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Operator
Good morning.
My name is Jodi and I will be are conference operator today.
At this time, I would like to welcome everyone to the Raymond James quarterly analyst call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
To the extent that Raymond James makes forward-looking statements regarding management expectations, strategic objectives, business prospects, anticipated expense savings, financial results, anticipated results of litigation, and regulatory proceedings, and any other similar matters, a variety of factors, many of which are beyond Raymond James' control, could cause actual results and experiences to differ materially from the expectations and objections -- objectives expressed in these statements.
These factors are described in Raymond James' 2012 annual report on Form 10-K which is available on RaymondJames.com and SEC.gov.
In addition to those factors in connection with the Morgan Keegan transaction, the following factors among others could cause actual results to differ materially from forward-looking or historical performance.
Difficulty integrating Raymond James' and Morgan Keegan's businesses or realizing the projected benefits of the transaction, the inability to sustain revenue and earnings growth, changes in the capital markets and diversion of management time on integration-related issues.
To the extent Raymond James discusses non-GAAP results, a reconciliation to GAAP is available on RaymondJames.com in the earnings release issued yesterday.
Thank you.
I would now like to turn the call over to Paul Reilly, Chief Executive Officer.
Please go ahead, Sir.
- CEO
Thanks, Jodi, and good morning, everyone.
And now that you know that we can't foresee the future by the disclaimer, I'd like to kind of get into the numbers in the quarter.
First, I want to kind of give a big picture.
We're very pleased where we stand today in terms of our market position and what we've accomplished over this last year in the Morgan Keegan integration.
And we've had a very successful integration, retention number has been very good.
We've just come off our conferences for our private client group, both our employee and independent groups, and I'd say the mood is very, very good.
They're very happy with the firm and where we stand, our technology as we continue to roll it out.
And I believe we are well positioned in all of our segments, certainly our -- despite market headwinds, our fixed income business is really a premier business now.
All of our segments I think are showing good growth.
If we look over the nine months, for the first nine months of this year versus nine months of last year we're up 23% in net revenue, 10% -- 17% in net income, and 10% in GAAP and non-GAAP diluted earnings per share -- 20% in GAAP, I'm sorry -- and 10%, I'm sorry, in our non-GAAP diluted earnings per share due to number of shares issued.
So, if you look at the overall performance over the last year and where we stand, I feel very, very good about it.
I also recognize, and I'm looking at the numbers, there is a lot of noise still coming through the Morgan Keegan integration both in our cost lines as we finish up with the integration, as we continued over this quarter to kind of size our business from that integration.
And also through numbers moving through different classifications of how Morgan Keegan kind of accounted for things and how Raymond James does.
So, hopefully we can move through each of those today and give you some more visibility.
And I think we had a decent quarter in most all of our segments except hopefully which was an anomalist fixed income trading cost which I will cover a little bit.
But I think if we go segment by segment I think the performance is pretty good.
If you look at overall for the quarter, our revenue was $1.1 billion.
We are up 2% over a year ago and we're down 3% from last quarter but, again, you have to remember on the Albion transaction that if you took that out, which was kind of a one-time event, we were up 2% to 3% really in revenue.
And even taking the Albion -- leaving the Albion transaction where it was 5% in our earnings.
So I think we had a reasonable quarter there and if you go through segment by segment we can give you a little color.
Assets under administration, you notice there was a $1 billion job kind of drop given the DOW, probably looks a little unusual, but there are two factors that impacted that.
One is the Canadian currency re-evaluation from 99 to 96 had $1 billion kind of impact.
And also some of the fixed income valuations given the interest rate changes in the markets, had an impact on that number.
I think what probably is more in line and more of an indicator of our business going forward if you look like assets under management was up to a record $52 billion.
And, more importantly, if you look at the private client group billable accounts going into the quarter, they're really up about 3.5% composed of a couple of elements.
One, a 2% increase on the assets under management, an extra billing day coming into this quarter.
And actually if you look at billings of movement from fixed income into equities, that is going to increase that billing base.
Also, if you look at the revenue in the private client group, there are some changes from the Morgan Keegan numbers.
We're up 2% from the quarter, but in Morgan Keegan they really did not have a fixed income segment and some of the income and private -- asset management segment -- I'm sorry, and what we call asset management at Raymond James was really reported in private client group.
That impact of what we pulled out of private client group and moved to asset management in our reporting is about $10 million a year or $2.5 million for the quarter.
So, the private client group number on an apples to apples basis, had we not gone through the re-class, would have been a little higher and the asset management growth really a little lower.
But I think both numbers are continuing to grow and we still have very, very good results for asset management.
Sticking with the private client group, we also expect the margins to continue to improve in private client group.
We'll go through some of the comp ratio kind of adjustments, Jeff will a little bit later in the quarter.
And our technology expenses continue to be raised as we finish off projects this quarter and this next quarter and the fourth quarter of our fiscal year that I would say that got deferred because we were working on the integration as we finished them up.
And we expect that technology expense to decline over the next couple quarters and get back into a run rate which we had planned to go on before the integration.
