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Tuesday, 28 June 2016

Finger in the air

Jefferies shows Wall St earnings still a crapshoot

Jefferies’ second-quarter earnings probably aren’t a reliable bellwether for the rest of Wall Street this time round. The mid-sized investment bank blamed a tough March and April for most of the 35 percent drop in second-quarter profit compared to the same period last year. That, though, is at odds with both market data and hints from some of its larger rivals.

Jefferies’ Chief Executive Richard Handler said the reason for the slowdown was client concerns “about the tapering of the Federal Reserve’s quantitative easing programs.” Such fears have certainly rocked markets in recent weeks, sending the yield on the 10-year U.S. Treasury up half a point to 2.2 percent and sharply curtailing new bond sales by companies.

It seems to have affected Jefferies more immediately than rivals, with the firm reporting a 27 percent drop in fixed-income trading revenue compared with a year ago. Yet Bill Gross, Pimco’s co-chief investment officer, for one, did not make his call about the end of the bull market for bonds until April 29.

April, while not the best month, was still pretty benign in many markets – high-grade and high-yield debt, leveraged loans and real estate all had a decent showing, according to Credit Suisse. Other banks certainly benefited. In mid-May, for example, Mike Cavanagh, co-head of JPMorgan’s corporate and investment bank, happily told investors at a conference that his FICC traders had, so far this quarter, added 15 percent more to the top line than a year earlier.

Of course, Jefferies’ results also included March, which fell into its larger rivals’ first quarter. Handler ruled out trading hits as a reason for his firm’s performance, which leaves either business mix or client activity – or more likely both.

It could be that Jefferies of late has been more dependent on trading government and agency bonds, which both had a tough April. Or perhaps the drop in futures and commodities volume hit the firm.

Unfortunately, it’s even tougher to discern than before. As of March, Jefferies has been a subsidiary of investment firm Leucadia National, so does not have to produce the same detailed earnings reports it used to. Executives probably like the reduced burden. But the opacity makes comparisons even trickier than usual.

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Jefferies on June 18 reported net income for the three months to May of $42 million on revenue of $646 million. That was 50 percent lower than the prior quarter and 35 percent below the bank’s second quarter last year.

Fixed-income revenue of $213 million was 27 percent lower than the same period last year and 37 percent below the first-quarter showing. Equity trading revenue, at $145 million, was 13 percent below the first quarter but 22 percent above last year’s second quarter.

Equity underwriting, debt underwriting and advisory revenue fell 12 percent, 5 percent and 7 percent respectively from the first quarter but were either just above or just below their levels in last year’s second quarter.

Jefferies was recently sold to investment firm Leucadia National, with the deal closing on March 1. As a wholly owned limited liability corporation within Leucadia, Jefferies no longer needs to publish as much detail about its results as it did as a public company.

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