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

Good morning, everybody. Really excited for our next session with Paul Shoukry, CFO, of Raymond James. Raymond James Wealth platform has really seen outsized growth. And as someone who covers a lot of names in the space, the word omnichannel is a nice buzzword. It's grown around quite a lot. I would say that Raymond James is really the only true omnichannel offering. So it's quite differentiated in the marketplace.

So Paul, there's no shortage of topics to talk about from organic growth, cash sorting, regulation, capital allocation. So there's quite a bit to unpack in this session. But maybe just to start things off, just given the challenging macro environment, why don't you just speak to what you're seeing in terms of client behavior and activity across both the retail business and maybe even touch on the institutional business very briefly.

Right. And maybe before doing that, I just want to thank you, Steve, for hosting us on a beautiful fall day here in New York, and thanks to all of you for being here and hearing more about the Raymond James story. So as far as the macro environment, certainly, uncertain and challenging times with sort of a record increase in short-term rates over the last year or so. But our advisers continue to do a remarkable job helping their clients stay aligned with their long-term financial objectives. If you look at our assets, and most of these assets are in fee-based accounts. They -- the asset allocation remains, again, remarkably consistent to equities and fixed income over the long term. And that's really the value that advisers can provide their clients, is keeping their clients aligned not -- helping their clients not make emotional decisions around buying when it's high and selling when it's low and just staying consistent and true to their long-term financial objectives. And that's really core to our mission at Raymond James. The changes that we are seeing in allocation are really -- and I'm sure, Steven, will have lots of questions around this is really in the cash bucket and when you're in a 0 rate environment, cash allocation goes to a good portion, if not the majority of the cash allocation goes to sweep cash because you can't earn anything on the alternatives. When I was here a year ago today, I was one of the few firms, I think, saying that the sweep balances will sort, which is a client -- which is industry terminology for saying will be reinvested into higher-yielding alternatives as rates increased. A lot of other firms were not only saying that, that wouldn't happen, but we're actually making balance sheet bets that wouldn't happen, which didn't turn out to be good for some of those firms during the March banking crisis. So we expected that to happen. That's good for savers. Frankly, savers were penalized for far too long over the last 10 years in a near 0 rate environment. And so we're starting to see savers starting to benefit again and earn something on their savings and their cash balances, which is a good thing for clients. And advisers are certainly helping them do that in a way that's again aligned with their financial objectives. On the institutional side, it's been much more challenging. That business with capital markets really over the last year -- after 2 record years, has really frozen up over the last year. Higher rates really cause a reset in expectations on pricing for buyers and sellers usually lag buyers on the way down. And so that's what we're seeing now in terms of the pricing resetting and certainly in our fixed income business, which we're a leading provider of selling securities to depositories when depositories have excess cash balances and want to take duration to earn incremental yield in the portfolio, that dynamic, obviously, is not conducive for that business now as banks are -- cash is becoming more precious for the banking system and the duration bet is really running off across the banking system over the investments that we've made over the last few years. So the Capital Markets business -- the private wealth business is much more consistent, stable financial advisers doing a great job keeping their clients aligned, Capital Markets business much more challenging.

So Paul, let's talk about the business that's performing a bit better since there's a wealth conference on the private client side, you really delivered consistently leading organic growth since you began reporting the metrics. This year, I believe it's running in like the high single-digit type range. How sustainable is that level of flows or organic growth across the platform? And what would you say are like the 2 or 3 key differentiators relative to the competitors and maybe just aren't growing as quickly?

