Jefferies trading slowdown bodes ill for other banks
Wall Street bellwether reports 27% drop in revenues from bond trading
Jefferies telegraphed a lacklustre third quarter for the trading arms of the big investment banks on Tuesday, blaming unusually calm markets for a 27 per cent fall in revenues from bond trading.
Results from the New York-based investment bank were mostly upbeat, boosted by a much-improved performance from the advisory business: fees from acting for big companies on mergers and capital raises came to $476m, up more than 60 per cent from a year earlier. That helped Jefferies to third-quarter net revenues of $801m, a record high if contributions from Bache, the commodities business it sold two years ago, are excluded.
Net income came to $84m, more than twice the $41m a year earlier, even after a $4.4m donation to charities for hurricane Harvey relief.
But conditions in the trading business were much quieter, with revenues falling 7 per cent to $320m, the lowest haul in six quarters. While equities revenues were up, rising 19 per cent to $177m, fixed income fell 27 per cent to $143m.
Rich Handler, chairman and chief executive officer, described the trading performance as “solid” amid “subdued . . . volumes and volatility”.
With its November year-end, Jefferies is often seen as a bellwether for Goldman Sachs and Morgan Stanley, and for the investment banking businesses of JPMorgan Chase, Bank of America and Citigroup, which report results for July-September about four weeks later. Already, executives from the big global banks have begun to prepare investors for disappointment, saying that revenues were tracking significantly lower than the same period a year earlier.
Chief financial officers at Citi and BofA said last week at a banking industry conference in New York that they were expecting overall trading revenues to drop about 15 per cent from the third quarter last year, while Jamie Dimon of JPMorgan said he was looking at a steeper fall of about 20 per cent.
The weak activity is likely to increase pressure on banks, which have been struggling to retool their businesses in the face of persistently sluggish revenues from their core trading units. Last week Goldman Sachs outlined various measures to pep up revenues, including a big effort to boost lending via Marcus, the consumer-focused venture it launched about a year ago.
Banks are also leaning heavily on representatives in Washington who have been lobbying the administration of President Donald Trump for relief from some of the tougher restrictions imposed since the financial crisis.
Meantime, though, analysts said the Jefferies numbers spelt trouble for banks heavily dependent on trading.
Devin Ryan at JMP Securities said he suspected the bright equity trading result would be an “outlier” amid markets still characterised by very low volatility. Other banks would struggle to match the Brexit-inspired rallies of the third quarter last year, he said.
Susan Roth Katzke, analyst at Credit Suisse in New York, said: “We strongly favour the universal banking model, with its multiple levers for growth.”