By now everyone knows that small banks – which have little to no capital markets exposure and are almost entirely reliant on NIM and debt transformations courtesy of their balance sheets in many cases with catastrophic results – are hanging by a thread and all it takes is one (alleged) tweet for deposits to be drained from bank XYZ, sending the bank into the waiting arms of the FDIC within hours, while Jamie Dimon will be delighted to collected the deposits. But while the large banks (and money markets) have been clear beneficiaries of the deposit flight, a question ahead of earnings season which starts in two weeks with JPMorgan, is how are they doing on their non-interest income which for most banks amounts to roughly half of their total revenue.
The answer, courtesy of mid-tier investment bank Jefferies which after the financial crisis remains perhaps the only one with an “off” fiscal year end (not Dec 31, but Nov 30) reported earnings last night one month ahead of the group, and in the process sent a flashing red alert for anyone expecting strong bank earnings this quarter. That’s because the bank reported profit for fiscal Q1 which plunged as a bump in equities and fixed income trading failed to offset a slump in investment banking.
Investment banking revenue dropped about 42% to $568 million in the period ended Feb. 28, the New York-based firm said late Tuesday in a statement. That fell well short of the $616.5 million average estimate of analysts in a Bloomberg survey. Meanwhile, sales and trading revenue grew 33% $639.4 million. Total revenue of $1.283BN dropped 24% Y/Y while EPS of 54c plunged 56% from the $1.23 a year ago.
The silver lining: while the bank was hit by the freeze in underwriting and advisory, it benefited from the turmoil in the secondary market, and fixed-income was a growth engine for Jefferies, posting a 63% gain to $330.7 million amid continued volatility across markets caused by economic uncertainty and rising interest rates. Revenue from equities trading also grew 11% from a year earlier to $308.7 million. Of note: the surge in market vol stemming from Silicon Valley Bank’s collapse happened outside Jefferies’ fiscal first quarter, but it will be captured in the Q1 period for most other banks that have a conventional March 31 quarter end.
“Despite the significant decline in M&A activity and a continued lull in the IPO and leveraged finance markets, our investment banking business continues to build on our momentum and growing market position,” Chief Executive Officer Richard Handler and President Brian Friedman said in the statement.
Capital markets will reopen, though probably not until the third or fourth quarter, Handler said after results were announced. “We saw capital formation early in the year, then the music just stopped. It won’t be a turn of the switch,” he said.
Handler said he sees pent-up demand for mergers and acquisitions, but interest rates will determine whether deals return (spoiler alert: higher rates aren’t helping). The recent banking crisis will cause even more complications for the Federal Reserve, he said.
To address the broader decline in revenue, the company’s non-interest expenses fell to $1.125 billion from $1.3 billion a year ago. Costs have been a focus for investors with persistent inflation putting pressure on spending and wage growth across the globe.
As Bloomberg notes, Jefferies’ results offer an early snapshot of how Wall Street’s biggest banks may fare as they report earnings for the first three months of 2023. Investment banking revenue plummeted last year, after corporate dealmaking and sales of new securities waned during 2022’s market swings.
The shares gained less that 1% Tuesday in regular New York trading to $30.20, and have declined about 8% this year.