By Saabira Chaudhuri
Jefferies Group LLC added to the gloom surrounding banks'
fourth-quarter trading revenues, on Tuesday reporting a steep drop
in fixed-income revenue while investment banking also fell.
Jefferies, seen by some as a harbinger of results for other Wall
Street firms, reported a 73% slump in quarterly fixed-income
revenue as the firm was hit by a decline in the value of distressed
securities.
Overall, the investment-banking unit of Leucadia National Corp.
reported it had swung to a loss in the quarter ended Nov. 30 as
revenue fell 43% from a year earlier.
After a pickup in client activity during the third quarter that
translated into stronger-than-expected trading revenue, big banks
are again grappling with a challenging trading environment that is
expected to hurt results when they report earnings next month.
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 hoped.
Jefferies meanwhile said it is considering a possible sale or
joint venture for the commodities and financial-derivatives unit it
bought from Prudential Financial Inc. just three years ago. The
unit has faced growth and margin challenges. Other banks have also
been retreating from commodities for both regulatory and financial
reasons.
"We experienced a very challenging fourth quarter," said
Jefferies Chief Executive Richard Handler. "Heightened volatility
from mid-September through mid-November and a tepid trading
environment throughout the quarter led to poor fixed-income
results."
Jefferies also reported softer investment-banking revenue of
$316 million, down 24% from a strong year-earlier quarter as deals
were delayed amid what Mr. Handler described as "unsettled
markets."
The investment bank's results are considered by some to be
indicative of how other Wall Street investment banks are doing.
Jefferies's quarter ends one month earlier than other banks, but
December has also featured rocky trading conditions and falling
stock prices.
Jefferies reported fixed income revenue of $61.4 million, down
from $227.1 million a year earlier. Much of that decline stemmed
from an $84 million drop in trading revenue after the firm was
forced to mark down the value of its inventory following a selloff
in distressed securities.
The selloff, Jefferies said, came after a court in September
dismissed claims brought by a group of Wall Street investors
against the federal government for sending nearly all profits
generated by Fannie Mae and Freddie Mac to the U.S. Treasury. A
drop in oil prices, which have fallen about 50% since June, also
contributed to the firm's trading woes, said a person familiar with
Jefferies' business.
Jefferies had to mark down securities issued by Freddie and
Fannie, and those from energy and transport sector issuers and some
high yield municipal issuers. The New York investment bank isn't
subject to the same level of stringent regulation as its larger
rivals, making it more able to hold riskier securities, according
to Wall Street analysts.
The "unsettled markets" also led to deal postponements,
Jefferies said, hurting the firm's investment banking business.
Revenue in that business, which includes merger advice and
underwriting, fell 24% to $316 million. In its release, Jefferies
also referred to a divorce proceeding of one of its senior bankers,
saying that any impact from the "unusual publicity" surrounding the
matter "was immaterial."
JMP Group analyst Devin Ryan said other banks may have better
investment banking results in the quarter. "Investment banking
broadly is still a positive theme," he says.
While fixed-income revenue is widely expected to be down for the
industry, the drop is unlikely to be as steep as what Jefferies'
reported, Mr. Ryan added, since the firm "is a bit more levered to
some of the more distressed and high-yield businesses" than its
larger rivals.
J.P. Morgan expects its markets revenue to be down in the
high-teens from a year ago, or 4% on a core basis. Bank of America
estimates its fourth-quarter trading revenue will be lower than
both year-ago levels and the third quarter's, while Citigroup has
said markets revenue would be down year-over-year by about 5%.
Jefferies's quarterly results released Tuesday don't include
December, a month Mr. Ryan characterizes as "challenging on the
trading front with high yield spreads continuing to blow out in
recent weeks."
Jefferies on Tuesday said it is in talks with third parties
about a potential combination of its commodities and
financial-derivatives unit, known as Bache, with a similar business
to improve its competitive standing.
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. They also include a $52 million
bad-debt provision tied to Danish fuel-supplier OW Bunker, which
Jefferies provides futures clearing and execution services to, and
which last month filed for bankruptcy.
Chelsey Dulaney contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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