Wall Street: Optimism in Investment Banking as Jefferies Stock Gains 7%

Wall Street just got another sign that dealmaking is picking up as Jefferies Financial Group (JEF) reported results that beat expectations and cheered investors.

Strong Performance by Jefferies

The stock of Jefferies rose 7% in early Thursday trading after the company reported Wednesday evening that its investment-banking revenue in the second quarter rose 59% from a year ago thanks to its bond underwriting, IPO assistance, and advice on mergers and acquisitions.

"Overall, we feel very positive," Jefferies CEO Richard Handler said in a statement. The results are a good sign for Jefferies' bigger rivals on Wall Street that are due to report earnings in roughly two weeks, starting with JPMorgan Chase (JPM) and Citigroup (C) on July 12.

Positive Outlook for Major Banks

Executives from those bigger Wall Street players have also pointed to a healthy quarter for the group. At a Citigroup investor day event last week, CFO Mark Mason said he expected investment-banking fees to be "up about 50%" from a year ago.

"We are still seeing good activity from a [debt capital markets] point of view and [equity capital markets] point of view," Mason told analysts during a Q&A session. "M&A announced deals continue to look pretty good, healthy, I would say."

Earlier this month, a top JPMorgan executive said he expected investment-banking fees to be up 25% to 30% compared with the second quarter of 2023, revising an earlier estimate higher. "There's opportunity everywhere," Troy Rohrbaugh, co-CEO of JPMorgan's commercial and investment bank, said at a Morgan Stanley conference. The bank is specifically focused on growing markets such as India, the Middle East, and Japan, he added.

Challenges and Cautious Optimism

The investment banking rebound for these banks couldn’t have come at a better time, serving as a boost while higher interest rates begin to eat away at more traditional consumer banking margins. Wall Street has been waiting two years for this moment, enduring repeated false starts.

Last year was supposed to be the year things turned around as executives touted a string of IPOs and merger announcements. Instead, 2023 was the worst year for dealmaking in a decade, as clients turned cautious about everything from the direction of interest rates to relations with China to the larger US economy.

Investment banking revenue at the five big banks with sizable Wall Street operations fell by an average of 9% last year. The portion of these fees tied to advice given on mergers or acquisitions declined even more, by 21% on average. Some executives even had to walk back their talk of "green shoots" after the hoped-for surge in deals failed to materialize.

So far this year, things are looking up despite lingering concerns about the Fed's elevated rates, geopolitical tensions, and an uncertain presidential election outcome. Global investment banking revenue so far this quarter has already surpassed its year-over-year period, according to data from Dealogic. Despite the improvement, there are still signs of sluggishness and caution.

Jefferies’ mergers and acquisitions advisory revenue actually fell when compared to the first quarter of 2024, for example. And it showed a 20% decline in its fixed-income trading division compared with the first three months of the year. Other Wall Street executives said trading was more of a challenge in the second quarter. At JPMorgan, Rohrbaugh said he expects the increase for revenues to be slightly better than "mid single digits" compared with a year ago. Citi’s Mason said last week he expected trading revenue to be "flattish to down a bit."

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