I mean that is the biggest growth driver for our business. The Private Client Group business for us is 70% of our revenues and really 80%, if you look at the attribution to the other businesses. So the net recruiting results is a primary growth driver for us, and it really starts with retention of our existing advisers. I think people -- a lot of people overlook on the street, how important the retention is to growing the platform, having a stable base of advisers and our regrettable attrition has been consistently at or below 1% in the industries, some players in the industry are averaging 5%. And it's very hard to grow on a net basis when your attrition is running at those type of levels. And then on that base of good recruiting retention results, we've had consistent recruiting results over a long period of time that's driving that leading net new asset growth across the industry. And you touched on it, Steve earlier. Part of that is that we have the largest addressable market in the industry. We're in the traditional employee channel, the independent contractor channel. Now the independent RIA channel has been a business we've been growing in and investing in, it represents 10% -- more than 10% of our assets now. We also have a Financial Institutions division, which serves banks and credit unions across the country. And so with that, a lot of other firms talk about hiring a person to grow that channel or starting an initiative to grow in those various channels, we have critical mass in all of those channels. And we've had critical mass in those channels for a long time. So we have the largest addressable market. And our value proposition, what we refer to as being kind of the best of both worlds, has only been strengthened over time. And what we mean by that is, on one hand, having the size, the scale, the technology, the products, the solutions that the advisers and their clients have become accustomed to at the larger firms, which is where we recruit 80% of our advisers, but coupling that with an adviser and client-focused culture, which the larger firms have lost over time, most of them are owned by the big universal banks. And that's a very unique value proposition there. There are larger firms that have those kind of services and products, but they don't have the culture. And then there's smaller firms with a culture there just aren't competitive on the technology and the products. So having that unique value proposition across all of those affiliation options has proven to really drive the success in both retention and recruiting across the Private Client Group business.

And so Paul, when we look at the industry trend, there's been this migration away from the employee model towards independence. You service all the different affiliation models or options. Maybe you could just speak to the differences in terms of economics and how do you try to manage cannibalization risk given some of the stronger growth within the independent channel specifically?

Yes. And I would say the trend has been less about channel and more about moving away from those big bank-owned firms to firms that offer them independence. I mean even in our employee channel, we say advisers own their book of business. And if they decide to leave on good standing, we help them move their clients to the new firm. So independence is not channel specific, if I think it's more firm-specific and we offer independence across all of our channels. But the growth trajectory that we're seeing, the pipeline that we're seeing and the interest levels that we're seeing is broad-based across all of our affiliation options. And so as Paul Reilly said on the last earnings call a few weeks ago, the number of $10 million and $20 million teams that we're seeing coming in at once is really unprecedented for us. And it just shows that we're resonating with the largest teams in the industry that focus on the highest net worth clients in the industry. And so having -- respecting that independence across our affiliation options, treating our advisers like clients, acknowledging explicitly that they own their book of business and all of those things reinforce that value proposition I was talking about earlier, which has been driving our consistent best-in-class net new asset growth.

And Paul, you touched on this earlier, but one of the big drivers of profitability has certainly been the interest rate tailwind for you and many of your retail broker peers, you did launch an enhanced savings program or ESP deposit product. It has a high minimum threshold, but it's a great way to keep a lot of that cash within that ecosystem. At the same time, you're relatively underpenetrated versus some of your competitors, MS, Stifel, which, I believe, close to 50% or more of their deposits closer to about 1/4 of yours. Where do you see that mix converging given we are continuing to see at least some sorting behavior across the retail complex?

We launched our Enhanced Savings program in March, not because of the banking crisis, I mean, the timing was fortunate in that regard. We've been working on this product for 1.5 years. We launched it in March. I think when we launched it, we thought maybe we'd raise $1 billion or $2 billion in balances, and it's grown quickly to $13.5 billion. I think it's a $14 billion today and that's just since launching it in March. And so we're the only firm that I know of that offers up to $50 million of FDIC insurance at an attractive rate. All the other firms can do that, but it's more expensive, it's more complex. And so they offer you only the FDIC insurance that they can internally offer through their own bank charters instead of broadening it out through the technology platform that we use -- the partner that we use. And so it's been a huge -- it's been hugely successful. The advisers have been really excited about it, and that's because they've been able to bring in balances from other firms, other banks that they've been pursuing for years in some cases, and being able to do that through an attractive and unique product that no other firm really offers. So that's been -- it's been great. It's -- as I said on the last earnings call, it's been naturally -- the growth has been naturally decelerating as we would have expected as the advisers have worked with their clients to bring on the balance that were addressable in terms of moving them over from other firms. The vast majority of these balances are coming in from other firms. And so as that opportunity has been tapped into, the growth is naturally decelerating. And so it's hard to compare mixes across other firms. A lot of other firms used all of their sweep cash to fund their own bank. We still have $16 billion or $17 billion of sweep cash at third-party banks. And the reason for that is really twofold. One is because we offer a higher level of FDIC insurance even on the sweep cash. We offer up to $3 million of FDIC insurance a lot of other firms reduce that FDIC coverage, not because that's better for clients, but because they wanted to monetize all the cash on their own balance sheet. And so -- and then we offer institutional money market funds and a lot of other products that clients have availed themselves to with the help of their advisers. So it's hard to compare apples-to-apples across firms, but we have seen really excellent uptake of the enhanced savings program balances and that has naturally decelerated over time as we would have expected.

