Raymond James Financial - Q4 2024

Transcript

Kristie Waugh (SVP of Investor Relations)

Good evening, and welcome to Raymond James Financial's Fiscal 2024 Fourth Quarter Earnings Call. This call is being recorded and will be available for replay on the company's investor relations website. I'm Kristie Waugh, Senior Vice President of Investor Relations, and thank you for joining us. With me on the call today are Chair and Chief Executive Officer, Paul Reilly, President, Paul Shoukry, and Chief Financial Officer, Butch Oorlog. The presentation being reviewed today is available on our investor relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. Please note that certain statements made during this call may constitute forward-looking statements.

These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions, and our level of success in integrating acquired businesses, anticipated results of litigation and regulatory developments, and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future, or conditional verbs such as may, will, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website.

Now, I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Paul Reilly (Chair and CEO)

Thank you, Kristie. Good evening, and thank you for joining us today. Before I discuss our fourth quarter and fiscal year earnings, I want to start by acknowledging the heartbreaking devastation our associates, advisors, friends, and neighbors experienced over the last several weeks. With Hurricanes Helene and Milton impacting communities throughout the Southeast, including the St. Petersburg-Tampa Bay area, where Raymond James is headquartered, as well as the Carolinas and Georgia, thousands across the region experienced unprecedented flooding, power outages, property damage, and devastation. We enacted our business continuity plans, and with our service workforce almost equally distributed across offices in St. Pete, Memphis, and Southfield, Michigan, colleagues outside impacted areas stepped in to ensure continuous service coverage. Even those affected associates and advisors continue to serve clients while facing storm and evacuations, often working remotely from safe locations.

The storm left a long recovery road ahead of us for all in their path, and while it's been difficult to bear witness to the pain and loss, I have also been humbled by the resilience of our associates, advisors, and our community. Following the hurricane, the firm and leadership team have contributed almost $11 million to associate and community relief, including stipends to eligible associates and donations to Friends of Raymond James, the American Red Cross, the United Way Suncoast, and other charitable organizations across impacted communities. In addition to granting associates the time needed to navigate recovery efforts, the firm continues to provide comprehensive resources and benefits, including information about financial support, immediate aid, relocation services, and wellness benefits. Challenging times like these highlight the importance of always putting people first, which has always been the foundation of Raymond James.

The preparation, perseverance, and response to the storm reflect the long history of Raymond James' service culture, and I'm especially proud to represent our team today. Now, moving to our quarterly performance, we achieved strong results once again, concluding another fiscal year with outstanding achievements. In fiscal 2024, we generated record net revenues and record net income, showcasing the strength of our diverse and complementary businesses. We ended the year with record client assets, healthy pipelines for growth across our business, and ample funding to support the balance sheet. We remain well positioned to continue to invest in our business, our people, and technology to help drive growth across all of our businesses.

Beginning on slide four, the firm reported record fiscal fourth quarter net revenues of $3.46 billion, net income available to common shareholders of $601 million, and earnings per diluted share of $2.86. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $621 million, or $2.95 per diluted share. We generated strong returns for the quarter, with annualized return on common equity of 21.2% and annualized adjusted return on tangible common equity of 25.8%. A great result, particularly given our strong capital base. During the fiscal quarter, we repurchased 2.6 million shares of common stock for $300 million....

Bringing our fiscal year total to 7.7 million shares for $900 million, and an average price of $117 per share. In total, we returned nearly $1.3 billion of capital to shareholders through a combination of share repurchases and dividends in the fiscal year. Moving to slide five, client assets grew to record levels this quarter, driven by rising equity markets and solid advisor retention and recruiting in the Private Client Group. Total assets under administration increased 6% sequentially to $1.57 trillion. Private Client Group assets and fee-based accounts grew to $875 billion, and financial assets under management to $245 billion. Domestic net new assets during the quarter were $13 billion, representing a 4% annualized growth rate on beginning of the period domestic PCG assets.

For the fiscal year, domestic net new assets were $60.7 billion, representing a 5.5% growth rate on beginning of the period Domestic Private Client Group assets. A key contributor to the net new asset growth is our continued recruiting results, which were really strong this quarter. To our domestic independent contractor and employee channels, we recruited financial advisors with approximately $100 million of trailing 12-month production and $17.5 billion of client assets at their previous firms. Including assets recruited into our growing RIA and Custody Services division, which we refer to as RCS, we recruited across all platforms, total client assets during the quarter of $22.3 billion, surpassing the previous best quarter, which occurred in 2021 in terms of recruited assets.

For the fiscal year, we recruited financial advisors with approximately $335 million of trailing 12-month production and $56.7 billion of client assets at their previous firms. Recruiting in the year production and assets equal to that of a pretty good-sized firm. RCS asset growth is bolstered by both external joins as well as from internal transfers. And RCS finished the quarter with $181 billion of client assets under administration, up 36% over the prior year level. This quarter, we reported financial advisors of 8,787. Overall, these fantastic recruiting results reflect the continuous focus of the entire firm to ensure Raymond James remains a destination of choice for advisors.

As we had mentioned in previous quarters, there are a couple of OSJ relationships in our independent contractor division who had decided to leave the platform. It takes time to effect these movements, but a portion of those assets left the firm in the fiscal fourth quarter, totaling roughly $3 billion of AUA. We anticipate approximately $5 billion of assets associated with these firms to complete their transfers off the platform in early fiscal 2025. Adjusting for these transferred assets, net new assets growth in the quarter would have been approximately 5%. Overall, we remain focused on serving advisors across our multiple affiliation options. Our robust technology capabilities and client-first values continue to enable us to retain and attract high-quality advisors.

