* Adjusted eps 32 cents vs. Street view 29 cents
* Knight stake boosts earnings by 8 cents/share
* Jefferies shares fall 6.6 percent to $14.62 after report
* Analysts question plans for pay, funding and potential
By Lauren Tara LaCapra
Sept 20 Jefferies Group Inc, an
investment bank, reported quarterly banking and trading revenue
below some analysts' forecasts, a sign that the summer was
likely also rough for its bigger competitors, and the bank's
shares fell 6.6 percent.
Trading activity picked up across the board in September
thanks to fresh stimulus plans from the U.S. Federal Reserve,
the bank's chief executive said. But a better September was too
late to help Jefferies' fiscal third-quarter results, which
cover the three months ended Aug. 31.
The New York-based bank reported a 2.8 percent rise in
third-quarter profit on Thursday, but excluding the acquisition
of a stake in Knight Capital Group Inc, results came in
slightly below what some analysts had been expecting.
JMP Securities analyst David Trone cut his estimates and
price target for the firm, saying Jefferies' operating results
excluding the Knight revenue and other special items "fell
short" and that he expected the stock to "remain captive" to
broader economic concerns.
Trading volumes and investment banking deals were stagnant
in the quarter. Because the firm reports earlier than bigger
Wall Street competitors, whose quarter ends Sept. 30, investors
tend to look at Jefferies' results as a harbinger for what will
come from banks like Goldman Sachs Group Inc and Morgan
Chief Executive Richard Handler said conditions have
improved dramatically this month after the U.S. Federal Reserve
unveiled a program to purchase $40 billion in mortgage bonds.
"September has begun extremely well," Handler said on a
conference call with analysts, citing improvements "literally
across the board" in fixed-income and equities trading globally.
But while improvements from the Fed's stimulus program, or
QE3, will undoubtedly help bank profits in the short term,
banking analyst Meredith Whitney questioned whether the
temporary improvements are just delaying resolution of
fundamental issues hampering industry profits since 2010.
"QE3 makes everybody feel like a really smart trader," she
said on the Jefferies conference call.
Analysts hammered Jefferies with questions about some of
those issues on the call, asking about the high portion of its
revenue that goes toward compensation, about how the bank funds
itself, and about how the threat of a Moody's downgrade may
affect the company in terms of business and collateral calls.
Jefferies paid employees 59.6 percent of net revenue last
quarter, in line with previous periods but higher than the 50
percent ratio that industry peers generally target. Three
analysts asked management about the figure, and how they expect
it to change moving forward.
Handler said he expects the payout ratio to decline
naturally over the next two years or so as revenues rise with
better market conditions, as employees become more productive,
and as retention bonuses, promised to woo talent in recent
years, wind down.
"We have obviously a long way to go from where we are to
where we need to get," he said.
Jefferies executives also said a potential Moody's downgrade
would not have a significant effect on their trading business
because Jefferies does not have much exposure to
over-the-counter derivatives, the kind of trades that would
likely be subject to large collateral calls if a downgrade
Moody's, which already downgraded 15 other banks with large
capital markets businesses this year, said this month that it
may cut Jefferies' rating as well.
Jefferies' results were muddied by the Knight stake and by
special items related to its acquisitions of Hoare Govett and
Bache. The company acquired the Knight stake last month when it
took part in a private bailout of the market-making firm after
Knight suffered a $440 million trading loss due to a software
Jefferies posted earnings of $70.2 million, or 31 cents per
share, for its fiscal third quarter, up 2.8 percent from $68.3
million, or 30 cents per share, a year earlier.
Adjusted earnings were 32 cents per share, topping analysts'
average estimate by 3 cents, according to Thomson Reuters
I/B/E/S. But excluding the Knight revenue, Jefferies' results
missed some analysts' estimates by a wide margin.
Trone estimated that the firm's operating earnings were just
24 cents per share and Oppenheimer analyst Chris Kotowski said
the reported figure came in 10 cents below his estimate, which
Jefferies said its stake in Knight contributed 8 cents to
its earnings per share, and $103.3 million to principal
Jefferies' overall revenue rose 45.1 percent, largely due to
positive income in principal transactions, versus a loss in that
trading business a year ago.