Jefferies Financial Group (JEF) has reported its first quarterly surge in investment banking revenue since the close of 2021, indicating a potential upswing in dealmaking activity on Wall Street. Nevertheless, the rebound fell short of analysts’ expectations.
During the third quarter, investment banking fees experienced a notable uptick of 26.5% from the preceding quarter, amounting to $645 million. However, this figure still represented a 5.4% decline from the previous year’s $682 million. This downturn weighed on the overall net revenue for the third quarter, settling at $1.18 billion, which was below the $1.25 billion projected by analysts, according to Bloomberg estimates.
Jefferies’ stock witnessed a dip of as much as 3.4% in after-hours trading on Wednesday. It rebounded with a 1% surge upon opening on Thursday, following a 2.4% decline in premarket trading. Since the start of the year, the stock has demonstrated a commendable 11% surge, outperforming numerous Wall Street banks boasting expansive investment banking divisions.
Addressing the challenges of 2023 in investment banking, Jefferies CEO Richard Handler stated, “Much of the new issue market shut or subdued until the last few months.”
Jefferies, ahead of major Wall Street counterparts, released earnings for the three-month period concluding on August 31. This provides a significant insight into the probable trajectory of third-quarter dealmaking for industry behemoths.
Goldman Sachs’ James Yaro, who holds a Buy rating on Jefferies, remarked, “The outlook for investment banking appeared more optimistic than a quarter ago.” However, Yaro cautioned that a potential recession in the US could significantly impact investment banking and asset management results.
A surge of IPOs this month, including prominent entities like chipmaker ARM (ARM) and grocery service Instacart (CART), has kindled hopes for an upswing in firms going public, translating to augmented fees for their bankers.
Since the record-breaking dealmaking period in 2021, quarterly investment banking revenue has hovered around half of 2021 levels, as per Dealogic data. As of mid-September, it appears that third-quarter revenue will not buck this prevailing trend.
Earlier this month, executives from major banks with substantial trading and investment banking operations alluded to this trend during an industry conference. With dealmaking trailing behind, these institutions have leaned on trading to secure returns.
JPMorgan Chase (JPM) CEO Jamie Dimon anticipated a slight dip of “down 1% or 2%” in trading revenue from the previous quarter, with investment banking fees expected to remain “roughly equivalent to last quarter.”
Bank of America (BAC) CFO Alastair Borthwick predicted a substantial drop in dealmaking from the previous quarter and the year-ago period, estimating it at “probably 30-35%,” while foreseeing trading to be up in the “low single digits” compared to last year.
Goldman Sachs CEO David Solomon indicated that a swift rebound in dealmaking should not be anticipated, but expressed optimism for a more favorable outlook in 2024. Solomon noted that trading activity levels are “good” for Goldman this quarter, but acknowledged that comparisons to the year-ago quarter will be “challenging.”
Jefferies Financial Group reported trading revenues in equity and fixed income at $524 million, marking a 3.5% dip from the preceding quarter, yet registering a notable 16% upswing from the third quarter of the previous year.
Notably, Jefferies did not disclose September deals. However, fees from equity capital markets, encompassing the business of aiding companies in going public, experienced a 4% rise from the previous quarter and a 2% increase from last year.
Conversely, the firm’s other two core investment banking services — mergers and acquisitions, and debt capital markets — fell short of projections. M&A advisor fees, traditionally a substantial revenue generator for investment banking, observed a 30% decline from last year.
In a bid to fortify its investment banking team, the firm incurred an additional $68 million in compensation expenses compared to the previous quarter. Notably, 39 new managing directors were brought on board for the division within the year.
Source: Yahoo Finance