Total client domestic cash sweep and enhanced savings program balances ended the quarter at $57.9 billion, up 3% over June of 2024. Bank loans grew at 2% over the preceding quarter to a record $46 billion, primarily due to higher securities-based loans, which grew 5% in the quarter, as well as continued residential mortgage growth. Moving to slide six. Private Client Group generated record quarterly net revenues of $2.48 billion and pre-tax income of $461 million. Year-over-year, results were bolstered by higher PCG assets under administration due to a strong equity market and net new assets brought into the firm.

Reflecting positive results from our long-term focus and patience to hold the course in our capital markets businesses, generated quarterly net revenues of $483 million and a pre-tax income of $95 million. Net revenues grew 42% year-over-year and 46% sequentially, driven primarily by higher M&A revenues as the market environment became more supportive of transaction closings in the quarter. Market conditions seem to be improving, and we are optimistic about our healthy pipeline and new business activity in M&A. The asset management segment generated record pre-tax income of $116 million on record net revenues of $275 million.

Results were largely attributable to higher financial assets under management compared to the prior year quarter, due to market appreciation and net inflows in PCG fee-based accounts, as well as modest net inflows into Raymond James Investment Management. The bank segment generated net revenues of $433 million and pre-tax income of $98 million. Bank segment net interest income increased 1%, due in part to higher loan balances. The net interest margin for the segment of 2.62% declined 2 basis points compared to the preceding quarter. Looking at the fiscal year 2024 results on slide seven, we generated record net revenues of $12.82 billion and record net income available to common shareholders of $2.06 billion, up 10% and 19% respectively over the record set in the prior year.

Additionally, we generated strong returns on common equity of 18.9% and adjusted return on tangible common equity of 23.3% for the year. On slide eight, the record results in PCG and Asset Management segments for the fiscal year primarily reflected a strong organic growth in PCG, along with robust equity markets. Now, I'll turn the call over to our new CFO, Butch Oorlog, to review our financial results in detail. Butch?

Butch Oorlog (CFO)

Thank you, Paul. Turning to slide 10, consolidated net revenues were a record $3.46 billion in the fourth quarter, up 13% over the prior year and up 7% sequentially. Asset management and related administrative fees grew to $1.66 billion, representing 15% growth over the prior year and 3% over the preceding quarter. This quarter, PCG domestic fee-based assets increased 7%, which will be an approximate 6% tailwind for asset management and related administrative fees in the fiscal first quarter. Brokerage revenues of $561 million grew 17% year-over-year, primarily due to higher brokerage revenues in PCG and fixed income capital markets. I'll discuss account and service fees and net interest income shortly.

Investment banking revenues of $315 million increased 56% year-over-year and 72% sequentially. Fourth quarter results benefited from a significant increase in M&A revenues. Moving to slide 11, client domestic cash sweep and enhanced savings program balances ended the quarter at $57.9 billion, up 3% compared to the preceding quarter and representing 4.2% of domestic PCG client assets. So far, in the fiscal first quarter, domestic cash sweep balances have declined about $1.3 billion, attributable to record quarterly fee billings. Turning to slide 12, combined net interest income and RJBDP fees from third-party banks was $678 million, up 1% over the preceding quarter.

The bank segment net interest margin was down 2 basis points to 2.62% for the quarter, while the average yield on RJBDP balances with third-party banks decreased 7 basis points to 3.34%, primarily due to the Fed rate cut. Based on current rates and balances, which reflects the September rate cut and the impact of quarterly fee billings, we would expect the aggregate of NII and RJBDP third-party fees to be down approximately 5% in the fiscal first quarter. Keep in mind, there are a lot of variables that could impact that estimate, including further rate actions which are not assumed. Turning to consolidated expenses on slide 13. Compensation expense was $2.16 billion, and the total compensation ratio for the quarter was 62.4%.

Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 62.1%. Non-compensation expenses of $543 million increased 10% sequentially, largely due to the bank loan provision for credit losses, which was a benefit in the preceding quarter. For the fiscal year, non-compensation expenses, excluding the bank loan provision for credit losses, unexpected legal and regulatory items, and non-GAAP adjustments presented in our non-GAAP financial measures, came in just under our expectation of $1.9 billion. While we maintain discipline in controlling our expenses, we continue to invest to support growth across the business. Slide 14 shows the pre-tax margin trend over the past five quarters. This quarter, we generated a pre-tax margin of 22% and adjusted pre-tax margin of 22.7%, an increase over the prior quarter, arising in part from the improved capital markets results.

On Slide 15, at quarter end, our total assets were $83 billion, a 3% sequential increase, largely due to loan growth and higher cash balances, primarily held in our bank segment. Liquidity and capital each remain very strong. RJF corporate cash at the parent ended the quarter at $2.2 billion, well above our $1.2 billion target. With a Tier 1 leverage ratio of 12.8% and total capital ratio of 24.1%, we remain well capitalized. Our capital levels provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate was 20.8% for the quarter, primarily reflecting the favorable impact of non-taxable valuation gains associated with the corporate-owned life insurance portfolio. Slide 16 provides a summary of our capital actions over the past five quarters.

