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Jefferies Profit Tumbles 83% on Plunge in Bond-Trading Revenue

September 17, 2013

Jefferies Profit Tumbles 83% as Bond-Trading Revenue Plunges

Jefferies Group LLC Chief Executive Officer Richard Handler said earlier this year that Jefferies saw a “significant slowdown” in fixed-income trading during March and April resulting from concern about the tapering of the Federal Reserve’s bond-buying program. Source: Jefferies Group via Bloomberg

Jefferies Group LLC, the investment bank owned by Leucadia National Corp. (LUK:US), said profit plunged 83 percent in the fiscal third quarter as trading revenue fell to the lowest since the depths of the financial crisis.

Net income for the three months ended Aug. 31 dropped to $11.7 million from $70.2 million a year earlier, the New York-based firm said yesterday in a statement. Jefferies was acquired this year by Leucadia, whose quarter ends Sept. 30.

Revenue from fixed-income trading, a unit overseen by William Jennings and Johan Eveland, plunged 88 percent to $33.1 million, bringing total revenue from buying and selling securities to $184.1 million, the lowest since the fourth quarter of 2008. The biggest Wall Street trading firms are scheduled to report third-quarter earnings in October. JPMorgan Chase & Co. (JPM:US), the largest U.S. bank, said this month revenue from trading could fall as much as 5 percent.

“We experienced a very challenging summer in our fixed-income businesses due to the rising-rate environment, spread widening, redemptions experienced by our client base which heavily muted trading, and related mark-to-market writedowns within our inventory,” Jefferies Chief Executive Officer Richard Handler, who also runs Leucadia, said in the statement.

Handler, 52, said earlier this year that Jefferies saw a significant slowdown in fixed-income trading during March and April resulting from concern about the tapering of the Federal Reserve’s bond-buying. Speculation that the Fed will reduce its $85 billion in monthly purchases has sent the benchmark 10-year Treasury yield to its highest level since 2011. The central bank is set to speak today about the stimulus program.

September Improvement

“Fixed-income markets were most unsettled in June, while July and August were more balanced,” Handler said in yesterday’s statement. “Since Labor Day, client flows have been stronger, and fixed-income performance has markedly improved to more normal levels,” he said, referring to the U.S. holiday on Sept. 2.

Handler became Jefferies’s CEO in 2001. He has since grown its assets almost 10-fold while more than tripling headcount to about 3,800 employees. The company paid him $19 million for fiscal 2012 after its stock jumped 48 percent in the period.

Shares of Leucadia fell 0.9 percent to $28.05 yesterday in New York. They slid about 21 percent in the three months ended Aug. 31 amid the surge in interest rates. In that same period, yields on the benchmark 10-year Treasury climbed from 2.1 percent to 2.8 percent.

Equity Rally

Central-bank stimulus has helped drive a global equity rally, with the Standard & Poor’s 500 Index (SPX) rising more than 150 percent from its bear-market low in 2009. The index reached a record Aug. 2, then fell 4.5 percent by month’s end as speculation increased that the Fed would begin winding down its stimulus.

“This quarter is going to be a quarter where banks differentiate themselves on how they manage risk and execute,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “Execution is going to be key in differentiating who did well and who didn’t.”

Jefferies’s revenue from trading stocks also declined, falling 28 percent to $151 million from the year-earlier period. Investment-banking revenue climbed 23 percent to $319.3 million amid increases in fees from underwriting and advising clients.

Knight Capital

Jefferies recorded negative revenue from principal transactions of $24.9 million in the quarter. That compares with $297 million in revenue in the same period of 2012.

The firm marked down its investment in the former Knight Capital Group Inc. by $16 million in the fiscal third quarter amid declines in that firm’s stock price, Handler said in the statement. That mark-down was recorded in the firm’s equities net revenue, he said.

JPMorgan said last week that third-quarter revenue from trading stocks and bonds could be unchanged to down as much as 5 percent from a year earlier. September 2012 was “particularly strong, and we’re not necessarily expecting it to be as strong this year,” Chief Financial Officer Marianne Lake said at an investor conference.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net


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Companies Mentioned

  • LUK
    (Leucadia National Corp)
    • $25.25 USD
    • -0.17
    • -0.67%
  • JPM
    (JPMorgan Chase & Co)
    • $61.25 USD
    • 0.14
    • 0.23%
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