By Saabira Chaudhuri And Chelsey Dulaney
Weak trading revenue in the fourth quarter may drag down results
for the nation's biggest banks when they report earnings next
month.
After a pickup in client activity during the third quarter that
translated into stronger-than-expected trading revenue, banks are
again grappling with a challenging trading environment.
Tuesday, Jefferies Group LLC, the investment-banking unit of
Leucadia National Corp., reported weak quarterly results. Jefferies
reported a 73% slump in fixed-income revenue to $61.4 million in
the fourth quarter.
Overall, Jefferies reported it had swung to a loss in the
quarter ended Nov. 30 as revenue fell 43.5% from a year earlier.
Leucadia shares fell about 0.7% in early-afternoon trading and are
now down about 24% for the year so far.
"Heightened volatility from mid-September through mid-November
and a tepid trading environment throughout the quarter led to poor
fixed-income results, including mark-to-market write-downs in our
inventory," said Chief Executive Richard Handler in a statement.
Overall, he said, "we experienced a very challenging fourth
quarter."
Jefferies also reported softer investment-banking revenue of
$316 million, down 24% from a strong year-earlier quarter.
The investment bank's results are considered by some to be a
harbinger for how other Wall Street banks, particularly Goldman
Sachs Group Inc. and Morgan Stanley, may be faring in trading,
mergers and acquisitions, and other businesses. Jefferies's quarter
ends one month earlier than the other banks.
Part of Jefferies's fourth-quarter weakness in investment
banking comes from the energy sector, which has been pummeled by
the recent slide in oil prices, leading companies to delay
deals.
Larger firms like Goldman and Morgan Stanley by contrast are
more diversified and could report investment banking revenue that
is higher than year-earlier levels, some Wall Street analysts
predict.
Separately, Jefferies said it is considering strategic options
for the commodities and financial-derivatives unit it bought from
Prudential Financial Inc. in 2011, which has faced growth and
margin challenges.
Jefferies bought the unit, known as Bache, in mid-2011 as part
of an effort to grow from a securities-industry boutique focused on
trading into a full-service investment bank that helps clients
raise money and transfer risks through the use of derivatives
contracts. Tuesday, Jefferies said it is in talks with third
parties about a potential combination of Bache with a similar
business to improve its competitive standing.
Much of Jefferies's decline in fixed-income trading revenue in
the fourth quarter came from mark-to-market inventory losses
because of what the firm characterized as a "broad selloff in
distressed and post-reorganization securities."
While fixed-income revenue is widely expected to be down for the
industry, the drop is unlikely to be as steep. Jefferies "is a bit
more levered to some of the more distressed and high-yield
businesses" than its larger rivals, notes JMP analyst Devin
Ryan.
Overall however, Mr. Ryan expects trading results to be lower
for the industry this quarter. Jefferies's quarterly results
released Tuesday don't include the month of December, a month Mr.
Ryan characterizes as "challenging on the trading front with high
yield spreads continuing to blow out in recent weeks."
Last week, Bank of America Corp., Citigroup Inc. and J.P. Morgan
Chase Co. all offered weak outlooks for trading revenue in the
fourth quarter, showing that a burst of activity for trading last
quarter may not carry over as much as some investors hope.
Overall, Jefferies posted a loss of $92.4 million, compared with
a year-earlier profit of $109.9 million. The results included a $52
million goodwill write-down and an $8 million write-down, both
related to the Bache business, as well as a $52 million bad-debt
provision tied to Danish fuel-supplier OW Bunker.
Mr. Handler said the prospects for 2015 are "solid, with our
investment banking backlog currently robust, and an expectation of
more normal trading markets."
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Chelsey Dulaney at c helsey.dulaney@wsj.com
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