During the quarter, the firm repurchased 2.6 million shares of common stock for $300 million at an average price of $115 per share. For the fiscal year, we repurchased 7.7 million shares for $900 million. As Paul noted earlier, in total, we returned capital to shareholders of approximately $1.3 billion during the fiscal year through dividends and share repurchases. As of October 19th, approximately $645 million remained under the board's approved common stock repurchase authorization. Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental share repurchases.

Given our present capital and liquidity levels, we currently expect to keep a similar pace of buyback activity as we did during this quarter, or possibly more, as we remain committed to maintaining capital levels in line with our stated targets. Lastly, on slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio remains solid. Non-performing assets remained low and relatively unchanged from the prior quarter level at 28 basis points of bank assets. Criticized loans, as a percentage of total loans held for investment, ended the quarter at 1.47%, up from 1.15% in the preceding quarter, primarily due to a small number of idiosyncratic loan downgrades.

The bank allowance for credit losses, as a percentage of total loans held for investment, ended the quarter roughly unchanged from the prior quarter level at just under 1%. The allowance percentage has trended lower, largely due to a loan mix shift toward more securities-based loans and residential mortgages, which carry lower allowance levels and now account for 35% and 20% of the total loan portfolio balances, respectively. The bank loan allowance for credit losses on corporate loans, as a percent of corporate loans held for investment, was largely unchanged from the preceding quarter at approximately 2% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios. Now, I'll turn the call over to Paul Shoukry to discuss our outlook. Paul?

Paul Shoukry (President)

Thank you, Butch. You definitely covered the financials a lot better than I did when I was the CFO. Great job! Now on to our outlook. We are pleased with our record results this quarter and for the fiscal year. More importantly, we are well positioned entering fiscal 2025, with record client asset levels, healthy pipelines for growth across the business, and ample capital and funding to support balance sheet growth. In the Private Client Group, next quarter's results will be positively impacted by the sequential increase of assets and fee-based accounts, which we expect will benefit asset management and related fees by approximately 6%. Our advisor recruiting activity remains robust, and we're encouraged by the number of large teams joining us and remaining in the pipeline.

We are focused on being a destination of choice for current and prospective advisors, which we believe, over the long term, should continue to drive industry-leading growth. In the Capital Markets segment, we were pleased to see significantly improved results this quarter as the market environment became more constructive for investment banking results and particularly M&A. Our M&A pipeline remains healthy, and we are optimistic that the consistent investments in our platform and people should continue to drive growth in fiscal 2025. In the fixed income business, the market is still challenging, but we've begun to see some improvement in the depository sector of our business. With short-term rates decreasing and the yield curve steepening, depository clients are starting to be more engaged in managing their securities portfolio.

Overall, despite the headwinds over the past two years, we believe our long-term, patient approach, along with opportunistic investments we've made, have well positioned us for growth as the market and rate environment become more conducive for the Capital Markets segment. In the asset management segment, we remain confident that strong growth of assets and fee-based accounts in the Private Client Group will drive long-term growth of Financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth over time, and while the entire industry has been challenged by high levels of redemption activity, the record levels of sales in fiscal 2024 are a testament to our strong portfolio management and sales teams. In the bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand.

We have seen securities-based loan demand increase as clients get comfortable with the current level of rates, further supported by the recent Fed rate cut. Corporate loan growth has been muted as new origination activity in the credits we target remain low, but we will remain patient, and we are confident that loan demand in this category will rebound as well. With ample client cash balances and capital, we are very well positioned to lend across the loan segments as activity increases within our conservative risk guidelines. In addition to driving organic growth across our businesses, we also remain focused on corporate development efforts. While we prefer to deploy capital to invest in growth, we plan to maintain this past quarter's pace of buybacks or potentially increase it, as we continue to look for opportunities that may meet our disciplined M&A parameters.

I want to quickly touch on short-term rates, because all too often, lower interest rates are viewed as a negative for our business. I would just say that there are a lot of potential positive outcomes as well. Two potential examples are higher loan growth and better investment banking results across the industry, both which have been really low over the past couple of years. Again, this reinforces the value of having diversified and complementary businesses. In closing, we are well positioned entering fiscal 2025, with strong competitive positioning in all of our businesses and solid capital and liquidity to invest in future growth. I want to thank our advisors and associates for their continued dedication to providing excellent service to their clients.

I also want to thank our fantastic leadership team, many who took on larger roles starting on October first, as part of our long-term CEO succession process. I really look forward to partnering even more closely with all of our leaders and associates for many years to come. And of course, I want to thank Paul Reilly for developing this strong team over the past 15 years. What is reinforced in the most challenging of times, including with the 200-year hurricanes that hit us in a two-week period, is that we have something really special here at Raymond James. And my number one job when I take over as CEO is to do everything we possibly can to fiercely protect our culture and values. That concludes our prepared remarks. Operator, will you please open the line for questions?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow-up. Again, please press star one to join the queue. Your first question comes from the line of Michael Cho with JPMorgan. Please go ahead.

Michael Cho (Analyst)

Hi. Good evening, team. Thanks for taking my question. My first question, I just wanted to touch on the Capital Markets segment here. I apologize in advance, I have a two-parter, but clearly a nice pickup, as you noted, in the advisory segment. Can you give any color or anything incremental in terms of maybe what you saw in the quarter or what and if there's anything particular that drove the quarterly results in advisory and maybe anything more on the pipeline as you look ahead as well? Then secondly, you know, Paul, as you've kind of talked through, you've invested in people and platform in this business over the last number of years.

