Fitch Ratings has assigned a 'BBB+' rating to Raymond James Financial Inc.'s (RJF) recently assumed 5.75% Fixed-to-Floating Rate Subordinated Notes due 2030 and a 'BB+' rating to its recently issued Series A and Series B non-cumulative perpetual preferred stock.

Key Rating Drivers

On June 1, 2022, Raymond James completed its previously announced acquisition of TriState Capital Holdings, Inc. (TriState Capital). As part of the acquisition, all series of outstanding TriState non-cumulative perpetual preferred stock were converted into newly created RJF fixed-to-floating non-cumulative perpetual preferred stock. Additionally, as part of the merger, RJF assumed TriState Capital's outstanding subordinated debt.

The subordinated debt is notched one level below RJF's Viability Rating (VR) for loss severity. In accordance with Fitch's Bank Rating Criteria, this reflects alternative notching from the base case of two notches due to Fitch's view of U.S. regulators' resolution alternatives for an entity like RJF, as well as early intervention options available to banking regulators under U.S. law. The subordinated notes have not been assigned any equity credit.

The rating on the preferred stock reflects standard notching based on Fitch's Bank Rating Criteria. The preferred stock is rated four notches below the VR, reflecting two notches for nonperformance and two notches for loss severity. Dividends on the preferred stock are non-mandatory and non-cumulative. The preferred stock, which qualify as Tier 1 capital, have been assigned 100% equity credit.

Fitch believes the acquisition of TriState Capital is highly complementary to RJF's franchise and introduces limited integration risk. RJF used a combination of cash and stock to finance the transaction, which helped maintain conservative leverage metrics. RJF reported CET1 capital and Tier 1 leverage ratios of 20.0% and 10.8%, respectively, at June 30, 2022, down from 25.9% and 12.6% at March 31, 2022 but substantially above regulatory minimums. RJF's cash flow leverage (debt/EBITDA) was 0.8x for the TTM ended 3Q22, which is viewed as adequate for the ratings. Interest coverage, as measured by EBITDA to interest expense on corporate debt, remained solid at 28.5x for the TTM ended 3Q22 and above the 12x-15x benchmark range for 'a' category securities firms with low balance sheet usage.

The Stable Rating Outlook reflects Fitch's expectations that RJF's cash flow leverage will remain near current levels, the Tier 1 leverage ratio will remain above the publicly articulated target of 10% and parent company liquidity will remain above $1 billion. The Outlook also reflects Fitch's expectation that RJF will sustain its conservative approach to acquisitions, strong operating performance, with limited increases in credit losses in the bank portfolio.

RATING SENSITIVITIES

The ratings of the subordinated debt and preferred stock are sensitive to any change to the VR and are expected to move in tandem.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Material trading or operational losses;

Adverse regulatory actions or litigation, or reputational damage that leads to impairment of the firm's franchise or funding profile;

An adverse alteration of the firm's underwriting standards or risk appetite, including a more aggressive M&A strategy, leading to substantial integration or financial risk;

An inability to successfully integrate acquired businesses, resulting in litigation losses, revenue attrition or an uncontrolled increase in costs;

Material deterioration in capitalization, such that tier 1 leverage decreases below 10%, and/or cash flow leverage increases above 1.5x for the firm on a sustained basis;

A reduction in parent company liquidity below the publicly communicated target;

Outsized credit losses or impairments in the loan or securities portfolio at the bank;

A sustained decline in interest coverage.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Continued growth of the wealth management platform and diversification of revenue streams;

Sustained EBITDA margin expansion towards 30% or above;

Cash flow leverage sustained below 1.0x while maintaining conservative cushion above regulatory capital and leverage ratios;

A demonstrated track record of minimal operational losses and regulatory fines.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2022 Electronic News Publishing, source ENP Newswire