NEW YORK (Reuters Breakingviews) - Jefferies is plodding in Morgan Stanley’s footsteps. Like its bulge-bracket rival, the investment bank run by Richard Handler seems to have steadied its bond-trading business. Its latest earnings, released on Tuesday, also got a boost from underwriting that should bode well for the rest of Wall Street. Morgan Stanley Chief Executive James Gorman, though, has so far done a better job turning progress into profit.
Both banks restructured their fixed-income divisions a couple of years back after some volatile quarterly swings in revenue. Jefferies, which had bulked up after the financial crisis left larger peers reeling, changed its unit’s management and dumped a futures business a year or so after buying it. Morgan Stanley, after several stalled attempts to get the unit on track, put equities chief Ted Pick in charge and slashed a quarter of the workforce.
The two firms' top lines still jump around, but not by as much. Morgan Stanley, in fact, has often grown faster than rivals and in each of the past four quarters has handily beaten its target of generating $1 billion of revenue from fixed-income trading.
The far smaller Jefferies, with just under $160 million of fixed-income trading revenue in its quarter to May, still has work to do as the top line for the segment fell by a third from the same period last year. As a result, the firm's overall trading revenue, excluding a gain on its stake in KCG, was almost 18 percent lower. That’s a bigger slump than the 10 to 15 percent drop for the three months to June that executives at Bank of America, Citigroup and JPMorgan have foreshadowed in recent weeks – but not by much.
Handler, though, still can’t crank out decent profitability, even with a near-threefold jump in bond underwriting fees last quarter. Jefferies' annualized return on equity was just 5 percent for the period. Morgan Stanley managed double that in the quarter to March, thus covering its cost of capital.
Gorman, of course, has more levers to pull, not least in Morgan Stanley's wealth-management division. Accounting for just a quarter of parent Leucadia's overall revenue may give Jefferies some breathing room. But Handler needs to pick up the pace.
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