So when we think about operating leverage ahead, I mean, is there a way to frame the incremental margins ahead, maybe relative to what you've achieved in prior environments of better capital markets activity?

Paul Reilly (Chair and CEO)

First, I think, you know, the whole market has pretty much shown an improving M&A environment, and I think it's rate expectation and frankly, a lot of capital on the sidelines. We had a big pickup this quarter, but we're seeing that both in activity in this current quarter coming up. A lot of bigger transactions, a lot of people who've been on the sidelines that have reached deals to close them. In terms of activity, you know, we could go by number of MDs. We'd have to speculate what the number, you know, what the rate is. Certainly, I think we've had a year, you know, a couple of years ago, that's hard to beat the benchmark because it was exceptional year.

But, you know, we've got room to grow from here, and I, I wouldn't really put a number on it yet, but we've got a lot of productive capacity.

Michael Cho (Analyst)

Okay, great.

Paul Shoukry (President)

As far as the margin goes,

Paul Reilly (Chair and CEO)

Go ahead

Paul Shoukry (President)

... the margin portion of your question. You know, for the year, it's 20.6%. You know, and that's a, a pretty healthy margin given the mix of businesses that we're in. Now, Capital Markets really wasn't hitting on all cylinders until this past quarter's final quarter of the fiscal year. But as you know, we have a-- we have puts and takes in our businesses. So, you know, I'd, I'd say over time, our, our goal has always been, to grow revenues faster than expenses and therefore, you know, grow earnings and margins, beyond that. But in any one quarter, any one year, there could be a lot of puts and takes in our various businesses.

Michael Cho (Analyst)

Okay, wonderful. Thank you, and then just a quick follow-up on the balance sheet. I know there's a willingness to ultimately grow the balance sheet, and you've called out, you know, that corporate loan growth particularly has been somewhat tepid. Just curious what you're hearing from clients and what ultimately drives more demand here, if it's really just simply lower rates, or if you're hearing anything else, in terms of that piece of business. Thank you.

Paul Shoukry (President)

Yeah, on the corporate side, you know, lower rates would certainly help as companies you know to take advantage of you know the debt that they could get at more attractive rates. But also, going back to your last question to Paul, M&A activity historically has been a big driver of financing needs, and so as we start seeing M&A activity pick up, hopefully that'll be a leading indicator for corporate loan demand over time.

Michael Cho (Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Dan Fannon with Jefferies. Please go ahead.

Dan Fannon (Research Analyst)

Good evening. Thanks for taking my question. I'm curious on your outlook for next year with the non-comp expense. You came in slightly below the 19% for fiscal 2024. Could talk about the areas of investment and maybe quantify, you know, growth in that non-comp as you think about the next 12 months?

Paul Shoukry (President)

A lot of our non-comp items, as we've said in the past, is really growth related. So, you know, investment sub-advisory fees, for example, that grows with fee-based assets, which have been growing really nicely, you know, 7% sequentially, as an example. And then the other expenses. We're going to continue to invest heavily in technology. If you look at it on a percentage basis, that's been our biggest grower consistently year in and year out, and on an absolute dollar basis, for that matter. And that's really to remain competitive and provide advisors the very best technology that we can, very competitive in the industry, to help them find time and serve their clients more efficiently and effectively. And so, technology will continue to be an area of focus.

And then, of course, as you grow, as an organization and grow the businesses, you're going to need to grow, the branch and office space, and other, aspects of non-comp to invest in the business.

Dan Fannon (Research Analyst)

Understood. And then, the comments around the backlog for advisors sounded pretty similar to what we've heard from previous quarters. Was hoping to get a little more context, maybe around numbers for retention in the period. And then I think, you know, the larger books of business coming on board, maybe talk about the size today that you're recruiting, average size versus, say, a year ago.

Paul Reilly (Chair and CEO)

I think that both of those are up. The biggest change, probably over the last few years, is a fewer advisors in total, but much, much bigger books. So not only was this year an onboarding of probably the most, you know, and the largest books we ever have, but also the same in the pipeline. So we've become a destination for, you know, very large teams. I think both because of our technology platform and our high net worth, you know, offerings over the last couple of years that we've developed, have really taken off and made us a destination. So we're very comfortable. Not only do we have a very, you know, good recruiting year, but we're very comfortable with the backlog that's in there, too.

Dan Fannon (Research Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Devin Ryan with Citizens JMP. Please go ahead.

Devin Ryan (Head of Financial Technology Research)

Thanks so much. Hi, Paul, Paul, and welcome, Butch.

Paul Reilly (Chair and CEO)

Thanks, Devin.

Devin Ryan (Head of Financial Technology Research)

First question, just on coming back to the balance sheet and just lending capacity, as demand picks up here. So you have, you know, obviously plenty of capital. You seem to be holding at least a couple billion dollars of excess liquidity on the balance sheet. And then I think you have $18 billion of cash at third-party banks. So appreciate, you know, this isn't going to happen overnight, and you're not going to force the lending, but how you would frame the amount of loan growth that could come from just remixing the current balance sheet. And then how much of that third-party cash you guys are comfortable moving on to the balance sheet over time, you know, with the assumption that deposits are stabilizing to maybe starting to grow a bit here?

