Raymond James' Steady Wealth Management Business Will Continue to Power Earnings

Director

Michael Wong

Raymond James’s results in recent years outperformed many of its peers, as it has a relatively large and steady wealth management business, made multiple acquisitions in recent years, and booked higher net interest income as the U.S. federal funds rate rose. While we continue to expect fairly steady growth in the company’s revenue powered by its wealth management business, its revenue and earnings growth could underperform peers over the next several years. If we assume a soft landing to the U.S. economy, investment banks will experience a large bounce back in profits from depressed 2023 levels. Raymond James has less exposure to a rebound in investment banking activity with its capital markets business historically being less than 20% of revenue.

Raymond James’s banking segment is leveraged to short-term interest rates and benefitted from the high U.S. federal funds rate. Net interest income in fiscal 2023 was nearly $2.4 billion compared with less than $700 million in 2021 and $1.2 billion in 2022. It’s widely anticipated that the U.S. Federal Reserve will be decreasing interest rates over the next several years as inflation wanes and to prevent a recession. We forecast net interest income remaining near current levels for the foreseeable future, as higher client cash and banking deposit balances are offset by lower interest rates.

Loan-loss charge-offs may tick up over the next year or two, but the company's existing allowance for loan losses and capital should be sufficient. At the end of fiscal 2023, Raymond James had about $44 billion of loans and about a $450 million allowance for credit losses. Of the total loans, $7.2 billion were commercial real estate loans and $10.4 billion were commercial & industrial loans. The company ended fiscal 2023 with $10.2 billion of shareholders’ equity, which is adequate to cover potential loan loss exposures.

Business Strategy & Outlook

Wealth management moats are a result of switching costs, with some contribution from intangible assets. A typical client stays with their financial advisor for 10 years or more. Wealth management is about trust, and clients are often attracted to the trusted brand of a financial institution and form attachments with their financial advisor. While there may be financial advisors that choose to go to another wealth management firm or start their own independent practice, many stay with their current firm, as there are operational difficulties setting up or learning a new wealth management technology system and significant uncertainties regarding how many of their clients would move with them if they switched firms.

Investment banking moats are primarily built on intangibles. Intangibles for an investment bank are in the strength of its reputation and relationships. For capital-raising, merger advisory, and restructuring advisory, companies work with investment banks that have a history of successful pricing and execution of deals in their industry and bankers with whom they have a trusted relationship. A benchmark of investment banking reputation is high placement in investment banking league tables.

We don't currently assess Raymond James Financial as having an economic moat. Many of the company's businesses are based on human capital, with intense competition for talent. Even given that the company's compensation ratio is affected by the relatively large proportion of independent contractors in its wealth management business, its compensation ratios in the past 10 years have been in the high 60s, the high end for investment banks. The company has a fairly profitable asset-management business, but it is less than 10% of total revenue. As the company continues to grow, we believe it may eventually attain enough size to develop an intangibles-derived narrow moat in the investment banking segment or a switching cost advantage in its wealth-management business.

None

Economic Moat

Raymond James

Raymond James Financial, Inc. is an investment holding company, which engages in the provision of financial and investment services. It operates through the following segments: Private Client Group, Capital Markets, Asset Management, Bank, and Other. The Private Client Group segment deals with financial planning and securities transaction services. The Capital Markets segment focuses on institutional sales, securities trading, equity research, and investment banking activities. The Asset Management segment offers investment advisory to individual and institutional portfolios. The Bank segment includes corporate loans, mortgages and loan syndications. The Other segment consists of principal capital and private equity operations. The company was founded by Robert A. James in 1962 and is headquartered in St. Petersburg, FL.

Earnings data Q4 2020

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Raymond James Financial, Inc. is an investment holding company, which engages in the provision of financial and investment services. Its services include investment management, merger and acquisition and advisory, the underwriting, distribution, trading and brokerage of equity and debt securities, sale of mutual funds, corporate and retail banking, and trust services. It operates through the following segments: Private Client Group, Capital Markets, Asset Management, Bank, and Other. The Private Client Group segment provides financial planning, investment advisory, and securities transaction services to clients through financial advisors. The Capital Markets segment focuses on investment banking, institutional sales, securities trading, equity research and the syndication, and management of investments in low-income housing funds and funds of a similar nature. The Asset Management segment is involved in asset management, portfolio management, and related administrative services to retail and institutional clients. The Bank segment refers to the results of banking operations. The Other segment includes private equity investments, which predominantly consist of investments in third-party funds. The company was founded by Robert A. James in 1962 and is headquartered in St. Petersburg, FL.

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