Raymond James Financial (RJF)

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Description

Raymond James Financial (RJF) manages money for both wealthy individuals and assists middle-market companies in raising money. ^[1]

In 2004, the Private Client Group switched from a commission based model, one where the client pays per trade, to a fee based structure, one where the client pays a fee as a percentage of assets under management. As a result, recurring revenue has steadily increased from 40% of total gross revenue to 60% in 2007. This gives the company a more stable revenue stream because the company makes money even if clients do not trade.

In Q1 2008, RJF's investment banking (capital markets division) had net income of roughly $6 million, down from $16 million in Q1 2007. ^[2] RJF's investment banking business has diminished significantly as a result of poor credit and stock market conditions in 2008. Investment Banking clients find it more difficult to raise money through bond offerings when credit conditions are poor. Additionally, when stock markets are down these same client are less willing to raise money by issuing stock, because they receive substantially less value for each share they issue. In a depressed stock market, it becomes difficult to attract new clients or retain old ones. It is worth noting, that although RJF has its own banks, its loans are limited to customers with high credit scores, and the company's exposure to subprime lending is limited.

[edit] Business Financials

RJF has more than 4,750 financial advisors, 1.6 million accounts from 2,200 locations throughout the United States and internationally, with $37.3 billion of assets under management. ^[3] They provide asset-management, institutional brokerage, and provides banking services. Gross revenue grew 18%, to a record $3.1 billion. Recurring revenue represents 60% of total revenue, up from 40% in 2003. Compensation costs were 80% of operating expenses in 2006. The company posted slightly higher Q1 2008 profits of $59.8 million (up from $59.7 million in Q1 2007), or 50 cents per share, beating consensus estimates by 8 cents. ^[4]

Private Client Group: RJF has actively converted its Private Client Group from a commission based structure to fee based accounts, which charge a percentage of assets under management. In 2007, RJF’s Private Client Group increased fee based gross revenues by $130 million. ^[5] As a result, RJF has increased recurring revenue from 40% of gross revenues in 2003, to 60% in 2006. The Private Client Group offers a dual-layered operating model, in which brokers can operate as employees (salaried) or independently (brokers operating as individual business). Fees and commissions rose more than 15% to $1.5 billion in 2007, along with higher production per advisor with a 23% increase in average annual production per Financial Advisor from $419,000 to $514,000. RJF increased the number of advisors by 330 in 2007, and accounts under management grew to a record 1.6 million from 1.2 million in 2002. U.K. wealth management has been the fastest growing department, with assets under management increasing from £79 million ($164 million) in 2002 to £1.1 billion ($2.3 billion) in 2007. ^[6]

Asset Management: RJF helps institutions, such as pensions, as well as high net worth individuals manage assets. The company manages mutual funds and also has custom-tailored investment strategies for certain clients. The Asset Management Group is also responsible for RJF's proprietary trading. ^[7] Assets under management fell by 4% in Q1 2008.

Equity and Fixed Income Capital Markets: This includes groups is responsible for investment banking advisory (mergers and acquisitions), equity research and fixed income research. Notably, Raymond James Tax Credit Funds is one of the leading syndicators in the U.S. of low income housing tax credit investing. ^[8]

Banking (RJBank): Over the last decade, firms in the wealth management business have sought to build customer loyalty, in addition to capturing a greater portion of their clients’ wallets by offering an expanding array of services, from helping clients plan for retirement to extending mortgages for the purchase of a home. To this end, RJF acquired its own bank, Raymond James Bank (RJBank) in 1994. RJBank’s revenue grew 178% in 2007. In 2007, Raymond James Bank increased its contribution to pre-tax profits by 129%. Retail brokerage was 67% of net revenue in 2006. In 2007, RJBank doubled loan balances, spread between residential mortgage pools (32%) and corporate loans (68%) from $2.7 billion to $5.7 billion and total assets from $3.4 billion to $6.8 billion. ^[9]

Other: RJF is also involved in proprietary capital operations, emerging markets investments and other miscellaneous corporate investments. ^[10]

RJF 2007 Annual Report pg. 2-3^[11]

RJF 2008 Q1 Report ^[12]

[edit] Trends and Forces

[edit] Tight Credit and Falling Stock Markets Hurt RJF's Investment Banking

• In Q1 2008, investment banking net income fell by over 60% to $6.3 million. The company helped arrange "just one securities offering in January, down from eight a year earlier and 11 in December 2007." ^[13] With a tightening of credit, it is more difficult for companies to obtain debt, making the process of buying or selling companies difficult. Even though RJF has emphasized its strong deal pipeline, if credit turmoil persists, the investment banking branch will suffer.

[edit] U.S. Economic Recession Reduce Assets Under Management

• In the past, the company results have been highly correlated to U.S. equity markets. For Q1 2008, the company reported a decline in assets under management in January 2008, of $35.8 billion, down about 4 percent from December 2007. Because the company takes a percentage fee of assets under management, a smaller pool of assets equates to lower fee generation.

[edit] Growth at RJBank Increases Net Interest Income and Loans

• Net interest increased over 100% for RJBank, representing 81% of the $54 million increase of RJF's total interst income in 2007. RJBank’s loans for 2007 totaled 62% in corporate, and 38% in residential mortgage pools, with a $600 million increase in corporate loans and a $700 million increase in residential mortgages. ^[14]

• RJBank’s growth has increased RJF’s exposure to loans, through a second transfer of client cash deposits of $1.3 billion in March 2007 from the Heritage Trust Fund and organic growth in deposits by $1.3 billion. ^[15]

• RJBank doubled net revenues in 2007 to $85 million from $41 million 2006. RJBank benefits from interest rate spreads, which widened in 2007. However, this is not guaranteed to continue down the line especially as the U.S. Federal Reserve cut the target federal funds rate to 2.25% as of Q2 2008.