So maybe just focusing on the Ray Jay ecosystem then in terms of that cash discussion. I recognize Paul, you like to say we should respect the unknown. None of us have a crystal ball here, but it does look like the sweep deposit outflows have started to moderate. You provided some views just in terms of how you think this sorting our cash realignment Saga ultimately unfolds and any sense as to what inning we're in as it relates to that?

Again, last 2 quarters really, I've been saying that I feel like we're much closer to the end of the sorting dynamic into the beginning. But we're not going to declare that it's over until we see several months of stabilization in those balances for us and across the industry. And rates -- short-term rates have stabilized as well because to the extent that short-term rates continue to increase that drives conversations, that drives the higher alternative yields you can get on alternative products, et cetera. So if rates stabilize where they are and balances stabilize where they are, then we'll be comfortable declaring that the sorting dynamic is over. But there's still a lot of competition for cash across the industry. You're seeing it on billboards, on social media advertisements, on signs as you walk up and down Park Avenue. So there's still a lot of competition for cash, but I also believe that a lot of the cash that was investable in client accounts in bank accounts that reside outside of the ecosystem have been deployed and invested and optimized. Not all of them, but a large portion of those, I think, have. And so that's why I'm comfortable saying, I think we're closer to the end of that dynamic in the beginning. But to your point, Steve, and none of us have a crystal ball and can declare exactly when that dynamic will end.

So Paul, does your -- the one thing that's actually served your firm quite well, I'm glad that you haven't listened to folks like myself who have tried to encourage you to take on additional duration or extend duration in recent quarters. Staying liquid, staying geared to the short end has certainly served you guys quite well. Maybe to speak to your appetite maybe extend some duration once you have clarity around stabilization in those sweep balances or -- like what's your philosophy around how you want to manage the overall duration of the...

Just to be clear, we always listen to -- yes, we may not do what you're asking us to do, but we always listen. We hear you well. No. We -- our philosophy really since our founding at Raymond James is to not make bets for the firm's own benefit or detriment. And really, the balance sheet we use to support and accommodate client business and client activity. And if you align your -- the risk you take as a firm to client activity, it's very hard to get in enough trouble on the balance sheet where you go out of business in 24 hours. So if you look back at the financial crisis, taking on wholesale funding to buy CDOs for your own prop book, they had no client benefit to it. Same in this last crisis, taking on 7 years of duration to get 1% or 1.2% in the agency MBS portfolio, at 0 client benefit to it. And so it seems like in our industry, what always puts firms -- what seems to put firms out of business more often than not are bets that have 0 client benefit or 0 client impact. And so Tom James and Paul Reilly have continued it. And certainly, our philosophy continues to be not to use the balance sheet to make market bets one way or the other, but to use the balance sheet to facilitate client activity and accommodate client activity that makes sense for clients and for the firm. And so I don't try to time the market. I'm not saying, okay, now is a great time to take duration so let me make a balance sheet bet now that has no client impact. And it's somewhat liberating that I don't have to try to time the market because the firm would be worse off, more often, it would be better off if they're relying on me to time the market on the balance sheet. That's why I'm in my role and not in all of your roles is because my timing is not great. So it's liberating that I don't have to worry about timing the markets and just focusing on what do we -- how do we use the balance sheet to support clients and their financial objectives. And that keeps us -- tends to keep us out of trouble.