Paul Reilly (Chair and CEO)

Devin, you answered the question just by giving the stats. We have a ton of cash and capital, and I think that what's limited our growth on, you know, is just we've been very consistent in our risk appetite, you know, and having low risk on the C&I side of the portfolio. And just, you know, the spreads and the demand haven't been there. They're just... I think a lot of that has been, as Paul talked about earlier, because of lack of M&A activity. Certainly the opportunities to lend at the spreads and the risk tolerances we like, haven't been there. But we're more than willing when that returns, to invest in them, so that's holding it back there.

On the other side, you know, the SBL loans, as rates went way up, and mortgages as rates went up, it just cooled the appetite. Now that we've seen even after just the 50 basis point drop, you know, we've seen a pickup in SBLs right away. I think people have gotten used to the rates and figured they're going to be around-ish to stay, and they are floating. So if they, you know, the SBLs, they go down, the rates will go down, and clients seem to be more active. So, you know, we're waiting on the commercial side to see a risk reward in terms of spreads and the risk part we like and are comfortable with. And on the client side, for SBLs and mortgages, it's really their appetite. We're here and ready, and we have plenty of cash.

So we're not, we're not trying to limit the bank growth. We've seen over the years, we'll have quarters where we've had fairly sizable growth, and then quarters where we've had none, just based on really what we think that market risk appetite is.

Devin Ryan (Head of Financial Technology Research)

Yeah. Thanks, Paul, I appreciate that. I guess, you know, where I was going was more that, you know, you have $18 billion of third-party cash. You wanna have some liquidity, you know, parameters there, I'm sure, for risk management purposes. So, like, are you comfortable moving $5 billion of that or $10 billion of that? Like, what's the threshold that we should be looking at? I know there's been thresholds over time, so just curious how you guys are thinking about that and where you're comfortable.

Paul Shoukry (President)

Yeah, well, I mean, the major thing that drives that is, you know, we offer clients FDIC insurance up to $3 million through the multi-sweep program. And so we wanna make sure that we avail our clients of those third-party banks to maximize their FDIC insurance. Not a lot of other firms do that anymore, especially firms with affiliated banks. And so we think it's important to protect, to give that client that type of protection. And so that would limit, you know, all $18 billion, for example, to being deployed in our own bank. Probably would limit half of that, I would say, something in that range from being deployed to our own bank to give the clients the FDIC insurance that they could get through the multi-sweep program.

Devin Ryan (Head of Financial Technology Research)

Got it. Okay, that's great color. Thanks, Paul. And then, follow-up, I'd love to ask about fixed-income brokerage. You know, just I think performing reasonably, in an environment that's been challenged. I think you guys highlighted starting to see some, light at the end of the tunnel with depository clients. So just trying to think about, like, where, where we could go from here, you know. If there's a, you know, kind of a framing of whether it's historical, levels of revenue, or how we should think about, like, how maybe much that part of the business is under-punching relative to its potential if liquidity builds in the system and banks are more active. Like, just where, where that could go relative to where we currently are.

Paul Shoukry (President)

I would say, you know, the periods during COVID with very low rates, you know, those were kind of record levels for fixed-income brokerage. It was a perfect environment and for that business. There's lots of excess cash in the system. Short-term rates were, you know, close to zero, and there's benefit for taking on some duration. Somewhere between kind of where we've been running in the last couple of years in COVID is probably a reasonable place to kind of think a healthy level would be over time. Then, of course, as we grow the business and we take market share and we grow tangential opportunities, like SumRidge has been a great addition beyond the depository spaces, that diversifies and further strengthens our business as well.

So we'll continue to look to add to our capabilities. And also, our balance sheet's getting bigger, so over time, we'll also use our balance sheet in a very prudent way to continue supporting that business as well. So it's still a growth business for us over time, but just from the pure depository space, the COVID period was sort of a components of that business were sort of perfectly aligned.

Devin Ryan (Head of Financial Technology Research)

Yeah, got it. Okay, that's helpful. Appreciate you taking all the questions.

Operator (participant)

Thank you. Your next question comes from the line of Brennan Hawken with UBS. Please go ahead.

Brennan Hawken (Senior Analyst of Equity Research)

Good afternoon, thanks for taking my questions. So wanted to ask about advisory. So it's one of the themes we've been noticing and has been sort of nagging, has been that sponsors have been sort of slow to reengage. But you know, I know your advisory business has a lot of leverage there, and certainly encouraging to see that strength. So hoping you could give maybe a little more color around what you're seeing. Is this a good sign that sponsors are beginning to reengage in the mid-market space? Or, you know, were there some lumpy results that benefited the revenues?

Paul Reilly (Chair and CEO)

I think there's a general reengagement, so, and across a lot of sectors, so it's a sign. So we've always been, I guess, pretty conservative on our outlook there. Anytime we've talked, we, you know, we've talked about a backlog, but the market wasn't conducive. We're seeing people engage. And it's not only on inventory, I mean, you know, existing things that were up for being sold, but we're seeing new engagement and discussions about, you know, new mandates. So, we think, I'm not gonna say it's gonna boom overnight, but we're seeing a much, much more conducive market, both in interest on buyers and sellers. So, you know, at least for the near term, you know, we see a fairly good market and recovering market.

But, you know, I don't know if we can give you more color because one quarter doesn't always paint a long-term trend. But we can tell you the backlog looks pretty good for this, you know, for the near term anyway.

Brennan Hawken (Senior Analyst of Equity Research)

Yep, that's fair. Thanks, thanks for that, Paul. And then ESP, given where the yields were on that product, I would expect that in the recent Fed cut, that had a very high beta. You know, should we just assume that that's a roughly 100 beta product as we see cuts? And, you know, have you noticed any change in behavior or engagement, since yields have started to come down around that, that offering?

