Jefferies Signals Green Shoots in Wall Street’s Investment Banking Lull

June 28, 2023

Some positive signs at bank might herald better-than-feared quarter for its megabank competitors.

By guest author Telis Demos from the Wall Street Journal.

Jefferies said the second half of the year could herald a more stable rate environment. Photo: EDUARDO MUNOZ/REUTERS


Jefferies Financial Group JEF 4.01 % increase; green up pointing triangle is often viewed as a bellwether for the Wall Street megabanks. Investors better hope that is really the case this quarter.

As anticipated across Wall Street, the independent investment bank and capital-markets firm on Tuesday reported a continuing lull in deal making for its second quarter, which ended May 31. Revenue from mergers-and-acquisitions advisory was down 32% from a year prior. However, the USD 254 million in advisory revenue was at least better than the less-than-USD 200 million figure analysts were anticipating, according to estimates tracked by Visible Alpha.

Debt underwriting—driven in part by leveraged-finance deals, or loans to highly indebted companies—also continues to trail behind last year. Rising and volatile rates have hit that business hard. But some thawing in frozen stock offerings may at least be a sign that markets are moving again, as private-equity sponsors clear out prior investments. Revenue from equity underwriting, which includes initial public offerings, was up 21% year over year.

Plus, Jefferies’ trading results should catch the eye, with equities and fixed-income trading revenue collectively up 30 % over the prior year. That is a contrast to megabanks’ expectations for the quarter, which as of late May and the start of June were somewhat grim. Those banks have cited worries about rates and the debt ceiling, and gave forecasts for quarterly trading revenue that ranged from flattish to down 25 % year over year. Trading has been a strength in recent years, though results began to weaken in the first quarter.

Also encouraging is Jefferies’ most up-to-date outlook, with the bank’s executives stating in the earnings release that “the month of June has brought green shoots.” The executives said that they “believe our second quarter results reflect a cyclically low period,” and that barring further adverse developments, the second half could herald a more stable rate environment and be more productive.

Bottoms, of course, can last a while. But with expectations set so low, it wouldn’t take much to give investors belief that things might turn around. Jefferies’ earnings have dropped off this fiscal year so far, lowering its key return on adjusted tangible equity to well below the important double-digit threshold. Part of that in the most recent quarter was attributable to a legacy merchant-banking investment that generated a USD 72 million pretax loss.

Jefferies in particular would benefit from a bounceback in leveraged finance, given its significant presence in that business. Not only is that market quite depressed, the landscape has potentially changed with big player Credit Suisse’s absorption into UBS. Grabbing market share would help offset any effects of a longer-term shift to private credit providers.

Jefferies said on Tuesday it had recruited 21 new managing directors in investment banking so far in its 2023 fiscal year. It also has a strategic relationship with Sumitomo Mitsui, so the Japanese banking giant’s balance sheet can help the pair snare larger deals together.

Meanwhile, Jefferies’ Wall Street megabank peers may be entering a period of increasing capital constraints. The Federal Reserve is looking at banks heavily dependent on fee income, such as trading and investment banking, for what are likely to be higher capital requirements, the Journal has reported.

That might give Jefferies some extra leeway to grab share in the quarters ahead.