Paul, maybe just the last one for me as it relates to this particular topic. But just as we think about deposit betas and repricing, one of the questions that we're fielding increasingly of late admittedly is in a higher-for-longer environment? Or when the Fed eventually start easing, how do you expect betas to behave? And I'm particularly interested in on the way down, what do you expect in terms of betas broadly?

Yes. I mean I think a lot of people's assumptions are if rates decline, the deposit betas would be kind of one-for-one. And I'm not sure if that's accurate or not. It just -- I think it really depends on why rates would be declining. How the magnitude of the decline and how competitive the market is for deposits in that type of situation. I mean the last few rate reductions we've had have been extremely severe, coincided with a essentially a panic where cash became flush in the system almost overnight. And so there wasn't a lot of competition for that cash as rates were declining. So the deposit betas were one-for-one almost. That may or may not be the case next time rates decline. And so I think it's -- there's just too many factors at play to know exactly what the deposit beta will look like or what the competitive environment will look like for deposits next time rates decline.

Great. And maybe just shifting gears, Paul, it would be great to hear any insights you might be able to share on the DOL's Fiduciary proposal. I recognize you've only had a week to digest it. My team and I have had the pleasure of reading all 300-plus pages already, but I was hoping to get some preliminary thoughts on the proposal, how workable is it in its current form? What's the impact to your business and any surprises, positive or negative?

And I have been waiting for your analysis on the rule as well because you always do a good job with that. So I'll be looking for it. I know you've been busy preparing for this conference, but it is really new. It is too early to really comment on it. But what I would say is that the fact that the major law firms haven't come out with the benefit of several days in a weekend, have not come out with an analysis yet, tells me that the rule must be extremely complicated or more complicated than it may appear on the surface. Because these law firms have been waiting for this proposal to come out. They are usually 2 or 3 nights away from coming out with a legal summary for the industry and for their participants. And so I've been awaiting those and haven't seen any yet. I haven't seen your report yet. That tells me that it may be more complicated than it appears on the surface. That's just conjecture. I don't know. But what I will tell you is that we have an internal team that is focused on it, a cross-functional team that is focused on it. A lot of the same team members that were part of the 2016 version of the rule as well as Reg BI, a rule. And so there's some overlap across all of those different rules. A big picture, when you just step back at all of these regulations and rules and helps that Raymond James, a core to our values and who we are as an organization, is we always put clients first. And so -- and at the end of the day, while there's always unintended consequences with these rules that create more cost and complexity, maybe sometimes unnecessarily in the system, they are aimed at trying to ensure that the firms across the industry are putting clients first. And so that has always been an advantage to us. So these type of rules are always more detrimental to the firms that don't put clients first. And that, over time, while it's painful for the industry, painful for us in a lot of cases because you have more disclosures and more mailings and more things that you have to do to comport and comply with the rules, having -- putting clients first puts us in a relatively good position for these type of rules.

Paul, admittedly, I was planning to ask you about comp and noncomp separately. I'd actually rather just frame it in the context of your philosophy around expenses. You guys have actually been early in identifying opportunities to invest in digital, invest in technology. The feedback, just having spoken to other advisers on your tech stack is actually quite positive and constructive. But as you think about organic growth and sustaining that high single-digit type organic growth rate, what is the level of expense growth that's required in order to sustain that growth? And is there an opportunity with AI and digital to maybe drive additional efficiencies within the business as well?