Paul Shoukry (President)

Yeah, I would say, you know, ESP balances, you know, are higher-yielding balances, sort of at the same rate range as money market funds. So that is typically 100% deposit beta type product. And we have others, we have balances and opportunities and certain balances in the bank segment as well. You know, in total, when you look at our total balances at the bank side, deposits at the bank segment and the sweep balances, roughly half of those balances are higher rate higher deposit beta type balances. So we have a lot of protection to downside rates, which is you know, which will give us some you know, offsets with as rates do decrease because obviously our floating our assets are mostly floating rate assets.

Now what was the other part of the question?

Brennan Hawken (Senior Analyst of Equity Research)

Any changes in engagement with-

Paul Shoukry (President)

Oh

Brennan Hawken (Senior Analyst of Equity Research)

... those higher yield products as we've seen rates come down?

Paul Shoukry (President)

Not really. You know, there, I think a lot of the cash reinvestment activity we saw are slowing down and decelerating well before the rate decrease. And so we haven't seen sort of an acceleration or deceleration, frankly, that's notable following the decrease.

Brennan Hawken (Senior Analyst of Equity Research)

Okay, thanks for taking my questions.

Operator (participant)

Thank you. Your next question comes from the line of Steven Chubak with Wolfe Research. Please go ahead.

Steven Chubak (Managing Director)

Hi, good evening, Paul. Good evening, Butch. Wanted to start with a question just on the spread revenue guide for next quarter. You know, the growth in sweep deposits was encouraging, even inclusive of the fee billings. Just wanted to drill down into some of the inputs that are underpinning that lower spread revenue guide. Maybe more specifically, just what deposit pricing changes are embedded in the guide, and does it contemplate any favorable cash seasonality, which we typically see around year-end?

Paul Shoukry (President)

Yeah, I mean, we've been accused of being conservative with our guidance in the past, particularly on this guidance. So hopefully that proves to be the case this time around. Because loan balances are continuing to grow, we're not really factoring in ongoing loan balance. This was more of a snapshot type view in terms of what the full run rate of rate changes would be to both the BDP fees and NII. And so to your point, balances can increase throughout the quarter, whether it be cash balances, but hopefully more loan balances. And, you know, that could offset some of the reduction in rate and the sensitivity around that. And I just gave you the breakout of the deposits that are higher yielding and higher deposit beta versus the ones that are lower yielding, lower deposit beta.

And so that's kind of what went into our math.

Steven Chubak (Managing Director)

Understood. And for a follow-up, just on, wanted to drill down to some of the earlier comments you made on net new asset growth in the pipeline. For both you and industry peers, this past year, we did see the moderation in industry flow trends. Understand you struck a positive tone in terms of the pipeline of new advisors, but just trying to gauge what drove the slowdown in industry growth, whether we should interpret the comments on the pipeline as supportive of an acceleration in that flow rate, and which channels are seeing the fastest growth across the platform, given the omnichannel offering?

Paul Reilly (Chair and CEO)

You know, it depends on how you want to look at it. In our RIA part, RCS, it is by far the highest percentage growth. And, you know, as consistent with industry trends, that has been, you know, it has been growing quickly. If you look at total dollars, and this goes back and forth, a couple of years ago, it was independent. This year, the employee channel really led the way. And it is, you know, we used to have, well, but, you know, independents grow faster than down markets. I mean, in up markets and employees and slow markets, we do not see that trend anymore. It is really just where we can meet the teams that like an affiliation option. And so, employee led the way.

I actually think that we'll get some improvement in the independent contractor model because it's just cyclical, and the employee side seems to have a very good backlog, as does RCS, so we're encouraged, but you know, it's a process both to you know get people to commit and then get people in the door, so we can never predict the timing, but we're encouraged even with the great results that we could do better, so.

Steven Chubak (Managing Director)

Helpful caller. Thanks for taking my questions.

Operator (participant)

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Alex Blostein (Managing Director)

Hey, guys. Good afternoon, and, Butch, welcome to the call as well. I wanted to follow up to Steven's question around cash trends. Is it possible to unpack sort of sources of growth you saw in the third quarter, your fiscal fourth quarter, across the cash stack? And curious whether it is really kind of abating of the sorting, or are you starting to see more cash coming onto the sidelines as net new assets coming in?

Paul Shoukry (President)

I mean, we've continued to grow a lot as a business, and as we grow and bring on new advisors, they bring on their clients, they're going to bring on their client's cash balance. And that's been happening throughout the last couple of years. It's just been masked by the fact that there's been a lot of reinvestment activity. And so as that reinvestment activity decelerates and subsides, then you're going to start seeing the pure, you know, the growth coming in from the addition of advisors and their clients.

Alex Blostein (Managing Director)

Yeah, that makes sense. So your point is kind of like, look, from this point on, like, your cash balances are likely to grow and trend more in line with net new assets like we've seen in the past?

Paul Shoukry (President)

... Well, you took my comments a couple steps further, but I'm not sure we're willing to declare a total end to the cash reinvestment, but that's the dynamic that you've seen over the last. I'd call it four to six quarters, is that dynamic has decelerated.