Asset management continued to perform well both from the market revaluations and good net inflows, both from outside and Morgan Keegan advisors who continue to move $160 million-$180 million in assets a month into our asset management system.
Again, a good sign that the integration has been going very well.
The capital markets is probably the one that has disappointed some people, but it's really kind of a two-end tail.
Our equity capital markets had a good quarter coming off a weak quarter, but both improvement in underwritings and M&A transactions.
And we right now would expect, although it's always hard to predict the capital markets going forward, is to keep it those levels in equity capital markets over the next quarters if we had to guess.
Backlog is good.
Who knows what happens to the market every quarter there.
August tends to be a seasonable month in that business and September a positive month, but if we look going forward, we think the performance in equity capital markets should continue.
The big surprise was fixed income.
And it was a surprise, although we had warned that trading profits were down.
If we look at really the month of June we had some almost record movements in the municipal market.
If you look at the MMD rates, the 10 and 30 year had the second highest one-week movement since second 2008 and almost the same as October of 2008.
Despite our inventories being down because of concern of the market, we hit a trading loss and we typically don't have many trading losses and hopefully it won't.
This month is moving -- has moved back to the positive, but I think we had that unusual event and a very highly volatile and unusual month.
Not that we continue to believe that rates over the medium to long term continue to rise and are managing for that, but we would expect the fixed income business to return to kind of the March quarter, not the quarter of when we acquired Morgan Keegan.
The fixed income market remained challenged versus when we acquired Morgan Keegan, but certainly we believe this month in the volatility was unusual.
Also, the comp ratio was driven partially by a much higher comp ratio and fixed income.
Trading profits disproportionately help us in terms of bottom line and fixed income, and when they're negative, disproportionately cost us to the bottom line.
Also, that is one business with the acquisition that between the RSU's and a number of guarantees that run through April in our two-year deal with the acquisition, as revenue go down it has a leverage effect to raise the comp ratio.
So, that did have an impact to the overall comp ratio in the business.
RJ Bank, the good news is despite our warnings that we thought it would be difficult to grow loans, we grew loans.
And I think we've had had good momentum on loan growth which is good news for future earnings.
With that comes a lot of things.
First, when you grow loans, the month you grow them then you get a charge for the reserve, so you seen some impact on that as we grew loans late in the quarter.
We also had a lot of things going on in the quarter in the bank and we'll give Steve a chance to address them.
We had the SNC exam which we talked about in the release, we had a lot of pay off of credit.
When a credit pays off, a loan pays off, you release the reserve and you can see the impact of the payoffs and some upgrades that gave us a credit this year.
The challenge also is spreads have come in on loans, but as the loan balances have grown, we feel pretty good for the quarter.
There is also a lot of items that have impacted the bank this quarter.
Again, the rise in rates in June impacted our SBA loans.
We had about a $2.7 million mark that we think will mostly reverse.
We had from our Canadian loans again the movement, although we hedge a lot of our loans in our finance company in Canada, the ones that are written in the bank are unhedged and that was about a $2 million translation mark there.
So, a lot of numbers again moving in the bank, but I think overall the bank has performed very, very well.
So, with that, that's kind of the overview.
I'll have Jeff give you some of the details.
We'll have Steve address with some of the banks and I know you have a lot of questions this quarter.
So, Jeff.
- SVP, Finance and CFO
Thank you, Paul.
Let me kind of go back to the beginning and just kind of fill in a little bit some things that I had made notes of that Paul mentioned most of them.
But in PCG there are a couple of things that you can't really tell very easily in there.
Average gross headcount was up just a little bit in terms of FAAs, but average gross actually made a little bit of progress in all of our units which is encouraging.
We do disclose margin balances in the release.
One thing that's not evident when you look at that is that we have kind of a companion-type product in security space loans in our bank which have hit an all-time high of $500 million, about $200 million of which were acquired from regions as part of the Morgan Keegan transaction.
So, there has actually been $300 million of growth in that product line as well which is again a similar product to margin but for different purposes, not for trading purposes.
We do look at overall asset mix.
As Paul noted in asset management, there was a slight shift to equities and as there was in our total client base, nothing very meaningful but a slight shift.
Ad it may be people investing some more in equities, it may also be somewhat the devaluation of all things fixed income related such as rate preferred and other things that took a devaluation in the quarter with an interest rate jump.
So, lastly, when you look at pretax income in private client group making a $4 million improvement over the preceding quarter, there are really four things that impacted that.
There was obviously an increase in commissions and the margin earned on those.
There was still this elevated IT effort which sort of offset that which we expect to moderate going forward.
From here, the other -- there was a $2 million benefit in administrative expense.
If you remember, we had a fairly significant riff in early April in technology and that was in our system of accounting, the technology and ops all roll into the private client group segment.
So, that was evident there.
And then there was about $2 million increase in fees from mutual funds really based on increased asset values as we get asset-based fees from the various fund groups.
So, that was sort of the story in private client group.
I think Paul talked in pretty much detail about capital markets.
