Raymond James Financial, Inc. — 2024 Q2

This is Michael Anagnostakis on for Steven. I did want to ask one just on cash sweep. I appreciate the commentary about how things have trended to the start of the quarter. And it was certainly nice to see that sweep cash was flat in 1Q, but seeing now tax season is behind us, are you seeing signs of cash sweeps building, inflecting positively? And maybe just speak to your level of confidence that we could see the absolute sweep cash balances build from here.

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. Though we had some -- a decline in the Enhanced Savings Program so far as it was able to -- and again, that could have been impacted. We have tracked significant payments to the IRS with the tax season here.

Got it. And maybe just pivoting to DOL. Paul, on the last earnings call, I recall that you were relatively comfortable with Raymond James' positioning and that you expected the industry to challenge the new rule. With the final DOL rule now published, maybe you can update us on your views in terms of what the rule in its finalized state means for the industry as well as any implications for Raymond James' that you would highlight?

Well, yes, so I appreciate the question. We're digesting 500 pages of a regulatory rule is a little more -- even more complicated than trying to get through our earnings release, so -- to analyze it. So it's early.

Totally appreciate that. And congratulations to you both.

Thank you.

If you look for the first 6 months, where it -- I think compared to the industry in the 5s, that 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.

Yes. 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 as revenue comes up. I mean so the margin 2 years ago, we put 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. I think we showed in '09 and the worst part of it, we were hiring when other people weren't and it really paid off for our growth for the whole next decade.

Congrats to both of you. Curious about the idea now that we're starting to see Capital Markets get going, activity begins to pick up. How should we think about incremental margins in that business for you given how weak the profitability has been? I would assume that they would be pretty good. But could you help us get a sense of what an incremental dollar of revenue would mean from an incremental margin perspective?

Yes. 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 [ 21%, 22% ] 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 3-year deferrals typically.

And if we did, we would be doing -- we would be taking a lot of different actions than 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 and as the market recovers, we believe they'll do very well.

Sure. Fair enough. And then thinking about the improving environment. If we continue to see signs of recovering strength in your core businesses, would that increase confidence and improve the likelihood for a better outlook for capital returns and buybacks?

Yes. 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 was an ongoing large investment, which is certainly, I don't think anyone thinks it's a bad 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.

Just to follow up on that last question. Can you talk about M&A and really what do you think makes the most sense in terms of strategic fit from a product, geography or scale perspective?

Yes, 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 then 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 and 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, this particular product. We can go on and on and on.

Understood. And then as you think about NII going forward, and you mentioned the kind of cash trends and some stabilization there. On the loan growth side, any signs of pickup and potential demand there? Or as you think about the rest of this year, what are the kind of most sensitive factors as we think about that line item in terms of up or down?

Yes. As you know, loan growth has been tepid, not only for us, but the -- really the 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 flushed with cash.

Just that the competition is still robust. I mean, that the advisor movement, especially of large teams has been -- [ already as a ] focus 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.

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 be RIAs. 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 set -- large RIAs at 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 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 3 deals that we executed in 1 year that brought it down.

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 transition 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 advisors, 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 advisors happy. It means our clients are happy, that's the cheapest growth for us. So our focus -- and it develops the platform for other advisors still want to come to. So the tools we put out, the technology we put out, the back office modernization, all of that is to help advisor productivity and that does drive a lot of our growth in what we do and keeps advisors here.

There's 2 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 advisors, 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 advisor's job is to figure out what's appropriate for their clients to use.

Congratulations, everybody. Question for you just on the NIM, the net interest margin. Just sort of wondering if you could talk a little bit about maybe what the exit level might be for the new quarter? And just if -- just given sort of the reinvestment rates of what might be rolling on, rolling off and in a world of a tepid type of loan backdrop for now. How do you sort of see that playing out if the sorting starts to ease a little bit as well?

I would say a lot of the shift in cash balances from on balance sheet to third-party banks have 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. And 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.

Great. That's helpful. And just trying to triangulate a combination of the senior executive leadership changes. Your comments, Paul Shoukry, about sort of the platform being in a very good spot with scale. Where are you investing right now as you think through maybe the comp or noncomp side? And how might the strategic vision be evolving as you sort of migrate to the next generation of leaders?

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.

Congrats again.

Yes. 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 the underlying factors that Paul discussed on the call in his prepared remarks was that depositories are still struggling to grow deposit balances or keep deposit balances 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.

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 I'm not sure I look forward to hearing all these generational comments about how old I am, 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.