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Raymond James CEO expects to be ‘flexible and liquid’ until recession risk indicators appear

Raymond James CEO Paul Reilly speaks with Yahoo Finance Live in an exclusive interview about the company's latest quarter, his 2023 macroeconomic outlook, rising interest rates, and layoffs in the banking sector.

Video transcript

DAVE BRIGGS: Shares of Raymond James Financial falling just about 3 and 1/2% today after the investment bank and financial-services firm reported slightly better-than-expected earnings. EPS came in at $2.29, a penny better than estimates, while net revenue came up just short.

Let's discuss the quarter and what's ahead for the economy in an exclusive interview with Paul Reilly, Raymond James CEO. Great to have you, sir. Really appreciate the time. We saw what investors think there of the quarter. What about yourself?

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PAUL REILLY: Well, Dave, thank-- it's great to be on the show. Had a very, very strong quarter. I don't think many firms projected records this quarter, which we did have a record return to shareholders. And our largest business-- our private client group business had record revenue, record profits, led the industry by far with almost 10% net new assets. I'd say double over the top performers. So we thought it was very, very solid.

I think the question investors had is we're very open and we're conservative. My job is to make sure that this company is a safe haven for clients, our advisors, and shareholders. And we a year ago started talking about the cash crunch when we had record cash in the industry. And we've seen now with rates going up and clients, as advisor should have them do, moving to high-yield types of investment instruments, and we haven't done any. Most of our competitors have been very aggressively raising higher-cost deposits. We haven't. And we announced that we are going to start to do that. We started off with a lot more liquidity, so didn't have to. But if it continues, we are going to roll out the programs and make sure that we have ample cash to operate on.

So I don't know if we weren't-- did as good of a job of communicating that we didn't have infinite amount of free cash. No one does. The whole industry has seen this whole movement, and it's probably impacted us last. But, again, we're in it for the long run. So we've had a great run in share price and valuation, and if we have a blip, that's OK. We just have to keep performing.

SEANA SMITH: Paul, I know you're in it for the long run, but the next 12 to 18 months, it really seems to be the big focus among many investors recently. I know you set aside some loan provisions here for credit losses potentially going forward. When you talk about that macroeconomic picture within that shorter time frame, how much worse do you see it potentially getting?

PAUL REILLY: You know, Seana, that's kind of the, I guess, multitrillion-dollar question for the industry is I don't know if we've ever seen a time like this where we saw rates go from prolonged near zero to raise so quickly, even though historically not high rates. So the movement of cash, I don't think anyone knows. We all can use our models and say how much. I don't think we've ever had the consumer so loaded. So much cash in the system, not just in banks but in nonbanking institutions, which drove a lot of the runs in the last year or two years in M&A and other activity. We've had a lot of people leave the workforce. I don't know if that's permanent or negative due to those cash build ups, both from government programs during COVID.

And so when that all unwinds, we don't know, right? So here our view is we'll look at the long run, and we don't know, so we're not going to take the bets. We've got well in excess of a billion dollars of extra capital, which we often get criticized for having too much capital. We don't think in an environment like that-- like this that that's-- you know, we should do that.

We have excess cash on our corporate balance sheets, and the view is let's see what happens. We're going to find out in the next six months what happens to demand, to supply, to inflation. We hear the debates both sides. You can go on any show and hear-- you know, just listen long enough and you'll hear your point of view because it differs all over, and I don't think we really know.

So I think the consumers in relatively good shape. It's going to tighten up. I don't-- you know, if you ask me to guess, I don't think it's going to be a hard landing, probably a soft one, but we don't know. So we're not-- our bet is being flexible and liquid and ride through it as a company until we see the economy turn.

DAVE BRIGGS: The era of free money being over, what is going to be the impact for the rest of the year? And do you think the Fed will hold rates where-- after a couple of more hikes, fail to cut rates until '24?

PAUL REILLY: I think that-- it's been interesting to me over the last year all these predictions that the Fed wasn't going to cut what they clearly said-- I mean wasn't going to raise what they clearly said they were going to raise every week. And every time there was 75 basis points to go, they're only going to do 25 or 50.

I think they've been very clear. I think their strategy has been very clear. I don't think they're worried about the stock market. They're worried about inflation and getting that down. Unemployment's still low, which is going to be the hard part of inflation to get under control. So I think they're going to stick to their guns, and they'll stop when they see signs.

So the trends are in the right direction. They're lagging indicators, but I think they're going to wait until they know, so we could have more in front of us. And again, I think even-- you know, we talk about 6% mortgages. I remember when I got my first mortgage. I would have died and thought I went to heaven to get a 6% mortgage.

So, you know, when you're used to 3%, 6% is a lot. But when you're used to 9%, you know, it seems historically like a reasonable rate. So as long as it levels out and people get certainty, I think people will start coming back into the market.

SEANA SMITH: It's very important to put that in perspective. Paul, what about layoffs? That has obviously been a popular topic among the earnings calls. We've seen the layoffs start to creep in to the financial sector. How are you looking at your current headcount, and do you potentially see the need to adjust that headcount over the next couple of months?

PAUL REILLY: Yeah, it's another thing about the way we have governed the firm well even before me is that we tend to have a little lower salaries and higher bonus percentage, just for these periods. We tend to hire as we need. We try to never get in front. So we still have open positions.

We did not hire, and we're still growing. If you look at our growth over the last two years, we never hired ahead of that growth. We were always a little behind. So we're in good shape in terms of our employee base. We didn't have the run up. Investment banking isn't the biggest part of our business. It's a very good part and productive part.

And so I think we traditionally have not, you know, had layoffs in our history except for very unusual events. Don't anticipate it. And I think a lot of the companies you see in tech and others, they were just-- if you look at the number of people they hired in the last two years-- the layoff numbers seem big, but as a percentage of the people they just hired in the last two years, it's pretty small. So I think there's a reckoning there.

There's still a lot of job openings. I think most of those people get re-employed. So I think there's still going to be pressure on the labor force.

SEANA SMITH: Yeah, I'm looking at your earnings report. Your headcount's only grown about 5% from a year ago. So comparing that against a lot of the companies laying off workers, clearly a different picture.

Paul Reilly, great to have you, CEO of Raymond James.