The only thing I would add is there is a third player in that segment that actually had a pretty good quarter which was our tax credit fund operation which you can see more detail on when you get our queue.
But they actually had a very good quarter relative to last quarter pretax up several million dollars from the preceding quarter, so that also aided capital markets margin for the quarter.
I have some bank notes, but I'll let Steve talk about that in just a second.
A couple of overall comments.
The tax rate was little lower than the previous quarter.
We were recognized some tax credits is quarter that we didn't think we were going to get because there was a program we thought we were shut out of because it was oversubscribed.
But turned out that they had room for us.
It's a Florida school credit program.
So, we ended up did get in that program, so we had to recognize that in the quarter.
The other thing we had in the quarter to a greater degree than usual is a dividend received deduction as we had some big dividends from the private equity investments, particularly Albion in the prior quarter.
A new item this quarter in the release, you can see we added a couple of the holding company capital ratios.
They're still preliminary in terms of the holding company.
We think they will be very close or we wouldn't have put them in there just to give you a feel for what the overall capital strength of the Company is and we will be doing that going forward.
The comp ratio, I would say partly -- largely because of the fixed income dynamics where we have a lot of fixed comp, not enough related to variability, particularly even in the management ranks and retention ranks and some of the high producers, et cetera, where we have guaranteed deals as part of the acquisition are causing a very disproportionate comp ratio there for the current period.
So, we really didn't make any progress even when you adjust for the private equity revenues.
Last quarter we really didn't make much progress.
I'm frequently asked what is really the longer term targets here.
When we look at what we would call a normalized tight environment, without interest rates, just in this environment in terms of right sizing all the businesses, et cetera, which we're substantially through now.
We still have a little bit more to go, I'll talk about that in a second.
We are in the process now of putting together or starting to put together our 2014 budgets, but when we look at the target margins for business like we talked about that analyst day recently and we rolled them all together.
And looked at the comp ratios in each of those businesses when they achieve those targets, et cetera.
If you look at it overall, we still do think there is 15% pretax margin on a total firm basis achievable which by math equates to about a 12% ROE in this environment without the interest rate help.
And if you look at the comp ratio in that environment, it's about 66.5%.
So, I guess we would call those our targets for next year.
Obviously, there is a lot of market assumptions and other things that would come into play to achieve all of that, but that is kind of still our 2014 targets.
With respect to the integration synergies, we've actually now achieved not only all but even a little more than all than what we thought we would.
The problem isn't the lack of recognizing synergies, it's that right now or this quarter at least, one of the core underlining business we purchased just hasn't been performing given the market environment and fixed income.
So, that's really been the issue there.
We still have a little bit more synergy to come, some real estate consolidations and things like that, but we're substantially through that process.
We probably still will have a little bit more in terms of one-time charges here in the September quarter.
We had a little bit more of that in the June quarter that we thought we would because we got a little more aggressive, particularly in the capital markets areas than we had originally planned given the environment.
So, that number where I said would probably be $5 million to $10 million in the June quarter actually ended up being $13 million in the June quarter.
And now I will say again it will probably be $2 million in the September quarter as well.
So, with that, let Steve talk briefly about the bank and I want to leave time for questions.
- President and CEO, Raymond James Bank
Sure.
Thanks, Jeff.
Good morning, everybody.
Just to elaborate a little bit on some of the comments that Paul and Jeff have already provided.
We were able to grow loans nominally in the quarter across all categories.
Our securities-based living business, as Paul mentioned and Jeff mentioned, is currently over $500 million now.
Our corporate lending business grew as of June compared to March by $68 million.
Our mortgage -- residential mortgage business grew and our SBA loans grew also.
The provision expense associated with that loan growth was relatively nominal because some of these categories are very low risk items that don't require a lot of reserves.
We talked a little bit about the margin.
We had an 8 basis point compression in margin in the June quarter.
We've seen that trend continue but the margin compression is starting to slow a little bit relative to the prior few quarters.
We do expect continued pressure on margins, but we are starting to see some of that subside in some of our businesses.
A little more information on our provision expense.
As Paul mentioned and you saw in the release, we had about a $2 million credit for the quarter.
And despite the impact of the shared national credit exam, there were nine loans that were downgraded as part of the exam and two loans that were upgraded as part of the exam.
The net impact of that was a $5.6 million provision expense.
Despite that and the nominal loan growth that I just mentioned, we had some significant loans that had large reserves against them.
We had a par pay off of a loan that was on non-accrual but had a lot of reserves against it.
We also had another loan that was upgraded to accrual status in the quarter that had a lot of reserves against it as well.
So, the net effect of some loans that had a lot of reserves against them we had some improvements, both payoffs and upgrades.
So, netting all that out led to the $2 million credit in provision expense for the quarter.
Paul mentioned some of the larger figures in our other income numbers for the quarter.
This is the first time, at least in recent history, that are other income was actually a negative number.
But Paul kind of elaborated on some of that already, the foreign exchange for currency and the mark on the SBA loans that were impacted by the rising rates.
