Moody's Affirms Raymond James Ratings, Outlook Positive

Raymond James Financial, Inc.’s (NYSE:RJF) long term issuer and senior unsecured ratings were affirmed by Moody's Investors Service, the rating services arm of Moody's Corporation (NYSE:MCO) , at “Baa2.” Moreover, the company’s outlook remained positive.

Reasons

The strength and stability of Raymond James' financial performance, further supported by the company’s diversified business mix and prudent financial policies led to the ratings affirmation.

Further, the positive outlook reflected improved creditworthiness, robust track record as well as strong capital and liquidity profile, which offered substantial strategic and financial flexibility.

Also, the three recent acquisitions by the company are expected to result in considerable expansion of its ultra-high net worth client capabilities and geographic presence.

While the acquisition of Deutsche Bank (DE:DBKGn) AG's (NYSE:DB) U.S. Private Client Services unit will expand Raymond James’ footprint in the Northeast and mid-Atlantic region, the company will broaden its investment banking capabilities in Europe with the acquisition of Mummert & Company. Also, the company will increase its wealth management presence in Canada through the 3Macs acquisition.

Risks

According to Moody's, though these strategic actions will provide the company an opportunity to further improve its financial strength, integrating and controlling an increasingly expansive group of business might prove to be a challenge for management.

Also, the company was recently slapped with a $17 million fine by the Financial Industry Regulatory Authority on the bank’s “widespread failures” to control money laundering. This reflects the need to enhance the company’s risk management and compliance frameworks to support its expanding and diverse mix of activities.

Moreover, the Department of Labor's final rule on fiduciary standards for retirement account advisors will present implementation challenges to the company and to the industry as a whole, by requiring business model modification and higher spend on technology, compliance and legal costs.

What Could Trigger a Ratings Upgrade?

If Raymond James’ financial metrics continue to improve consistently and it displays a significant level of risk management and compliance capabilities without increasing its risk appetite, the company could look forward to a rating upgrade from Moody’s.

What Could Trigger a Ratings Downgrade?

A significant debt-funded acquisition could result in a downgrade, especially if unaccompanied by a coherent near-term deleveraging strategy.

Moreover, if the company does not effectively adapt to the intensifying complex regulatory background, it could have a negative impact on its financials, causing a ratings cut.

A departure from the firm's conservative financial policy and increasingly shareholder friendly distributions could also prompt a reduction in ratings.

Currently, Raymond James holds a Zacks Rank #2 (Buy). A better-ranked investment brokerage firm is LPL Financial Holdings Inc. (NASDAQ:LPLA) , which sports a Zacks Rank #1 (Strong Buy).


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