Jefferies Group Inc., the investment bank that helped rescue Knight Capital Group Inc., dropped the most in 10 months in New York trading after reporting revenue and earnings that fell short of analysts’ estimates excluding gains from the deal.
Shares of Jefferies declined 7.3 percent to $14.52 at 4:15 p.m., after the company posted net income for the three months ended Aug. 31 of $70.2 million, or 31 cents a share. Earnings adjusted for the Knight Capital transaction were 24 cents a share, compared with the average estimate of five analysts surveyed by Bloomberg for 26 cents.
Jefferies helped arrange a $400 million bailout for Knight Capital earlier this year after trading losses spurred by a software failure. The share ownership added $103.3 million to Jefferies’s principal-transaction revenue and 8 cents to its earnings per share, according to a statement today from the New York-based firm.
“There is some disappointment that more of the Knight gain did not accrue to shareholders,” said Douglas Sipkin, an analyst at Susquehanna Financial Group LLLP. “Knight made a big gain of $100 million, so why only 8 cents for shareholders? Why are you paying out so much of that to employees?”
Jefferies set aside $440.4 million, or 60 percent of net revenue, for compensation in the quarter, compared with $299.6 million, or 59 percent, a year earlier. The firm employed 3,814 people at Aug. 31, compared with 3,809 on May 31 and 3,842 on Aug. 31 last year.
The compensation ratio should fall during the next several years following a surge in headcount from 2008 to 2011, Brian Friedman, chairman of the executive committee, said today on a conference call. Jefferies is focusing on cutting costs, which will make room for the ratio to decline, he said.
Total non-interest expenses increased to $608.3 million from $468.7 million in the fiscal third quarter last year.
Net revenue jumped 45 percent to $738.9 million from last year’s fiscal third quarter. The increase was driven by sales and trading, which more than doubled to $475.7 million. Investment banking revenue fell 11 percent to $260.2 million.
Revenue from fixed-income sales and trading surged to $265.7 million from $33.1 million in the year-earlier period. Equity sales and trading revenue climbed 66 percent to $210 million.
“Absent Knight, it was a revenue miss,” said Jeff Harte, an analyst at Sandler O’Neill & Partners LP. Jefferies’s fixed-income trading revenue missed Harte’s estimate of $278 million. “My sense was that the market was thinking the consensus number was conservative, but it turned out to be aggressive.”
Jefferies will probably report “solid financial results” for the rest of the year, Moody’s Investors Service said this month. The rating company said it may still cut Jefferies’s credit grade as it faces the same capital-markets pressures that prompted the downgrade of 15 other banks earlier this year.
The firm has kept leverage down and has a “more liquid, less complex” balance sheet than its larger peers, Moody’s said.