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Morningstar | Potential Negative Turn in Interest Rates and Asset Prices Puts Cloud Over Raymond James

We expect slowing revenue growth for Raymond James and likely continued revenue turbulence, but our longer-term thesis of normalized operating margins being higher than historical is intact. Near-term causes of turbulence include falling asset prices, fluctuating interest rates, and generally weaker institutional trading revenue. However, taking a broader view, the company materially built out its private client and capital markets businesses with its 2012 acquisition of Morgan Keegan from Regions Financial and 2016 acquisition of Deutsche Bank’s U.S. wealth management unit. Net revenue has nearly tripled since the prior capital market's peak of 2007, while bank interest-earning assets are around quintuple their 2007 levels.We forecast Raymond James' operating margins in the next couple of years to be more than 20% higher than the past decade. Margins should expand from operating leverage in the wealth management segment and a larger contribution from the company's bank. Employee advisors and the bank have lower compensation ratios than the independent advisor business. Any margin expansion in wealth management will materially improve earnings, as approximately 70% of revenue is from that segment.The company's bank recently had operating margins around 65%, but we believe they will gradually decrease during the next several years as loan-loss provisions normalize. We believe an operating margin in the mid- to low 50s is more reasonable. The moderate decrease in bank operating margins won't detract much from the overall company’s operating margin expansion story, as a mid-50s bank operating margin is still several times greater than Raymond James' historical margin in the mid- to low teens.