Jefferies’ Record Investment Banking Results Raise Stakes for Wall Street Giants

It’s officially autumn. Spooky horror movie offerings are about to overwhelm your streaming algorithms for a solid month. But a Nightmare on Elm Street viewership spike won’t interrupt what has been an investment banker’s dream on Wall Street in recent months.

Jefferies Group, widely seen as an early bellwether for capital markets, reported third-quarter results on Monday. In addition to beating analysts’ expectations, the firm posted record performance in investment banking and equities. 

Asset Management Misfires

On the investment banking side, Jefferies set the tone for JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, all of whom report in mid-October. It also raised the stakes, as some bank leaders have tried to downplay expectations about their forthcoming results. In recent weeks, BofA’s Brian Moynihan suggested trading revenue would be flat at his firm, while Morgan Stanley co-president Daniel Simkowitz and JPMorgan co-president Doug Petno said the third quarter might not live up to the previous one, when market volatility resulting from global conflict fueled trading windfalls and underwriting surged thanks to the SpaceX IPO and capital raises. 

As for Jefferies, its $1.3 billion in investment bank revenue, up 17% from last year, represented more than half of the bank’s total $2.2 billion in revenue, up 7%. Within investment banking, advisory services revenue jumped 25% and equity underwriting revenue 69%. The bank’s capital markets division raked in $802 million, an 11% increase driven by record equities trading. That will likely leave markets expecting, at minimum, solid returns when the big banks step up to the plate.

At the same time, Jefferies is still dealing with the nagging pain of some fund strategies gone wrong at its asset management division, which could hinder the stock’s performance:

• Revenue at the asset-management unit fell a whopping 52% year-over-year to $85.6 million in the third quarter.
• In the last year, funds linked to Jefferies have been hit by hundreds of millions of dollars in exposure to bankrupt auto parts manufacturer First Brands Group and embattled iron ore trader Radiant World, the latter of which has had assets frozen by authorities in the UK and Singapore.

Scared or Buying: The asset management misfires are still spooking investors. Jefferies’ shares have tumbled 24% this year compared to a 2.2% gain by the S&P 500 bank industry group. On the other hand, of the five analysts who rate the stock tracked by Zacks Investment Research, the average price target of $62.20 implies a roughly 30% upside from its Monday closing price.