Yes and yes. I mean, the -- we are a growth-oriented firm and getting consistently achieving leading net new asset growth in a highly competitive industry does take investment. And technology is a big part of it, but so is occupancy expense, right? I mean, when we open up new branches that cost more, especially in a highly inflationary environment. I mean, I'm on the real estate committee, the cost to renovate these spaces or build out these spaces is extremely expensive right now as I'm sure some of you have experienced in your -- even personally when you're doing a repair renovation in your home. So there's a lot of growth-oriented expenses. I mean some of them are directly correlated. Investment sub-advisory fees expenses are directly correlated with fee-based asset growth. FDIC insurance expense is directly correlated with deposit growth at the bank. And so we're going to continue to invest in growth. But as you noted, we have been very disciplined around managing the investments that aren't growth focused, that aren't focused on providing the very best support we can to our advisers and our clients and also investing in automation and tools and solutions that help us be more scalable as a firm to drive efficiencies over time. And so if you look at our margins this year, this is a year where, unfortunately, capital markets lost money, just given the challenging macro backdrop. And we were still able to generate north of 20% pretax margins and return on equity on a GAAP basis of 17% or 18% for the year and a return on -- adjusted return on tangible common equity of, I think, 21% or 22%, something in that range, and that's on capital levels that are over 2x the regulatory requirement. So we have been focused on growth, but we've also been focused on driving and delivering very attractive returns to our shareholders without taking undue risk. And so we -- it's a very -- it's a balance that we take very seriously. And when you step back and you think about it, this is our third -- our fiscal year-end September 30, this is our third consecutive fiscal year where we've generated record revenues and record earnings. And we're particularly proud of that because -- and we haven't seen any other firm be able to do that because the 3 years were very different in terms of the markets. 3 years ago, we had a lot of equity in capital market support and near 0 short-term interest rates. 2 years ago, it was kind of a tale of 2 halves. For the first half, we had equity markets support but low rates and then rates started rising and the equity markets declined pretty substantially. And then this year, we had pretty high rates and the capital markets froze up on us. And in all 3 of those years being able to generate record revenues and record earnings and 3 very different market environments is really a testament to our Private Client Group focus, which is why all of you are here at this wealth management conference as well as our diverse and complementary businesses that support the Private Client Group business and they do well in different market environments. And so we're really proud about that.

Maybe I'll open it up to the group actually and see if anyone has any questions, and we'll make sure to repeat the questions for those on the webcast as well.

I just want to call, one part of your business is maybe a little different to adjacent peers as the bank. And within the bank, you guys actually have a loan book. So you should give us a couple of seconds on credit and what if anything you're seeing?

So the question is on the bank, the unique aspect of the bank and the fact that we also have a loan book and some commentary around the credit. So you're right. Our bank is unique. We have 1 branch and 2 ATMs, and for a long time, we said we had no plans to double either. And then we had -- we did the acquisition of TriState Capital and Paul and I were joking that, that may have been the only bank in the country that didn't make us liars because they had 0 branches and 0 ATMs. And so really, our bank is -- Raymond James Bank is really is there to support our Private Client Group business, first and foremost, and then also to support our capital markets clients as well. Most of the deposits -- the vast majority of the deposits are sourced from the Private Client Group business through the sweep program that we talked about earlier as well as the enhanced savings program. Our largest loan category in the bank segment collectively is the securities-based loans. That's about 24% of our total assets, which was -- we almost doubled those balances with the TriState Capital acquisition, which is the main reason we pursued that acquisition. They have a very strong third-party platform. And we feel very good about that portfolio. I mean it's over collateralized with liquid securities that reprice daily. And so it's -- from a credit perspective, we feel good about -- very good about that portfolio. The corporate loan book is -- we -- again, we have a very strong track record there, very tight box that we target in terms of who we lend to and what we pursue. And the credit performance knock on wood has remained solid. We have seen some deterioration as you would expect, in certain credits over the past 6 to 12 months, just given higher rates in the uncertain market environment. But we look at each individual credit, and we still feel good about our overall portfolio and the allowances that we have on that portfolio, we feel good about as well.

Paul, maybe just a follow-up to the discussion around the loan book. I mean the growth has stalled for you as well as for some of your peers. What's your expectation in a higher-for-longer environment in terms of SBL growth where I imagine you're more comfortable with the credit risk. And on the commercial side, where maybe you're inclined to retrench given some of the risks and the broader macro?