[edit] Minimal Exposure to Subprime Loans and Buying Discounted Loans

• Subprime Mortgage Exposure: The company has relatively low exposure to the subprime market, compared to some of its competitors. Raymond James only has 0.11% of its loans 90 days or more past due as of December 31, 2007. This is in comparison to 2.90% for Countrywide Financial (CFC), 2.07% for Citigroup (C) and 2.17% for Washington Mutual (WM). Raymond James' customers have an excellent FICO score of 747 (a score of more than 760 is considered excellent), a positive indication of the reliability of its loans. ^[16] Furthermore the CEO stated that RJF was able to pick up many good loans at discounted prices from financial institutions seeking liquidity. ^[17] As of Q1 2008, RJF has not written down any debt while competitors like MER has written down about $29 bln of debt since Q1 2007. ^[18]

[edit] Competition

RJF competes with other brokerage firms, including Merrill Lynch (MER), A.G. Edwards (AGE), Charles Schwab (SCHW).

 Raymond James Financial

	Select All  |  Select None Metrics Principal Transactions Commissions Pre-Tax Income Number of Financial Advisors Compensation & Benefits Mortgage & Asset Backed Securities Completed Merger & Acquisitions Operating Income Investment Banking Revenue Managed Accounts & Fee Based Revenues Daily Value at Risk Announced Mergers & Acquisitions Net Income Cancel

	Select All  |  Select None Companies Merrill Lynch (MER) Morgan Stanley (MS) Citigroup (C) J P Morgan Chase (JPM) Bear Stearns Companies (BSC) Cowen Group (COWN) Deutsche Bank AG (DB) Diamond Hill Investment Group (DHIL) Friedman, Billings, Ramsey Group (FBR) Gabelli Asset Management (GBL) GFI Group (GFIG) Greenhill (GHL) Investment Technology Group (ITG) Jefferies Group (JEF) Kent Financial Services (KENT) LaBranche (LAB) Ladenburg Thalmann Financial Services (LTS) Knight Capital Group (NITE) Nomura Holdings Inc ADR (NMR) Oppenheimer Holdings (OPY) Paulson Capital (PLCC) Raymond James Financial (RJF) Stifel Financial (SF) Siebert Financial (SIEB) SWS Group (SWS) Thomas Weisel Partners Group (TWPG) UBS AG (UBS) Waddell & Reed Financial (WDR) Legg Mason (LM) Bank of America (BAC) KBW (KBW) Goldman Sachs Group (GS) Lehman Brothers (LEH) Cancel

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Company	Data From	Managed Accounts & Fee Based Revenues	Daily Value at Risk	Announced Mergers & Acquisitions	Net Income
Jefferies Group (JEF)	2006	$110M[20]	$4.75M[21]	Add	$206M[20]
Legg Mason (LM)	2007	$4.33B[22]	Add	Add	$647M[23]
Merrill Lynch (MER)	2006	$6.54B[24]	$50M[25]	Add	$7.5B[26]
Raymond James Financial (RJF)	2007	$308M[27]	$536K[28]	Add	$250M[29]
Waddell & Reed Financial (WDR)	2006	$719M[30]	Add	Add	$46.1M[30]

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[edit] References

1. ↑ RJF 2007 Annual Report pg. 14
2. ↑ RJF 2008 Q1 Report
3. ↑ Raymond James Company Information
4. ↑ Forbes: Raymond James Q1 Profit Edges Higher April 2008
5. ↑ RJF 2007 Annual Report pg. 24
6. ↑ RJF 2007 Annual Report pg. 11
7. ↑ RJF 2007 Annual Report pg. 15
8. ↑ RJF 2007 Annual Report pg. 13-14
9. ↑ RJF 2007 Annual Report pg. 28
10. ↑ RJF 2007 Annual Report pg. 4
11. ↑ RJF 2007 Annual Report pg. 2-3
12. ↑ RJF 2008 Q1 Report
13. ↑ Reuters: RJF CEO Sees Market Conditions Worsening, Feb. 2008
14. ↑ RJF 2007 Annual Report pg. 28
15. ↑ RJF 2007 Annual Report pg. 22
16. ↑ Washington Post: Raymond James on Solid Ground, Apr. 2008
17. ↑ RJF 2007 Annual Report pg. 5
18. ↑ TMC: Merrill Posts Steep Losses on Writedowns April 2008
19. ↑ Schwab Wikinvest Chart
20. ↑ ^{20.0 20.1} JEF,2006,10-K,page-17, ITEM 6
21. ↑ JEF,2006,10-K,page-35, ITEM - 7A
22. ↑ LM,2007,10-K,page-64, ITEM 8
23. ↑ LM,2007,10-K,page-32, ITEM 6
24. ↑ MER,2006,10-K,Consolidated Statement of Earnings,PG-71
25. ↑ MER,2006 Annual Report, Market risk,PG-52
26. ↑ MER,2006,10-K,Selected Financial Statements,PG-20
27. ↑ RJF,2007,10-K,page-44, ITEM 8
28. ↑ RJF,2007,10-K,page-38 ITEM 7A
29. ↑ RJF,2007,10-K,page-14, ITEM 6
30. ↑ ^{30.0 30.1} WDR,2006,10-K,page-26, ITEM 6