Jefferies Financial Group (JEF) posted its first quarterly rise in investment banking revenue since the end of 2021. The results signal dealmaking on Wall Street may be past its bottom, but the bounceback wasn't as much as analysts hoped.
While investment banking fees climbed 26.5% from the previous quarter to $645 million, they were still down 5.4% from last year's $682 million. That weighed on overall third quarter net revenue of $1.18 billion, which was lower than the $1.25 billion expected by analysts, according to estimates from Bloomberg.
Trading for Jefferies’ stock was volatile following the release. It fell as much as 3.4% in after-hours trading Wednesday then opened Thursday morning up 1%. Since the beginning of January, the stock has risen 11%, outpacing most Wall Street banks with large investment banking divisions.
"2023 has been a challenging one in investment banking, with much of the new issue market shut or subdued until the last few months," Jefferies CEO Richard Handler said in a statement.
Jefferies, which reported earnings for the three-month period ending Aug. 31, weeks ahead of the biggest banks on Wall Street, can offer hints at how third quarter dealmaking is likely to turn out for the industry's biggest players.
"The outlook for investment banking appeared more optimistic than a quarter ago," Goldman Sachs' James Yaro, who has a Buy rating on Jefferies, said in a Thursday note. A future recession in the US, Yaro cautioned, "could weigh notably on investment banking and asset management results."
A string of IPOs this month including attention-grabbing chipmaker ARM (ARM) and grocery service Instacart (CART) have fueled optimism for a pickup in firms going public, and that means more fees for their bankers.
Since a record period for dealmaking set in 2021, quarterly investment banking revenue has stood at roughly half of 2021 levels, according to Dealogic data. As of the middle of September, third quarter revenue won't buck the trend.
Earlier this month, executives of big banks with significant trading and investment banking operations hinted at the trend during an industry conference. As dealmaking continues to lag, these banks have depended more on trading to squeeze out returns.
JPMorgan Chase (JPM) CEO Jamie Dimon said he expected trading revenue to be "down 1% or 2%" from the previous quarter and investment banking fees to come in "roughly equivalent to last quarter."
Bank of America (BAC) CFO Alastair Borthwick suggested a significant decline in dealmaking from the previous quarter and year-ago period, of "probably 30-35%," while he expected trading to be up in the "low single digits" from last year.
Goldman Sachs CEO David Solomon said dealmaking shouldn’t be expected to rebound so quickly but that 2024 "should be a better year for sure." Solomon added that trading activity levels are "good" for Goldman this quarter but that the comparison to the year-ago quarter will be "tough."
Jefferies reported trading revenues in equity and fixed income of $524 million, down 3.5% from the previous quarter but up 16% from the third quarter of last year.
Jefferies, which didn’t report September deals, saw fees from equity capital markets, which includes the business of helping companies IPO, rise 4% from the previous quarter and 2% from last year.
However, the firm’s other two core investment banking services — mergers and acquisitions and debt capital markets — missed expectations. M&A advisor fees, typically the largest money maker for investment banking, fell 30% from last year.
The firm also paid an additional $68 million more in compensation expenses compared to the previous quarter in a bid to bolster its investment banking team. It has added 39 new managing directors for the division year to date.
David Hollerith is a senior reporter for Yahoo Finance covering banking.
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