- CEO
I'll just add one more thing here before we open it up and that's in the proprietary capital section.
It was still a -- once again it was a pretty significant contributor to the results.
This June quarter every year is the quarter we get audited results on all of the external investments that we're in as well as some of the ones that we sponsor.
And when we -- there were a whole host of relatively small $1 million to $2 million-type marks, some of which we don't own 100% of, of course, which is why you see the increase in non-controlling interest related to that.
But this was a very active quarter.
Didn't match the Albion results of last quarter, but it was certainly still a significant contributor again to the results including some of the private equity holdings that we acquired in the Morgan Keegan transaction which came to resolution.
So, we were happy to have that little added bonus for the quarter.
- President and CEO, Raymond James Bank
One last comment and I will open for questions.
The other thing you need to recognizes that we continue to still operate still pretty heavy operational support through the integration that our headcount pre Morgan Keegan acquisition for Raymond James and Morgan Keegan is actually higher than where we were when we both started.
And we're going to keep that support level elevated as our new advisors are getting used to new systems.
Our support staff from Morgan Keegan are very good understanding security transactions.
Our systems are also new to them.
And there is a learning curve and through that learning curve we'll keep support levels high.
Again, our focus has been on retention.
And you know over time we'll be able to address that, but that has been also an area that will -- that has kept some of our costs elevated through this year.
- CEO
That's a much more involved process I think than people realize.
It's not just looking up client accounts on your PC.
It has a lot to do with a lot of financial planning software, a lot of other instruments and programs that we have here at the firm that is a lot longer learning curve than just accounting query.
- SVP, Finance and CFO
And so I think as our hope and as our early results have shown is that those advisors are moving assets to our asset management platform.
As they learn our software, we believe it will help productivity climb but, again, that's not overnight.
As we said during the acquisition-- pre-acquisition, that's a one- to two-year kind of timeframe.
We're pleased with the result and we have more to go and we're focused on it.
So, with that, we'll go ahead and open up the questions.
Jodi.
Operator
(Operator Instructions) Hugh Miller from Sidoti.
- Analyst
Good morning.
I guess I'll start with a couple questions for Steve at the commercial bank.
Obviously, it seems like it was a little bit of a change with the loan portfolio growth in quarter.
I think in the press release you guys still mentioned that competition is intense, but we've been hearing from several commercial banks that a lot of that cutthroat loan pricing competition has kind of subsided towards the latter part of the quarter with a shift in the yield curve.
Can you just give us what you're seeing there and your outlook for now going forward for now going forward for potential for growth in the loan portfolio?
- President and CEO, Raymond James Bank
Yes, Hugh.
That's a good point.
I would say in early May when rates started ticking up, that really lead to some of the institutional investors with other options and we saw some improvement in the loan market.
We've actually seen some push back from the banks against companies on some of the repricings that are going on.
Some of that's still going on, on the better credits, but once again as I mentioned we're seeing that trend at least subside for the most part at this point.
It's still a lot of competition, a lot of money chasing too few deals, but I would say that we have seen some improvement over the last two to three months in that regard.
- Analyst
Okay.
And is your outlook now for the potential for continued growth?
It looks like just in the month of June the portfolio expanded by 3%.
Are you guys anticipating that you'll continue to see some measure of growth in the loan portfolio?
- President and CEO, Raymond James Bank
I think so.
I think it will be nominal though.
We're growing assets in kind of in all categories.
Our Mortgage business has gotten to be quite a bit bigger is being impacted.
Our pipeline over the last 60 days with rates ticking up is a little bit lower.
We've seen a big shift to purchase market versus refinances, obviously, given the more confidence in the market place, in the real estate market.
Most folks that have refinanced have already done so or they could refinance they have done so.
On the corporate side, obviously that's a bigger business.
We're now a little over $6.5 billion in loan outstandings.
That's obviously our biggest business.
Continued challenges but I do think we can nominally grow over the next few quarters given the current market conditions.
- Analyst
Okay.
And is there a different. --
- SVP, Finance and CFO
I'm sorry.
That may come at the -- I think there will still be pressure on margin.
We will -- we have been guiding people down to the 325, 330 type level.
We obviously aren't there yet, but the older ones that are refinancing or paying off or maturing, even with this backup in pricing that we've seen lately, we're still not back to the levels of the current portfolio.
So, we're still going to see some compression, I think in the net interest margin.
But hopefully some loan growth so we can keep net interest earnings about flat.
- Analyst
Okay.
Interesting commentary there.
Can you also then on the credit side, I know that you took the provision reversal, but can you talk about the uptick that we saw in the criticized loans quarter over quarter, or was that just all from those nine loans that you mentioned from the SNC exam that were downgraded or what's the --?
- CEO
Not exclusively but that was the vast majority.
Once again, the criticize loans also include even more harshly graded loans, loans that are by regulatory definition classified and worse.
Those have even higher reserves.
We actually had a reduction in our worst rated, our higher rated credits for the quarter which contributed significantly to the credit for the quarter, the provision expense line, so -- but the bulk of that increase in criticized loans was attributable to the downgrades in the shared national credit exam.
