Investment Banking Revenue Hits Record, but Credit Mishaps Drag Down Results; Jefferies (JEF.US) Q1 Earnings Miss Expectations, Stock Falls 36% Year-to-Date

Jefferies Financial Group (JEF.US) announced earnings that fell short of Wall Street expectations, weighed down by losses from credit investment missteps. Although the firm posted its strongest first-quarter record for investment banking, earnings per share of $0.70 still missed the analyst forecast of $0.87. The results included a $17 million loss related to two recent credit risk events—Market Financial Solutions and First Brands Group.

President Brian Friedman said in an interview on Wednesday, “There’s some noise in our data, which is well known. We’re working to steer market attention toward what we believe are the most important aspects—our strong and healthy business.”

Jefferies was the first U.S. bank to report earnings, offering a glimpse into how Wall Street has been handling issues like private credit, artificial intelligence, and geopolitical turbulence in the first few months of this year. The results suggest that large U.S. banks—whose earnings reports are due next month—may also see growth in investment banking revenue and a boost in trading activities, despite disclosing their own credit issues.

Jefferies stated that revenue increased 26% year-over-year to $2.017 billion, with net income up 22% to $155.7 million. The performance was driven by a 45% surge in investment banking revenue, supported by increased transaction volume across multiple industries.

The capital markets division also contributed to profit growth, with stock trading achieving its best first-quarter performance ever. The firm said that trading revenue reached $558.5 million, up 37% year-over-year, driven by higher trading volumes.

This somewhat offset a 24% decline in fixed income trading revenue, which included a valuation loss related to the collapsed UK mortgage lender Market Financial Solutions last month. The judge overseeing that case cited allegations of fraud and asset double-pledging.

The firm also took a $36 million impairment related to the sale of Tessellis SpA, a telecom company in its gradually exiting merchant banking portfolio. The transaction is expected to close in the first quarter of next year.

Jefferies’ asset management division also experienced other credit-related losses. The bank previously recorded a pre-tax loss of $30 million on its stake in bankrupt auto parts supplier First Brands. After an additional $10 million write-down in the first quarter, its exposure to First Brands is now zero.

In a letter to shareholders accompanying the earnings release, CEO Rich Handler and President Friedman wrote, “Management is disappointed with the recognized losses and the potential future losses that First Brands may absorb, and takes full responsibility, but these losses are within manageable limits.”

Jefferies’ stock has fallen 36% this year, underperforming the S&P 400 MidCap Index.

The two executives stated in the letter that despite credit losses and uncertainties from the Iran war, Jefferies still sees ongoing business momentum.

Friedman said in an interview, “Assuming hostilities in the Middle East are reasonably resolved in the short term, we believe the remainder of this year and into next will see active M&A markets and strong IPO performance.”