Jefferies: chlorophyll thrills cost a lot of lettuce on Wall Street

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Jefferies Financial Group is doubly blessed among Wall Street banks. It not only reports quarterly results a whole month before the others. As a standalone investment bank with no federally insured deposits, Jefferies is also exempt from many regulations. As such, it avoids dividend or share buyback curbs imposed by the Federal Reserve. 

Jefferies therefore has plenty of room to make bold bets. Peers have been culling their workforces. Jefferies has been busy hiring.

It has added 21 managing directors in investment banking since the start of its 2023 fiscal year. Senior recruits have come from Barclays and Credit Suisse.

Revenues — down 22 per cent in its latest quarter that ended in May — remain in the doldrums amid a drought in mergers and acquisition. But Jefferies thinks the worst of the slump is over. Tempting fate, it sees “green shoots” ahead.

Trading continues to be a bright spot for the group. Revenues rose 30 per cent from a year earlier. Equity underwriting fared better than expected, with revenues up a fifth year on year. 

Japan’s Sumitomo Mitsui Financial Group has announced plans to triple its stake in Jefferies to 15 per cent. The duo want to offer investment banking services to bigger public companies and create a broader cross-border M&A offering. Backed by SMFG’s massive balance sheet, Jefferies is well-placed to take advantage of any bounceback in leveraged finance.

But good bankers do not come cheap. About 55 per cent of the revenue Jefferies made in its most recent quarter went on pay and benefits. The figures at Goldman Sachs and Morgan Stanley are about 33 per cent and 44 per cent, respectively. Jefferies’s annualised return on adjusted tangible equity came in at a paltry 0.7 per cent — although much of that decline was due a one-off loss related to a merchant banking investment.

The stock consistently trades at below book value, despite gaining almost a quarter over the past 12 months. Jefferies needs those green shoots to start sprouting quick.