Jefferies Third-Quarter Earnings Fall 16 Pct

NEW YORK (Reuters) - Jefferies Group Inc (JEF.N: Quote, Profile, Research, Stock Buzz), a U.S. investment bank serving small and mid-sized companies, said on Tuesday third-quarter earnings slumped by 16 percent, falling short of expectations as the summer credit crunch slammed its junk bond business.

The New York-based company said third-quarter net income was $38.8 million, or 26 cents a share, compared with $45.9 million, or 32 cents a share, in the same quarter last year.

Analysts, on average, had expected Jefferies to earn 32 cents a share, according to Reuters Estimates. The disappointing results sent Jefferies shares down as much as 7 percent in morning trading to a one-month low.

"The financial market turmoil during the quarter clearly took its toll on Jefferies' high-yield business, which was already facing a challenging comparison" against record results in the second quarter, Fox-Pitt Kelton analyst David Trone said in a client note.

Jefferies has grown rapidly in recent years with its focus on underwriting and trading securities for small and midsize companies. But that gave Jefferies' greater exposure to junk bond and collateralized loan obligation (CLO) markets, which were disrupted by this summer's credit crunch.

Net revenue fell 2 percent to $334 million, with weakness in almost every business line. Principal transaction revenue fell by half and asset management swung to a loss.

The high yield bond business lost $7.4 million in the quarter, compared with $75 million of revenue in the previous period.

Investment banking fees, though, rose by 31 percent to $189.8 million, that business' second-best quarter ever, reflecting Jefferies' expansion of its merger advisory and stock underwriting activities in recent years.

That expansion, intended to help diversify earnings, also helped push up expenses during the quarter.