Jefferies will go from banking standout to misfit

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NEW YORK, Sept 30 (Reuters Breakingviews) – Jefferies Group is an uncommon Wall Street beast. That’s not simply because its monetary quarter falls a month earlier than its friends’. It’s additionally as a result of in contrast to them, the agency run by former Drexel Burnham Lambert dealer Rich Handler just about does only one factor: funding banking. Over the previous yr and a half, that made Jefferies a standout. It might quickly make it a misfit.

The funding banking unit of Jefferies Financial (JEF.N) reported $1.7 billion of income within the three months ending Aug. 31. Fixed earnings buying and selling and equities buying and selling income collectively fell by a 3rd however have been nonetheless 30% up on two years in the past. Income from advising and underwriting doubled year-on-year. This yr to date, Jefferies is the ninth largest recipient of U.S. charges, in keeping with Refinitiv, however its 64% charge of development beats all of its greater rivals.

As Jefferies has made hay, although, its massive friends have been transferring to new pastures. Goldman Sachs (GS.N) is turning into a client financial institution, whereas Morgan Stanley (MS.N) is pitching deeper into asset and wealth administration. The large JPMorgan (JPM.N) makes just below 40% of its income from buying and selling, underwriting and advising. At the $9 billion Jefferies Financial, these actions make up over 80% of the enterprise.

Attracting financial savings and funding deposits, as Handler’s rivals are doing, is an inexpensive method of funding racier exercise. Besides, rates of interest will rise. When they do, conventional banking will regain its luster. Handler’s agency trades at roughly 10.5 occasions the approaching yr’s earnings, in keeping with Refinitiv’s compilation of estimates, the next a number of than Goldman Sachs however roughly 20% beneath much less risky lending companies like U.S. Bancorp (USB.N) or Fifth Third Bancorp (FITB.O), and the extra diversified Morgan Stanley.

One day, Jefferies’ future may lie inside a much bigger monetary agency. Its buying and selling and underwriting might complement a future Wells Fargo (WFC.N), say, or a midsize U.S. financial institution eager to develop. But that may be years away. Besides, the historical past of lenders shopping for funding banks is fairly dire. People go away, cultures conflict, and already, Handler’s bankers are among the many highest paid on Wall Street, with $600,000 earmarked per worker for the final 9 months, versus round $450,000 for the entire of 2019. It’s a profitable path and for now, an enviable one. But it’s prone to develop into lonelier.

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CONTEXT NEWS

– Jefferies Group reported $419 million of earnings within the three months ended Aug. 31, up 57% from the identical interval a yr earlier. Revenue elevated 19% to $1.7 billion. The investment-banking arm of Jefferies Financial mentioned that its backlog of offers for the fourth quarter was at a report degree.

– As the primary main Wall Street agency to report earnings that embody July and August, Jefferies is an indicator of the sector’s buying and selling and underwriting efficiency within the third quarter.

– Jefferies was the ninth largest recipient of funding banking charges, which incorporates advising on mergers and underwriting inventory and bond points, within the yr to Aug. 31, in keeping with Refinitiv. Its $1.6 billion of estimated charges for U.S.-related enterprise was 64% greater than the identical interval in 2020.

Editing by Richard Beales and Amanda Gomez

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A Wall Street subway stop sign is seen in New York, October 10, 2008. REUTERS/Shannon Stapleton