Morgan Stanley downgrades this investment bank, cites ongoing legal and credit risks

Uncertainty around credit exposure and legal risks could weigh on Jefferies in the near term, according to JPMorgan Analyst Ryan Kenny downgraded the bank to equal weight from overweight. He also lowered his price target to $49 from $78, though that still implies upside of 28% ahead for the stock. Kenny cited elevated uncertainty around credit and legal risks. These recent credit developments include a lawsuit from Western Alliance Bank, alleging $126 million in missed payments, as well as approximately $134 million of reported exposure to failed UK mortgage lender MFS. JEF 1Y mountain JEF 1Y chart “Given that the ongoing fallout from recent credit-related events at JEF may persist in the market for some time, we are adjusting our valuation methodology,” Kenny wrote. “We see a wide risk-reward as JEF has already de-rated significantly, down 38% YTD. Core business activity is improving and we expect JEF to gain share in IB.” The analyst noted that while Jefferies denies any wrongdoing, the market has expressed concerns about additional potential credit risk alongside any future potential fallout, including legal and reputational risks. However, he remains fundamentally bullish on Jefferies’ stock. “These concerns could weigh on JEF’s multiple for some time. We continue to expect revenue and earnings improvement at JEF and note that JEF’s ongoing messaging is that the current business environment is strong,” Kenny said. “We expect core business activity at JEF to accelerate as the capital markets environment improves.” Shares of Jefferies have plunged 38% this year and are down 32% over the past 12 months.