Profile: Raymond James Financial

November 18, 2021 | In this Premium Service edition of The Institutional Risk Analyst, we look at a small but highly profitable bank holding company (BHC), Raymond James Financial (RJF), the 47th largest banking group in the US and a comp for larger specialty BHCs such as Charles Schwab (SCHW). RJF is one of those quiet high-performer banks in the investment world that few understand but many own in LT portfolio, resulting in a 2.6x multiple to book value.

The FL-based RJF just announced the purchase of Pittsburgh, Pennsylvania-based TriState Capital Holdings, Inc. (TSC), a $12 billion asset banking group with an asset management business. Upon the close, the TriState combination will make RJF a $70 billion institution with more than $2 trillion in client assets and 8,500 financial advisors. Of note, TSC will keep its name and continue to operate as an independently chartered bank subsidiary of RJF.

Source: Google Finance

The fact that RJF has out-performed larger institutions in the equity markets is no surprise. The BHC’s financial performance is quite strong, due largely to the non-interest income generated by the investment business and its large broker-dealer unit, Raymond James Associates. If we compare the performance of RJF with larger institutions and Peer Group 1, the firm’s performance immediately stands out.

Of note, RJF saw a significant increase in loan losses at the end of 2020 due to the adoption of CECL and the write-down of criticized loans held inside the bank. The explosion of COVID at the start of 2020 pushed down valuations for RJF and other financials, but the CECL adoption nine months later did not really affect stock prices for RJF or the Peer 1 large bank group. RJF had the capital and income to increase loss provisions as required by CECL, write down more than $100 million of doubtful loans and keep on going, and reported record revenues in that quarter.

Source: FFIEC

After credit losses, the next question to ask is how does RJF do in terms of pricing on the loans that they originate? Half of RJF’s consolidated balance sheet is actually loans, evenly divided between real estate, C&I and consumer facing exposures. The BHC’s loan pricing is competitive with SCHW and Morgan Stanley (MS).

Source: FFIEC

Note that while RJF is not able to compete with the likes of JPMorgan (JPM) in terms of loan pricing, it compares well with the other bank specialty investment shops such as SCHW and MS. And again, while lending is important to RJF based upon assets, the total income of the BHC is weighted 16:1 in favor of non-interest revenue vs net interest income. Even though the RJF business is primarily focused toward investment products, net loans and leases are almost half of total assets of the BHC. RJF's bank unit has $30 billion in core deposits and a cost of funds that compares with the largest banks in Peer Group 1, as shown below.

Source: FFIEC

As we’ve noted previously, SCHW with nearly $500 billion in core deposits has among the lowest cost of funds in the industry, but dollar for dollar of assets in the bank, RJF has more investment assets than its larger rival. In fact, the investment business at RJF is so large as a percentage of the total that the FFIEC puts the firm in Peer Group 9, which is designated for “atypical” BHCs. This is also why RJF has a fiscal year ending in September, whereas most banks run on the calendar year by regulation. We’ve used Peer Group 1 for financial comparisons.

Only when you look at RJF in terms of consolidated income vs average assets do you begin to appreciate the earnings power of the investment business and how this could support the growth of the bank. At present, RJF only retains half of the $66 billion of sweep deposits generated by its investment business and places the other $25 billion with other depositories. There is potential for RJF to grow the asset side of the bank and thereby increase the internal earnings of the group. As RJF grows the bank, it should be able to push its efficiency ratio down from the nosebleed 80% today to something close to the 60% reported by SCHW.

Source: FFIEC

In the quarter ended September 30, 2021, RJF reported $2.7 billion in net revenues and took $429 million down to the bottom line. This was a 72% growth rate year-over-year in terms of the bottom line, one reason why RJF trades in the same company as SCHW and First Republic Bank (FRC), which trades over 3x book value. Like most financials, RJF is fully priced but has excellent potential for growth in the future, both on the investment side and the bank.

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