Business Strategy & Outlook
Raymond James’ revenue and earnings will hold up better over the near to medium term compared with more pure-play investment banks, thanks to a combination of acquisitions, interest rates, and a relatively large wealth-management business. Over 80% of Raymond James’ net revenue comes from relatively more stable wealth management, asset management, and traditional banking, with usually less than 20% coming from capital markets. 2021 capital markets revenue was abnormally high and will likely continue to reset lower over the next year or so. Given Raymond James’ relatively lower proportion of capital markets revenue, its company wide revenue should hold up better than many other firms’. Raymond James’ bank will also receive a boost from rising interest rates. The company as a whole will benefit from multiple acquisitions, such as Charles Stanley, TriState Capital, and SumRidge Partners. The company’s banking segment experienced quite a bit of pressure over the previous two years, but the future looks bright. Net interest margins compressed by more than 100 basis points to less than 2% in 2021, as benchmark interest rates fell and much of the bank’s assets were variable rate. Additionally, the allowance for loan losses has increased to about 1.2% of loans in early 2022 from 1% in 2019. The company’s banking operations in recent years contributed around 40% of operating income, but that has fallen to less than 20% in some recent quarters.
Expectations are that the U.S. Federal Reserve will increase the federal-funds rate to over 3% by the end of 2022, which will boost the yield on Raymond James’ variable-rate loans. Additionally, the acquisition of TriState Capital has increased the company’s banking operations by about 30%. Loan-loss charge-offs may tick up over the next year or two, but the company’s existing allowance for loan losses should be sufficient, so Raymond James’ banking segment will regain its place as a material driver of earnings.
Financial Strengths
Raymond James is in fine financial health. At the end of its fiscal 2021, the company had $2 billion of senior notes payable compared with $8.3 billion of equity. It doesn’t have any senior notes coming due until 2024. The company has total leverage of about 7.5 times, representing a combination of the bank, which is leveraged 14 times, and the brokerage operation. These leverage ratios are reasonable, given the profile of the company. Raymond James also has quite a bit of cash on its balance sheet. Typically around $500 million is housed at the parent company with upward of another $1 billion of parent company cash that is housed in Raymond James’ own bank or lent to its other businesses.
Bulls Say
- Additional acquisitions can provide some lift to earnings if the macro environment falters.
- The company may have a greater opportunity to recruit advisors as it fills holes in its geographic footprint and offers both employee and independent advisor affiliation options. Recent advisor headcount growth and the Alex. Brown brand may portend superior advisor recruitment.
- Net interest income and earnings will meaningfully rise with interest rates.
Company Description
Raymond James Financial is a financial holding company whose major operations include wealth management, investment banking, asset management, and commercial banking. The company has more than 14,000 employees and supports more than 5,000 independent contractor financial advisors across the United States, Canada, and the United Kingdom. Approximately 90% of the company’s revenue is from the U.S. and 70% is from the company’s wealth-management segment.
(Source: Morningstar)
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