Alex Blostein (Managing Director)

Gotcha. Okay. Good enough. Thanks. And then a quick follow-up on the buyback. I just wanna make sure I'm interpreting your comments correctly. So $300 million share repurchases this quarter, a nice step up. Should we assume that to be kinda run rate quarterly pace of buybacks from here as well? Or, absent, obviously, of, like, M&A or anything like that. And if there are opportunities to do more, you're likely to do that as well. I'm just trying to understand what the criteria are from here for trajectory of share repurchases.

Paul Shoukry (President)

I mean, to your point, we'd much rather use the capital to grow the business, whether it's through organic growth acquisitions or balance sheet growth with loan growth, and we are optimistic on those fronts as well, but to the extent that we're not using the capital and we're generating, you know, pretty good earnings, then, you know, we wanna make sure that we limit further expansion of the capital ratio.

And that's where we come up with the sort of pace that we've been at here for the last quarter, or maybe even a little bit more, you know, depending on all those factors and price and other things that we, you know, wanna show our commitment to, you know, limiting further, you know, capital ratio growth, given, you know, how strong it is now, and it is over our target of 10%.

Alex Blostein (Managing Director)

Yeah, makes perfect sense. All right. Thank you, guys.

Operator (participant)

Your next question comes from the line of Bill Katz with TD Cowen. Please go ahead.

Bill Katz (Senior Equity Analyst)

This evening. Just coming back to the margin discussion. Excuse me. Just wondering if you could unpack a little bit from the top-down view of driving operating leverage to maybe the segment lines. So if I look at each, maybe the private client business and the capital markets business in particular, the margins there improved reasonably strongly, particularly in capital markets. So how do we think about the marginal margin in those segments? And then coming back, Paul, to your comments, Paul Shoukry, your comments of, you know, 22% margin is pretty fulsome at this point. So how do we think about the incremental margin at the segment level, and then that sort of translating into the overall margin outlook for HoldCo? Thank you.

Paul Shoukry (President)

How many more hours do you have tonight? Yeah, I mean, I think, listen, to the extent that revenues grow in our segments, then that should result in margin expansion for each one of our segments. Interest rates and spreads play a big role in that, both for the Private Client Group segment and the Bank segment, and, you know, we just had a 50 basis point reduction. Now, I think we can, over time, offset that impact by growing the balance sheet at the bank, as loan demand comes back. So, you know, over time, I think we can do that. And then to the extent, you know, Capital Markets margin improved this past quarter, but, you know, they've it hasn't been exactly great, the first three quarters of the fiscal year.

So the incremental margin when you're operating at a loss is pretty significant, when especially with the significant revenue increase we had in the segment this quarter. So I'm just saying, over time, you know, what I caution the Street from doing is just assuming that the margin gets better in every segment because everything goes in the right direction, and then that generates a substantially higher margin than we generated this year. I think that's maybe not factoring in the puts and takes that are natural in our diverse and complementary businesses.

Bill Katz (Senior Equity Analyst)

Okay, that's helpful. And then just one follow-up, just coming back to client cash for a moment. So I've seen this in some of your peers. You've seen a big pickup in client cash into the end of the quarter, and some have pointed to just some fixed income liquidity, maturities coming in, some uncertainty around interest rate expectations, given some of the moves by the Fed, and obviously, election coming up in just a couple of weeks from now. So are you seeing a structural shift in the client cash, or is this more of a timing element on asset allocation that is somewhat plumping up client cash, all else being equal, and could sort of move back into more sort of AUM type of levels, and not so much on the NII side? Thank you.

Paul Shoukry (President)

I would say our asset mix has been remarkably consistent. Advisors have been doing a very good job through different cycles, both market cycles and rate cycles, keeping clients' asset mix relatively aligned with their long-term investment objectives. And so, like, for example, equities for us right now is roughly 60% on an X-ray basis of assets, and that's been consistent, you know, within 2 or 3 percentage points, for the last several years in various environments. And so the mix shift that you've seen, over the last 5 years has really been within the cash category when it's a low-rate environment. There's more in transactional cash, and when you're in a higher rate environment, there's more investable cash there. And so, that's the only shift I think we've seen over the long term.

You know, one quarter, the difference, I think, in just the last couple of quarters is the deceleration I talked about of the sorting activity, and now you're starting to see more of that growth coming in from just bringing on advisors as they bring on their clients and existing advisors bring on new clients.

Bill Katz (Senior Equity Analyst)

Okay. Thank you for the perspective and taking the questions.

Operator (participant)

Your next question comes from the line of Kyle Voigt with KBW. Please go ahead.

Kyle Voigt (Managing Dire Equity Research)

Good evening. Paul, you noted a continued focus on corporate development efforts and remaining disciplined there. Just curious if you can give us an update on the M&A environment. Are you seeing more or less opportunities today compared to earlier in 2024? Is the rate certainty helping to narrow bid-ask spreads for potential targets? And, any areas of focus we should really be thinking about in terms of the wealth segment, or are there other areas you're considering for inorganic growth?

Paul Reilly (Chair and CEO)

Yeah, we look across all of our businesses for growth. We really believe we're positioned, you know, for the right opportunities to grow. And I'd say our corporate development team has done a great job of bringing opportunities to us, right? So we look at a lot of deals. Some we just don't like, you know, the deals, the way they fit in our environment, some are not culturally there. And some we like and, you know, we just can't get the terms on what we think is good long-term price. So we're constantly looking. We take them very seriously. We're, as you know, a conservative buyer, and that we'll be competitive, but we won't stretch way out to buy an asset. And so it really just depends when they click, and that's the hard thing on timing.