- Analyst
Okay.
Thanks for the color there.
I guess in the retail segment, it seems like we've finally had a month of year-over-year growth in equity trading volumes.
And I was wondering, I know you guys, obviously, have a large exposure to fee-based businesses, but for some of the transactional-based TCG accounts, did you guys see any improvements in the month of June for commission levels there?
- CEO
I wouldn't say noticeable.
I would say it was noticeable for the month.
We typically aren't the leading indicator on those.
- Analyst
Sure.
Sure.
I understand that.
Last question for me was, in the investor day you guys kind of commented, I believe that with the period of low volatility that we were in, it was kind of weighing on some of the negative convexity products that you have within the fixed income capital markets group and that a shift in rates could be a benefit for that segment.
How is that playing out now with what we're seeing in your expectations there?
- CEO
I think with the uncertainty we don't expect any short-term pickup in the fixed income business.
We think, hopefully, the trading profit thing was unusual, but in terms of commission levels, I don't -- we don't expect a short-term improvement.
Our -- a big part of our fixed income franchise is the financial institution franchise.
And we don't see a big uplift in the short term yet.
- SVP, Finance and CFO
Longer term, though, I think that the steepening of the yield curve will definitely help the Commission business fixed income when people believe rates are where they are going to be for the time being, and willing to put some ladders in place and other things.
- Analyst
Okay.
Thank you very much.
Operator
Your next question comes from Alex Blostein from Goldman Sachs.
- Analyst
So, I appreciate your extra color on the expenses, and it sounds like you guys continue to run with still fairly elevated level of support.
I understand it might be difficult but anyway [cut] two sizes for us and I know you said that it's still going to be probably a few quarters until you start to see some of that support level out, but I think it would just be helpful to understand the magnitude of a drag this could still create on the earnings stream?
- CEO
I think the technology is certainly running much higher.
I think you will see an improvement in that over the next few quarters.
In terms of the operational support, it will remain elevated for a period of time yet.
And what will be the indicator for us is just call volume in the call centers.
As long as people have issues and are learning the systems, we'll continue to stay elevated.
As that comes down -- and we're also going through a number of technology projects to streamline our interfaces between the branch and home office.
As those come online I think we'll be able to get those more in line.
I think those will stay higher through this coming year on the operational support side where I think you'll see the technology costs come down some in the next quarter -- the next couple of quarters.
- Analyst
Okay.
That's helpful.
And then when we look at the PCG business and with the Morgan Keegan transaction, obviously, things have moved around a little bit for your guys relative to the sensitivity you get to the equity market versus (inaudible) market.
So, going forward as you think about the growth in the Business, can you help us understand I guess how sensitive the revenue stream there is to potential further declines in fixed income markets?
I know you've in the past provided kind of ballpark numbers of how much the revenue stream there is fee-based versus more transaction-based, but any way to queue that out to get a sense specifically for the fixed income performance?
- CEO
That's kind of a hard one because they move in different ways.
Movements from fixed income into equities helps our PCG business if there's good equity markets.
I think actually the interest rate and the yield curve in rates are actually going to impact our fixed income business itself.
So, it depends where they move and actually how volatile they are.
So, it's kind of hard.
If you look at our overall business, about 45% of it is now exposed to the equity markets and the rest are exposed to other interest rate or trading or the bank, but they move in different pieces.
Obviously, the big one is short-term interest rates for us which haven't moved.
The longer-terms rates moving up as long as they're not too volatile or positive I think for some of our other businesses.
If they are lumpy, we have exposure in the fixed income fund.
- SVP, Finance and CFO
That's a point we're trying to make to people.
People say, well, look at these results and say why aren't you doing better, it's been a great market.
Well, it has been a good Dow, but it's not been an obviously good fixed income market.
It's not been a very good bank lending market.
It's been a very competitive bank lending market, so the equity market isn't the only arena we play in.
We used to be much more exposed and correlated to the equity markets than we are now.
We are much more diversified.
So, we're really -- one of our three major markets has performed well this past couple quarters only.
- Analyst
Got it.
And then the last one for me.
Steve, maybe you can comment a little more on the security-based lending.
Sounds like it could be a pretty substantial opportunity for you guys.
Any way we could have to measure that, the loans relative to the decline asset base because it does seem like the loan growth dynamic remains challenging for market?
This is a little bit of a sort of idiosyncratic lever you could pull, and then maybe you could comment on the yields you guys are getting on those loans?
- President and CEO, Raymond James Bank
Yes, Alex, it is a growth initiative for us.
This is very much a joint effort with the bank and private client group, not only to grow loans but it is a way to grow assets as well as we are transitioning financial advisor from other institutions.
Almost all of them have a client that has loans at other institutions and we transition them over.
Big focus for us is to continue the marketing and support of that business.
We are adding something in the neighborhood of $25 million to $30 million a month in loan outstandings from that team and the margin right now in that business is right at 300 basis points.
