-site, the Board got to see a augmented reality, Avatar adviser interact with them, not ready for prime time, but not far off. And then the next presentation was an adviser, who couldn't make it to the offsite showed up on stage, and you had to look closely, but it was a hologram. And you see those technologies are coming. So we're already playing with those for the client connection and they're not going to be that far off. So we look at those technology changes, but at the end of the day, we look at the roots of who we are in our investments, and some people criticize us for acquisitions and on the speed, but for us to take a firm that fits us culturally it takes a while to convince them to join. So 3Macs in Canada, 7 years from our meeting. In fact, Tom was meeting before I met with them, so 15 years for them to join us. Charles Stanley, 7 years in the U.K. Same with the, Alex. Brown, opportunity or Morgan Keegan, we've talked for a long time, you have to wait for them to be transactable. In the capital market space, they've been much more agile, but there's been just opportunities in this market for acquisitions where people are willing to join us in a good cultural fit. So we try to be relevant. We don't dismiss anything, but we try to stay true to our roots.

Just elaborating on the question with? Do you have any of what market share looks like for millennials? And can you tell us what your percentage of millennials also accelerated is to be it, Paul? Is there a way sort of millennial clients to the core point?

We do have that. I don't have it in hand, but -- the biggest part of our investment even isn't even -- it's just going from baby boomers to millennials. The wealth is still being transferred. The biggest part is baby boomers and older I mean it's just getting to a millennial transition much less than to the X and Z. So that transition is just starting. Certainly, a focus in our Private Client Group has always been to add NextGen. We have all this training to become advisers. We have all this training if you're not even thinking about it. It's the training to see if you can go through and then be an adviser, and it's all focused on NextGen. And for a lot of people, it's even family members that are going to take over their business, which -- we like -- Tom James said he believed in the position because he had to, took over from his dad. But we have fourth-generation advisers at Raymond James. So, it is an issue we're training for. We're geared up for. It's harder for a young adviser to come up. So although we have some great success stories, but it takes time. It's an apprenticeship business like most businesses, and you have to build your assets. So it's a focus. So I have the data, but the vast majority is Baby Boomers and older still today. That's where the wealth is too, but it's changing.

Paul, what kind of efforts are you looking at it [indiscernible]

Yes. So in areas that require a lot of capital. I mean, we're still at a point where the SEC says crypto is a security. And the OCC has told banks that they can't do anything with it. So we're kind of in a place that whether we believe in crypto or not. I mean, we believe it's an asset, but whether it's a good investment or not? Or how it's valued separate from that? Is we're just sort of regulatory place where you can spend a lot of money? You don't know what you can do. So some of the big banks are invested at being a custodian, but that's okay. We can use people for [ cryptocuse ], we don't have to be in order to serve our clients. And the ironic thing is the regulators are complaining that it's all in the hands of unregulated institutions, yet they ban regulated institutions from doing anything with it. The rules are coming. I think the SEC's focus, the OCC, they said they want rules that don't inhibit innovation. But Gensler has clearly said publicly that it is the security. So that means both regulation or penalties for dealing with it. When you're selling unregistered security will probably happen. So on that, we study it. And we certainly -- blockchain is a technology we use. We don't use it in crypto. But I think as soon as the regulations clear, we will offer it to clients and probably with some restrictions for those with lower net worths, but so it's looking at it, understanding it, but waiting because it's not very clear what we can or can't do.

[Technical Difficulty]

The [indiscernible] irony for the last 10 years is we've seen pressure on almost every fee accept advisers. Their fees have been extremely resilient. So whether it's trading or other fees that have gone away or pressure in back office, they've happened. But if you look in our average production in M&A is up fivefold in 5 years. Our adviser fees, maybe over a few years, they've gone down a couple of basis points. But if people are paying for advice, they're going to pay for the advice. But that advice has to be holistic family planning. It isn't asset allocation that is being given away or trading is being given away. It has to be in the advice field. And the people who depend on that advice are willing to pay so far. And we predicted it was going to go down over the last decade, and it really hasn't from our adviser stamp back office has had pressure from third-party fees, but we just have to be more efficient. Great. Any other questions? Thank you all for attending. We appreciate it.

Thanks so much.