Jefferies profit drops by half as firm closes ‘trough year’

JEFFERIES Financial Group’s fourth-quarter profit and revenue dropped as the investment bank continued to grapple with a deal slump, potentially foreshadowing how its bigger Wall Street rivals fared amid the prolonged drought.

Jefferies’ revenue was dragged down by a steep drop in asset management, which fell 64 per cent to US$141 million, and another quarter of declining advisory fees. Still, debt and equity underwriting both performed better, helping to lift investment banking revenue in a sign of a possible return of dealmaking.

“2023 was a transition year in the economy, in capital markets, in our industry and at Jefferies,” chief executive officer Richard Handler and president Brian Friedman said. “We are hopeful that 2023’s results will represent a trough year and, as such, it wasn’t too bad,” they said.

Jefferies’ parent company posted earnings of US$66 million for the period – or 29 US cents a share – a 53 per cent drop from US$140 million a year earlier.

The results offer a first glimpse into how Wall Street’s biggest banks navigated higher interest rates and geopolitical concerns that continued to depress deal activity. Investment banks have taken a hit as corporate dealmaking and sales of new securities remained muted, with many forced to cut thousands of jobs.

Jefferies has said the challenging year cut into its performance. This quarter, the pain was felt most in investment banking, where fees were muted by a “dampening of merger and acquisition activity”, the executives said.

With a potential end to rate hiking cycles in sight and a flurry of major deals late last year, there was renewed optimism about a rebound in mergers and acquisitions activity. But fresh uncertainty stemming from the war between Israel and Hamas has dampened some of this new-found enthusiasm for dealmaking.

Jefferies shares fell in late New York trading before paring those losses. They closed at US$40.69, up about 1 per cent for the year. The firm said it will pay a quarterly cash dividend equal to 30 US cents per Jefferies common share.

In recent months Jefferies has expanded its presence abroad. In December, the firm said it was starting an investment banking unit in Canada as part of an international expansion of its core Wall Street operations. They also opened an office in Sao Paulo in July.

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Jefferies has also expanded its partnership with Japan’s Sumitomo Mitsui Financial Group (SMFG), which agreed to triple its stake in the investment bank and further its alliance into additional businesses.

On Monday (Jan 8), Jefferies said SMFG currently holds a 9.1 per cent equity interest in the firm, or 8.3 per cent on an “as converted, fully diluted basis”, according to a shareholder letter dated Jan 8. Once a 10 per cent threshold is reached, Jefferies said it would welcome an SMFG nominee to its board.

The New York-based firm has been focused on hiring senior bankers and expanding across the globe as it seeks new opportunities amid the deal slowdown. In the past three years, the firm has added 182 investment banking managing directors through external hiring or internal promotion, bringing the total to 344 managing directors as at Dec 1.

The biggest Wall Street banks are scheduled to start reporting Q4 results on Friday. Investors will also be listening for expectations of performance in the months ahead. While Jefferies does not give guidance, executives said the firm has never been “better positioned”.

“It is impossible to estimate with clarity when our opportunity will fully normalise, but it always does,” Handler and Friedman said. “Given the Fed’s statement in December, it may even be sooner than we had expected.” BLOOMBERG