So, it actually is kind of a negative relative to our overall margin, but it's a very low risk business which we've got a nice system and technology and process in place to make sure that the collateral monitoring relative to the loan position is intact.
So, when I see that continue to grow and we want to grow margin balances, as well.
So --
- SVP, Finance and CFO
The big issue on the SBL loans is the assets that come over with the loans are multiples of the loan amounts.
So, it's kind of a strategic initiative for us, as well as we think a low risk lending because of the security -- securitization of the loans.
- Analyst
Yes.
Makes sense.
Thanks guys.
Operator
Joel Jeffrey from KBW.
- Analyst
Jeff, I apologize for missing it, but could you repeat sort of the outlook you gave for the 2014 pretax margins as well as the comp ratio?
- SVP, Finance and CFO
It's the same ones that we presented analyst day by business, 9% at private client group, 15% capital markets, 30% in asset management, and the bank with a net interest, it's really more of a net interest margin than it is a pretax margin at the bank that's relevant.
But when you roll those businesses together, if that's what our 2014 budget shows, which we haven't put together yet.
That would equate to something about a 15% consolidated pretax margin for the Company which equates to about a 12% ROE.
Encompassed in that if again all the forecasts prove to be correct, this is where the forward-looking disclaimer comes into play.
The comp ratio would be something around 66.5%.
- President and CEO, Raymond James Bank
And I think as Jeff talked about targets, I think those are things we're shooting for and transition to.
It does not happen on October 1. So, they don't move that quickly.
- Analyst
Okay.
Great.
And then in terms of -- you made some comments that the trading losses sort of had started to reverse themselves and kind of go back to the March quarter.
What are sort of the prospects and potentially the timing for these profits to return to the levels we saw post Morgan Keegan deal?
- CEO
With interest rate cycles, that could be a while.
When we were making $5 million to $6 million a month I think at the Morgan Keegan time of the acquisition of the fixed income group and enjoyed for a couple of quarters you're seeing pre this quarter about half that level.
And the commission levels just because market commission level is down 20%.
I think that that's the return.
Until there is some big movement in the market, either in trading activity, which will drive the commissions, which I think is going to be some change in the yield curve or movements in rate or volatility.
You're not going to see -- that's why I'm saying short term if you look for the next quarter, I would expect it to move back.
You're going to have to see some fundamental changes in the market for that activity to go up, which means rates are starting to move, volatility, directional volatility, volatility.
But in a direction over time.
I think is when you'll see that business pick back up.
So, I would say for the short term we don't expect that.
Longer term, as rates move, I think that business will start getting more active.
- Analyst
Okay.
Great.
Then just lastly for me, in terms of the bank I appreciate the comments that you're starting to see some slowing of margin compression and you're starting to see some loan growth.
But I think prior to that you mentioned that you felt you guys could offset any flat growth in the bank with improved credit quality.
Is there any prospect that we can see barring some kind of significant increase in the size of loan portfolio that the bank earnings could pick up in the near term?
- CEO
There's no big macro thing that would say you're going to see a big pickup.
What we said before is that we had capacity that we would look at better credits, but better credits have lower margins.
So, -- but we wouldn't go down, that we wouldn't go after higher yields, lesser credit lines and that's still our strategy.
So, I don't see any impetus to say that there is something between loan growth.
There's spreads reversing in the short-term that would show any growth in the short-term.
- President and CEO, Raymond James Bank
That's a business that doesn't really have a lot of room for positive -- big positive surprises.
A negative provision expense is about as exciting as it's going to get.
You can make a currency blip here and there but, again, we don't have that much in Canadian loans outstanding anymore on the bank's books.
So, there's not a lot of room for surprises other than the credit area, which, hopefully we can continue to control well.
- CEO
Or if they move the capital ratios way up on the big banks, we might have a bigger opportunity.
So, but I think short term we don't see a lot of opportunity there.
- Analyst
Okay.
Appreciate you taking my questions.
Operator
Chris Allen from Evercore.
- Analyst
In the release you mentioned the headcount reduction in capital markets the end of June.
I'm wondering if you can provide some color on that, in terms of what areas that was in and just the magnitude of the severance charge related to that?
- CEO
I don't want to really talk too much about headcount there, but it was both in fixed income and equity capital markets where we've looked at reducing both because of the integration.
During the integration we ran heavy hoping the market would allow us to retain more people, and I think in both those businesses that the market wasn't significantly better than when we acquired the firm, so we've just been more aggressive on getting those reductions in.
So, I don't know what --
- SVP, Finance and CFO
All in capital markets at the end of June.
- Analyst
Got it.
Got it.
And then earlier you talked about maintaining extra levels of support until the improvement in terms of the calls into the tech center and things like that from your FAs.
Have you seen progress on that front since the integration was closed?
Can you give us an update there in terms of how it's progressed maybe on a monthly basis broadly speaking?
And given the current pace, what the timeframe may look on that?
- CEO
I would say first it's been very good.
The first was the conversion which scared us to death, and it would scare anyone to death even if you think it's going well.