Like, a few years ago, people would say, "Well, you guys aren't going to buy anything. You're hoarding all this capital," and we closed four deals in the next few months. I mean, it just took a while, and they just all happened to hit around the same time. So, we're still in that mode and, but we're not going to do a deal just to do a deal. It has to be something that fits and makes sense for the firm and shareholders.

Kyle Voigt (Managing Dire Equity Research)

Makes sense. And, and for my follow-up, maybe just a question on the balance sheet. On the AFS portfolio, I know that continued to run off in the quarter. I guess with some more clarity on the rate environment in terms of the direction of travel with the Fed and still with, significant excess capital, is there any desire to change your stance on that and begin, holding that steady or growing those balances in fiscal 2025? Or do you anticipate letting that portfolio continuing to run off?

Paul Shoukry (President)

Yeah, we let that portfolio grow modestly, just really to accommodate client cash balances when the banks, during the COVID period, didn't really want those balances. And so now all we're doing is getting back to sort of a normalized liquidity level at both banks, and primarily at Raymond James Bank, where we were accommodating those balances. So once they get to that normal state, then we'll maintain the balance for the securities portfolio. You know, banks typically need to run at maybe around a 10%-15% liquidity ratio between cash and securities, and so Raymond James Bank is still well above that. And so we'll let those securities run off, and then once they get to that type of range, then we'll maintain the balances.

But the point is, we're not taking bets on duration. We're not taking bets on where the Fed may or may not take rates. That got a lot of our peers in trouble. And so we want to just stay focused on serving clients and keeping the balance sheet as flexible as possible for anything that the market or the interest rate environment may bring us.

Kyle Voigt (Managing Dire Equity Research)

Thank you.

Operator (participant)

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

Michael Cyprys (Managing Director)

Great. Thanks for taking the question. Wanted to ask about the PCG business internationally, if you could elaborate on how that's performing and contributing across Canada and the U.K. today. I know you've done some acquisitions there over the years. Just curious what you're seeing in terms of organic growth contribution over the past year versus, say, fiscal 2023, and in Canada and the U.K., maybe you could talk a little about some of the initiatives there to accelerate organic growth and improve scale and profitability.

Paul Reilly (Chair and CEO)

It's a little bit of a tale of, you know, two cities for different reasons, but the private client group in Canada is doing great growth in recruiting. When we acquired that business, it was really a capital markets business, and with the small PCG business, and today it's a very, you know, strong, like similar to the U.S., really. A big capital, private client group base, continuing to recruit, similar profit margins, good growth. Same kind of platforms that we have here in the U.S., where we have Advisor’s Choice, and they've, you know, executed very, very well to where we're really getting to the size of the, the smallest of the largest banks, which is quite unusual in Canada. But, you know, we are up there. We feel like a Canadian firm.

They just have a U.S. parent, but they operate very, very well. The U.K., because we've done a recent acquisition, are still in integration. The growth has been kind of flat, you know, and that as we get people and systems and everything really hooked together and going through that integration process, the growth is much slower. But we anticipate once we're able to do that and get the integration, we expect to be able to grow there. But it's a smaller business too, so won't have as big of an impact consolidated.

Michael Cyprys (Managing Director)

Great, thanks. And just on the RCS business, maybe you could help remind us, just in terms of the economics there, how that compares to your traditional channel, say, for $1 billion of assets. Just maybe you could walk us through the PNL impact across revenues, expenses, and-

Paul Reilly (Chair and CEO)

Yeah. What we've disclosed so far, so, you know, maybe it's something we'd cover at analyst day or something. We haven't really disclosed in detail, but we really get an asset fee there. So if you looked at pure RAA, the way they measure margins, they're higher margins. If you look at, you know, our net basis points on assets are lower. So, you know, part of it, the service model is different, too. You don't have all the supervision and compliance requirements that an RIAA has. Those responsibilities, there's certain things that they do. They are clients of ours. Their clients are their clients, they're not our clients. And outside of some AML responsibilities and just oversight to make sure they have process, there's a lot less cost that goes into it, although we're a higher service model.

So it's not easy to give a quick answer, but it might be something that we can show in more detail at maybe the next Analyst Day.

Michael Cyprys (Managing Director)

Just any sense, ballpark, directionally, PBT margin, revenue, ROCA, just how to think about that versus the firm or versus individual times?

Paul Shoukry (President)

Yeah, it's, it's complicated. Again, as Paul said, the Analyst Investor Day would be a good time to talk about. The margin on a P&L basis is actually higher because the attachment revenue that you book is much lower, whereas in our other businesses, we gross up the revenues pre-payout. And then the ROCA just varies dramatically depending on the asset mix that the RIA has, and the pricing structure, because there's different pricing structures depending on the RIA as well. So, we can get probably more time than we have now to discuss, but Analyst Investor Day is probably the right forum for that.

Michael Cyprys (Managing Director)

Great. Look forward to that. Thank you.

Paul Shoukry (President)

Thank you.

Paul Reilly (Chair and CEO)

Well, great. Well, we appreciate everybody's attendance, and we're very proud of the quarter, but we're already working on the next quarter because that's just what we do here. And Butch has done a great job and, you know, we've had a great transition, and we'll continue to do that over the next year. So appreciate you joining us, and we'll talk to you next call.

Operator (participant)

Thank you, and this concludes today's conference call. Thank you all for participating. You may now disconnect.