Investors in Wall Street banks are getting a bit carried away with Jefferies. They boosted shares of some of the major firms by as much as three per cent on Tuesday after their smaller rival unveiled a 56 per cent increase in second-quarter profit. Barring a financial upswing in June, though, the likes of JPMorgan and Goldman Sachs will be hard pressed to deliver an equally pleasing performance.
The key reason is that trading is not as big a part of the business at Jefferies, where it accounts for some 55 per cent of the firm's revenue. At Goldman, JPMorgan and Morgan Stanley, it supplies between two-thirds and three-quarters of the top line generated by comparable investment-banking business units.
That means Jefferies has a slightly better buffer when trading lags. So in the three months to May, improvements in all its other Wall Street business lines allowed the bank to shrug off a five per cent drop in fixed-income trading.
On top of that, Jefferies lacks scale in areas that could make this quarter tricky for other banks. Foreign exchange volumes for the industry were on track to fall 45 per cent compared with last year, Goldman President Gary Cohn told investors last month. Mortgage bond trading has fallen, too. Drops like these explain why executives at Citigroup and JPMorgan have already warned that trading revenue for the second quarter could fall by a fifth.
Jefferies' showing does offer some good news for other financial institutions. Mergers and acquisitions are on the rise, as are new stock and bond sales. Jefferies' results include March deals, of course, which others reported in their first quarter. Also, these businesses have a tougher time moving the revenue needle at trading-heavy banks. And the data ought to come as no surprise to anyone keeping an eye on deal flow and league tables. Investors may want to dial back their exuberance.