But the day after the conversion everything was -- every account was in balance which, amazed us.
Call centers were very elevated even though we had people in the branches at that point, we don't now, actually helping them.
Those call volumes came down in a matter of days, which, we are actually surprised.
But a lot of those were basic, how do I open this, how do I do that.
We're into more the sophisticated using as how do I do this planning thing, how do I get this -- how do I generate this kind of report, how do I -- I've got this issue and account, who do I talk to?
People that have been here know all that and they know who to go to and talk to.
The people who are new at Morgan Keegan, the people that used to call in Memphis, the systems are new to them too, so the questions are fairly complex and need to get help.
That is working its way through, but it's going to take some time.
So, we'll have phenomenal cost reductions even in this quarter as we've looked at kind of some structural changes in the operational support, but my guess is that's going to stay elevated through the first half of next year as we just want to make sure the support levels are there, and we're going to be slow to reduce support unless those levels are down.
The questions that we get now are pretty sophisticated and we just got to get people used to the system and get our new support people, who are very good used to our systems too.
- Analyst
Got it.
And then just one question on the P&L.
The other expense line, and I'm not sure if you mentioned this, but last quarter it had a I think it was a $7 million goodwill impairment.
It still remained fairly early elevated this quarter.
I'm just wondering, although down a little bit sequentially, is there any impairments or anything like that that is keeping that up right now?
- SVP, Finance and CFO
This year was predominantly legal.
We had some favorable legal activities, settlements, et cetera, last quarter on client matters.
This quarter we had some additional provisions.
Just like in the bank, we try to get ahead of those pretty much in terms of reserving for cases when complaints are filed and actual arbitrations are filed.
So, that had to do predominantly with legal activity.
- CEO
But the magnitude of it was more of a credit last quarter and an addition this quarter, not any massive additions to reserve.
You're just seeing the swing mystique.
- Analyst
Got it.
Thanks, guys.
Operator
Your next question comes from the line of Douglas Sipkin from Susquehanna.
- Analyst
Just wanted to follow up with a couple of things.
First off, I don't know if you guys touched on it, but any sort of improving signs in the advisory market, the M&A market?
I know that's become a little bit of a bigger piece of the capital markets framework for you guys.
I know it's been slow post the end of last year, so any update there?
- CEO
Yes, I'd say it's improving.
There are two factors to that certainly.
As we've all talked about in the industry, the acceleration in December slowed backlog and March was -- the March quarter was slow by everyone's standard.
I think that we're seeing improving activity, and I think you're seeing that in competitor's reports too, that backlog looks good.
There seems to be more interest.
I think most of us were surprised there wasn't more M&A activity actually given rates and market outlooks and growth initiatives.
So, as we look at -- as we kind of look forward to the next quarter, we think that the activity that we received this quarter we should continue.
Again, it gets lumpy, but I think the longer-term outlook should be positive for M&A.
- Analyst
Great.
And then just a follow-up and without putting words in your guys' mouth, at least from my vantage point, it seems like we're trying to find some synergies in costs, and it continues to sort of be a grinding effort.
And I'm thinking this has to do with the fact that maybe just fixed income has just gotten so much tougher for you guys, given what's gone on and given the exposure Morgan Keegan has.
Is it fair to assume that if fixed income sort of stays at this level, the ability for you guys to realize significant synergies probably needs to be tapered a little bit, or is it really more of just sort of grinding along with the extra support and things of that magnitude?
Because I know we're still sort of trying to wait and figure out when we expect some more synergy to show up, but obviously the fixed income (inaudible) has changed a bit for you guys in the last quarter or two.
- CEO
Let me separate the pieces.
First, I want to start we were very pleased with the Fixed Income business and the people we have and the integration of the two pieces.
It's a very, very good business.
Now, having said that, the market's tough, right?
So, it's kind of hard to beat the market.
And certainly I think this quarter was the result of a tough market and hopefully again, you're in the business of risk management here, so you have to say on top of it, but trading losses hopefully are unusual for us.
So, I think you'll see some bounce back on that piece, but it's still going to be a tough market.
So, given when we did the acquisition, that segment of the market will be down.
If you look at overall synergies, whether it's between fixed income and capital markets or PCG, these synergies that we've recognized in PCG, we've actually taken more cost out than we had told you guys to pre-acquisition at the announcement time, and we're very pleased with the synergies in terms of private client group and asset management, the integration of the businesses.
The productivity gains we think we can get in private client group, but those take time.
They're not a light switch.
It's more of a dial.
You have to get people on board, understanding, working together, trusting, and I think we'll continue to make those kind of gains.
But that's separate from the fixed income market.
Just as we had a bad equity market we could be operating perfectly, and everybody would be working together, and you could be synergistic, but it's hard to beat the markets.
So, I think you got to separate the synergies, the integration, which I think has gone exceptionally well and will continue to make progress on, and the performance of fixed income markets, which are just hard right now.
- President and CEO, Raymond James Bank
But to your point, if you step back and look at it, from acquisition to now, I'd say private client group has actually outperformed our expectations somewhat, not dramatically but slightly, but fixed income has significantly under performed our model that we based the acquisition on.
