Last quarter, brokerage earnings calls were filled with questions and comments on the impact of AI cash optimization tools, but the latest quarter had virtually nothing on the topic. Both Raymond James and Ameriprise Financial released earnings and hosted calls last week, and the calls were unusually thin on cash and sweep comments. Raymond James CEO Paul Shoukry says, "Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.8 billion, up 2% from the preceding quarter and 7% over the prior year level, representing 3.4% of domestic PCG client assets at quarter end. Cash sweep balances grew 4% year-over-year and reflect the impact of organic and recruited growth over the period. We continue to diversify funding during the quarter, with strong growth in Enhanced Savings Program balances up $2.4 billion, or 19%, over the prior quarter level. This on-balance sheet increase in bank deposits enabled us to shift a portion of our cash sweep program balances from our banks to third-party banks." (See the RJ earnings call transcript here.)
He explains, "This dynamic highlights the strength of our deposit gathering capabilities and the flexibility inherent in our funding model to move cash sweep balances on or off balance sheet, enabling us to better serve client needs.... Combined net interest income and RJBDP fees from third-party banks were $658 million, up $8 million, or 1% from the prior quarter. Fee revenues earned on RJBDP balances with third-party banks increased $5 million as a result of both an increase in the yield of five basis points to 2.75%, as well as an increase in average balances swept to third-party banks in the quarter. Bank segment net interest income was flat sequentially as incremental interest from loan growth was offset by higher interest expense, primarily from the growth in the Enhanced Savings Program balances that I previously discussed."
Shoukry comments, "Professional fees during the quarter reflect elevated legal expenses, with the vast majority being defense costs incurred during the quarter associated with the previously disclosed putative class action lawsuit related to our cash sweep programs. We believe we have strong defenses to the claims asserted, and we are vigorously defending the action. However, such defense is triggering an increase in our costs."
In response to a question, CFO Butch Oorlog states, "Just a couple of things to point out. The yield on our bank segment interest earning assets was flat. We maintained the same yield on interest earning assets over the quarter. As we think about the impact on our NIM, the nature of the deposits and how much the constitution of our deposits, whether on balance sheet or off balance sheet, has a direct impact on our NIM. In this quarter as an example, we grew the ESP deposits. Those are on balance sheet, enabling us to use other capacity in the suite program off with third-party banks. We get fee revenues from that. From time to time, the impact on our NIM can be negative as we have higher cost deposits on balance sheet."
He adds, "Overall, we manage to the aggregate of the BDP fee revenues and the NII in total in aggregate. We have to look at them in aggregate. We think over the long run, we continue to see in a steady rate environment. We've demonstrated basically consistent NIM performance. I would just say that when you think about our NIM, you really have to keep in mind that dynamic between our deposits that are on balance sheet and off balance sheet."
Shoukry comments, "The goal really is to grow interest earnings and BDP fees over time. We're confident that we'll be able to do that. As Butch points out, the geography of the cash will impact the NIM versus the third-party fees. The most critical thing is that we have various funding sources both at the bank and at the wealth business, etc., that we test from time to time. We want to see how successful those sources can be. This quarter, we were able to be very successful in raising ESP balances, which allowed us to put more off balance sheet with third-party banks. It's working. The apparatus and the diversified funding sources is working."
In response to a question on rates, he responds, "Higher interest rates, [it's] amazing that we're talking about that because I think a year ago we were talking about maybe five or six cuts.... The world changes quickly as we are consistently reminded. If rates do increase, that would be a nice tailwind for our business, all else being equal. There's always puts and takes in our various businesses. As far as the floating rate asset that we have on the balance sheet ... we have a relatively floating rate balance sheet. We've always tried to keep it that way, so we're not effectively taking interest rate risk. Some firms who did that saw the downside of that in 2023. All else being equal, when rates go down, we see a negative impact on those balances, and when rates go up, we see a pretty nice benefit to those balances."
During the Ameriprise Q2 earnings call, CEO Jim Cracchiolo tells us, "We've seen a good response to our recent bank and certificate promotions. We know from our early results that practices using our banking solutions manage nearly 10% more assets."
CFO Walter Berman explains, "I will note that our bank revenues increased in the mid-single-digit percentage range from business growth, including the expansion of lending products, while revenues from cash sweep and certificates declined, particularly as clients repositioned from term products into other offerings on our platform."
Asked about the amount of the company's earnings that come from sweep cash compared to competitors (that they're much lower), Berman answers, "Well, certainly, you're in the right ballpark. I would say there is more on the core." Cracchiolo adds, "Yeah, it's definitely more than half in the core (vs. sweep).... It's more like 70%.... Let's just say it's more in the core." Cracchiolo says, "It's somewhere in between what you just said."
Finally, Berman responds, "It's not only that, it's also the stability where the bank is to maintain that generation of earnings. Obviously, we have a bank, so we don't have to swap, and we keep the premium, and certainly the bank is growing in its net interest income. Yes, I think we will look at doing that because there's certainly a big differential between the concentration we have and the concentration that exists in peers. I'll leave it at that."