As Paul Reilly said on the earnings call, we are open for business and on both sides of the portfolio. And actually, the securities-based loan portfolio has continued to generate new originations and kind of gross flows, if you will, during the last year, but the payoffs and pay downs, I guess, I should say, have been truly remarkable. I mean the extremely high percentage of pay downs which is what we would expect. But I mean we're talking about very high percentage of paydowns as rates have increased. So anyone who didn't need to borrow or to draw on those lines paid off the lines as rates increase from borrowing rates of 3%, 3.5% to now 6.5% to 7% or something in that range. And so I'm optimistic that as those payoffs stabilize, given the gross growth we're seeing, not the net growth, but the gross growth that we will start seeing some pretty attractive growth in that portfolio. 5 years from now, and again, for what it's worth, because it is guidance and it is a crystal ball's statement. But I would be surprised if we don't look back over the last 5 years and see kind of mid-teen type growth in the securities-based lending portfolio. And we said that when we did the TriState Capital acquisition about 1.5 years ago. The corporate portfolio, we're open for business, but there's just an incredible lack of demand out there. There's very few new originations. A lot of it is driven by M&A activity, which is very -- I mean, not almost nonexistent in the space. So the spreads have widened, there's attractive yields out there to be had if there is new origination activity, but there really is just a lack of new origination activity. So we're just -- we're not going to chase loans outside of our target box just to grow the portfolio. Our goal is to remain patient, wait for the loans that meet our targets to come back into the system, and then we'll have plenty of capital and cash to take advantage of that.

Since you talked about how much excess capital you have here, Paul. I imagine it's burning a hole in your pocket at the moment. Now that your valuation or multiple has contracted, we noted that it's a more tepid environment just in terms of loan and balance sheet growth more broadly. How are you thinking about the buyback? Any way you can help us frame the amount of capital that you might look to deploy in the form of buyback. And is it mechanistic? Or is it more opportunistic?

Yes. So we have a Tier 1 leverage ratio target of 10%. We announced that to the public 3 years ago. I think we're at 14% at that time, and a lot of the analysts and investors thought that, that was possible for us to get to. And over the next 2 years, we did 6 acquisitions and brought that ratio down to 10%. And with earnings growth and some other cash balances declining that were on the balance sheet were back up to 11.9% which is $1.5 billion over our 10% target. And that 10% target is twice the regulatory requirement to be well capitalized. So while we're above our target I am -- I do feel fortunate that at this point in the cycle that we're at 11.9% talking about having too much capital and not having the opposite problem where we're talking about maybe not having enough capital to be well capitalized. So I feel fortunate about our position. But with that being said, we work very hard to develop a reputation for being more proactive around managing to that 10% level, and we don't want to lose that reputation that we've worked hard to get over the last 3 years. So we have hired a new Head of Corporate Development. He's focused on developing relationships and showing us as much flow as we can possibly see to look for companies, but we're still going to have very strong filters in place just because we have excess capital, doesn't -- almost means you have to be more disciplined with what you're looking at to make sure that you're really looking at deals that a good cultural fits and strategic fits and make financial sense long term for our shareholders. And if we can't deploy the capital and keep -- stay true to our 10% target through growth initiatives, both organic growth and through acquisitions, then we'll do buybacks. We prefer to invest in growth and use the capital to invest in long-term growth. We think that generates superior returns for shareholders over the long term. But if that growth is not available and we're growing capital well above that target, which we are today, we will do buybacks, and we think that, that would represent a good long-term return as well, as long as we don't also lose focus on growing the business, which we're not going to do. We're still, first and foremost, focused on growing the business. Too many firms fall back on the buybacks and lose the growth focus. And that erodes shareholder value over time, and that's something that we're committed to not do.

Great. And I know we're just over, Paul, really quickly, if there's one particular area or you're more inclined to buy versus build, what would that be given the excess capital forecast?

We're at a wealth conference, our biggest business is wealth. And so I would say, wealth.

Well said. All right. Great way to close. Paul, thanks so much for being here. I appreciate you continuing to support the event.