Raymond James Lookin' Good—But For How Long?

The folks at Raymond James have something to smile about—for now.

The folks at Raymond James have something to smile about—for now. Yesterday, the company posted positive numbers for the first quarter of fiscal 2009, and managed to beat some analysts' expectations.

For the three months ended December 31, net income stood at $61.1 million, a 9 percent increase from earnings of $56.2 million in the first quarter of fiscal 2008. Net revenues, however, dropped 3 percent to about $664 million. "The 2008 fiscal year was largely a story of massive damage to the financial services industry occasioned by the sub-prime crisis. Fortunately, we avoided most of the direct damage through our conservative business practices," CEO and Chairman Tom James stated in the earnings release.

One analyst who covers Raymond James says the firm's results are much better than what most analysts were expecting overall. "It's definitely a positive surprise," he says. However, Raymond James may be in for some problems going forward. "It was a strong quarter for them, but they won't be immune from the rising credit problems," he added.

The firm took a big hit in its private client services division, its largest business segment. Retail commissions and fees declined almost 17 percent in the first quarter from last year's first quarter. The analyst covering Raymond James says he expects more significant headwinds in the fee-based business on both the retail brokerage and institutional sides of the business. James attributes the "weakness" in the private client group to the industry's overall consumer, corporate loan and mortgage portfolios as well as deteriorating stock and bond markets.

But there may be some good news for its brokerage division. Recruiters say Raymond James' b/ds are the biggest beneficiaries of the wirehouse firms' credit and liquidity troubles. "Wirehouse advisors used to look at Wachovia and Raymond James when thinking about going independent. Because of the Wells Fargo acquisition, Raymond James is the one major player taking in most of those advisors," says a recruiter who works with independent b/ds. In the last year, Raymond James has signed on about 200 additional advisors to its b/ds.

The highlight of the quarter, however, is on the banking side. Revenue at Raymond James Bank rose 6 percent and its pre-tax income jumped 270 percent to $54.6 million from the December 2007 quarter. "While we continue to make large additions to reserves for loan losses to reflect deteriorating economic conditions and loan growth, both our real estate and corporate loan portfolios continue to perform far better than industry benchmarks and actual charge-offs remain low," James says. (The earnings release notes corporate charge-offs over the past year have been limited to the Residential Acquisition & Development/Homebuilder segment of the corporate loan portfolio, which constitutes less than 1 percent of Raymond James Bank's assets.)

"The strength for Raymond James is that they are diverse. They play in a multitude of fields including RIA, full service brokerage and banking. They're almost always going to have one business line that's doing better than the others," says Dennis Gallant, principal and founder of Gallant Distribution Consulting.

Still, Raymond James will likely face a tough year ahead. "The outlook for the revenue side of the securities business looks anemic for the balance of 2009," James says. "[Raymond James] appears to be bucking the trend right now, but going forward there are still a lot of challenges," the analyst says. James himself points to the possibility of increasing charge-offs as the economy continues to plunge.

As one advisor puts it, "Everyone's dealing with the same problems right now. You just try a little harder these days and hope you're not completely beat up when the market recovers."

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