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After performing well for most of the year, retail-brokerage firm Raymond James Financial (NYSE:RJF) is finally beginning to feel the wrath of the credit crisis. As markets continue to flail, more of Raymond James' corporate loans and home mortgages could go bad, says Barron's Sandra Ward, potentially sending the stock down another 20%.

Raymond James missed expectations in FQ4, posting net income of $0.41 per share vs. $0.51 consensus. Its stock has fallen sharply since September, from $38 to as low as $16.95 last month before floating back to around $19. CEO Thomas James says 'our outlook is mixed' and the firm is braced for recession for the next 6-9 months. James warns tough market conditions will hurt key businesses while the costs of positioning itself for the future will weigh on short-term results.

The one bright spot James points out is the Raymond James Bank, which has been the fastest growing part of the company for the past few years. James expects the growth to continue and points to an influx of deposits and attractive loan opportunities. Yet the bank, which accounts for 40% of Raymond James' assets and contributed 40% of FQ4 pretax profits, gives good cause for investors to be concerned. Most of its growth came during the credit bubble and stresses are beginning to show.

Nonperforming loans in FQ4 rose to 0.82% of total loans from 0.54% in FQ3, an unusually high level for recent loans. Many of the bank's loans are large, corporate credits acquired in the secondary market, under the Shared National Credit Program. A mid-2008 report on the program showed credit volume had risen nearly 23% from the previous year, but problematic credits had jumped to 13.4% from 5% the year before. At the end of FQ4, this left Raymond James exposed to mostly the telecom industry, retail property, consumer products and services, industrial manufacturing and health care, excluding hospitals.

The bank's corporate and commercial real estate loans total $4.6B, and have been focused in areas that are now hard-hit by the housing downturn, including California and Florida. Raymond James also has nearly $3B in residential mortgages, 90% of which are first-mortgage loans bought from other financial institutions. Over 75% of these are risky interest-only adjustable-rate mortgages. The bank also has a sizable investment in mortgage-backed securities.

  • Sy Jacobs, of JAM Partners, doesn't like the main retail brokerage business and is short the stock. However, the real "misunderstood part is the bank and credit risk at the bank," he says, explaining it will only be a matter of time before more serious loan problems develop.
  • Douglas Sipkin, of Wachovia Capital Markets, downgraded the stock last week to Underperform on concerns the current economy will negatively impact the bank's loan quality. Sipkin cut his 2009 earnings estimate by 33% to $1.60 per share, and thinks the stock could fall to $16.

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  • At the end of September, Raymond James announced it wanted to convert itself into a bank holding company, a path CFO Jeff Julien said the firm has been pursuing for years. Raymond James Bank would become a commercial bank, which could give it more flexibility to make different types of loans. Originally slated for next year, the company wants to fast-track the plans.
  • Raymond James Financial (RJF): FQ4 EPS of $0.41 misses by $0.10. Revenue of $760M (-9.4%) vs. $707M. (PR)
Source: Rough Ride Ahead For Raymond James - Barron's