And unless conditions do improve in the fixed income markets, then it will be difficult for us to show any significant accretion from the acquisition for sure.
- CEO
And you have to look and, again, if you look at the initial run rate, and this isn't equal because we've had the retention.
You would say fixed income was outperforming, when the market turned down it's been under performing.
And it's going to under perform until market conditions improve.
But the people we've got, and the franchise we've got and the systems we've got we are very pleased with.
We just wish the market conditions were a little will better.
- Analyst
Great.
So, when we think about that, what are you guys looking for to see stabilization in the markets?
Do we need stabilization in interest rates?
Obviously, they've moved some.
I can't imagine that the news around Detroit does add such great things for munies in general?
I'm just trying to think what type of environment is more suitable.
I mean, do we need just a really low rate environment or what?
- CEO
No.
I think actually a rising rate environment that is predictable and people believe there is a predictable direction would be very good for that business.
- SVP, Finance and CFO
That is not credit driven.
- CEO
Yes.
So, I think an upwardly rising predictable rate with people thinking it's going to move will cause people both in the public finance business to go ahead and issue where they're holding right now and looking at spreads of Treasuries versus tax freeze and not knowing where they're going causes people to pause.
Once there's a direction, people will know how to invest and will issue.
I think right now it's just unpredictable and people are waiting, knowing rates are going to go up.
They're not going to -- at some point aren't going to make bets until they feel like they have a vision or can see where things are headed.
The business isn't off, it's just slower.
- Analyst
Right.
Understood.
Okay.
Great.
Thank you for taking my questions, guys.
Operator
Your next question comes the line of Chris Harris from Wells Fargo.
- Analyst
I dialed in late, so I apologize if this has already been asked.
Just one question really for me.
Just wondering if you guys would ever consider doing stock buybacks, or whether you feel like you've got the capital there to be able to do something like that?
- SVP, Finance and CFO
As I tell people first, at these prices we don't think it's a good investment.
We hope to be able to utilize our capital and I always say people that are betting on a balance sheet restructuring for us for accretion, we're probably not a good bet.
We're conservative.
We like a lot of capital.
And, again, at today's prices we don't think that's a good use of capital.
- Analyst
Okay.
Fair enough.
Thanks, guys.
Operator
(Operator Instructions) William Katz from Citi.
- Analyst
Good morning, this is actually [Neil] filling in for Bill this morning.
I just wanted to come back one more time to the comp ratio.
I know you went into some detail.
The 66.5% that you mentioned, would you see that as achievable over the full year?
Or would you see that more back-end loaded?
Thanks.
- SVP, Finance and CFO
I think we would hope to be there by the end of '14 as a run rate.
But that's what would be embedded if we achieved all those targets that I mentioned earlier.
I mean, that's a pretty big change from where we are, and that's a pretty big number.
And it encompasses revenue growth, not just expense reduction.
So, it would definitely take a little period of time to get there.
- Analyst
Got it.
And then one last one for me.
On the Capital Markets business you had mentioned the 15% pretax margin.
That is a bit of a step up from the run rates last two quarters, and I sort of recognize those are depressed levels, but what is it going to take to really get that number to that 15% level?
Thanks.
- CEO
It's going to take a good capital market and a good fixed income market.
Fixed income was running almost 20% for a while and it's down in half and capital -- equity parts up, so it's -- we just need some stabilized markets.
I think we've taken the appropriate cost reduction and if we get some reasonable markets, we can hit that.
But we need some market help.
Between the equity side and fixed income side, both those sides have been choppy for a while now.
- SVP, Finance and CFO
Certainly it would take a recovery in the fixed income markets for sure and continuation or improvement of equity capital markets activity from where it is today, as well.
They have both been at that level in the past, it's just a matter of getting back to those levels, and that takes the market environment to some extent.
- CEO
And then again we've taken the cost actions now too, they have a better chance of hitting those.
But we need some help.
We are going to keep our franchise intact.
If the market is low for a while and we have good people, we're going to keep the people and gut through it.
It's been the way we've operated for a long time and we will continue to do that.
We have good people.
We've made the cuts we think that are necessary.
And then we're going to need some market help.
Operator
(Operator Instructions)
- CEO
Great.
It sounds like we've gotten through the questions today.
I know again sometimes the number is a little challenging because of the integration.
As we told you back through the integration, our goal was to get most of the cost-cutting and the adjustments out through the end of this fiscal year.
I think we're on track to do that in June.
I think we were a little quicker than we said we had been and we still have a little bit to do.
But we're on our way and hopefully through this next quarter we can get most of the cost adjustments out and positioning.
The good news is the integration has gone well.
We like the positioning of the franchise and we have to continue both to grow the Business and focus on the cost side as we would in any normal environment.
So, we appreciate you attending this morning and look forward to talking to you soon.
Thank you, Jodi.
Operator
Thank you, Sir.
That concludes today's conference call.
You may now disconnect.