--Jefferies second-quarter profits fall 34% on fixed income
trading revenue decline
--CEO says concerns over Fed slowing its bond-buying program led
to "subdued" fixed-income volumes
--Jefferies restates first quarter results to fix expense
error
(Adds information on trading and investment banking, headcount,
compensation and first quarter earnings restatement
throughout.)
By Brett Philbin
Jefferies Group LLC, the investment bank acquired by Leucadia
National Corp. (LUK) earlier this year, said its fiscal
second-quarter profit fell 34% as fixed-income-trading revenue
slumped amid concerns that the Federal Reserve would taper its
economic stimulus program.
Jefferies and Leucadia Chief Executive Richard Handler in a
statement called the trading environment "tepid and cautious,"
which could bode poorly for larger rivals including Goldman Sachs
Group Inc. (GS) and Morgan Stanley (MS) that report earnings next
month.
Jefferies, which closed the Leucadia transaction on March 1, is
the first U.S. investment bank to report second-quarter results and
is often seen as something of a barometer for the bigger banks,
though its fiscal period ends a month earlier than those firms.
Jefferies, while no longer a public company, still files
quarterly and annual reports with the Securities and Exchange
Commission separate from those of its owner, Leucadia, because it
issues debt under its own name.
Shares of Leucadia fell 0.1% to $27.70 in recent trading. The
stock has climbed nearly 20% year-to-date.
Overall for the period ending May 31, Jefferies reported a
profit of $42 million, down from $63.5 million a year earlier. Net
revenue, excluding mandatorily redeemable preferred interests, fell
9% to $643.1 million.
For Jefferies, the period was marked by poor fixed-income
trading results as revenue in that business came in at $213.3
million, down 27% from a year earlier and 37% from the prior
quarter.
In a statement, Mr. Handler said clients traded less frequently
in March and April because they were worried that the Fed would
pare back the third round of its quantitative easing program, in
which it buys $85 billion each month in mortgage-backed securities
and longer-term Treasury bonds.
Mr. Handler said those concerns led to "subdued fixed-income
secondary volumes and opportunities, particularly when compared to
our exceptionally strong first-quarter performance," though he said
activity improved in May.
Tough fixed-income trading conditions overshadowed a rebound in
equity trading, where revenue rose 22% from a year ago, though it
fell 13% from the first quarter. Like many firms, Jefferies has
been hurt by weak equity trading volumes in recent years.
Unlike in previous quarters, the firm didn't have the added
benefit of a gain on its 23% stake in Knight Capital Group Inc.
(KCG). Jefferies's investment in the trading firm and market maker
was marked down by $6 million in the second quarter, reflecting a
roughly 2% decline in Knight's stock price.
Roughly 10 months ago, Jefferies led a consortium of financial
firms in providing a $400 million lifeline to Knight after a costly
technology snafu. The transaction made it the firm's largest
stockholder. Knight later agreed to be acquired by Getco LLC in a
$1.4 billion acquisition.
Within investment banking, Jefferies said its revenue fell 6.7%
to $277.1 million, as its advisory fees fell 17% from a year
earlier. Along with its rivals, Jefferies has been hurt by a
skittish merger and acquisition market. The number of globally
announced transactions is down as the confidence of chief
executives remains dimmed by the recent fiscal turmoil in Europe
and a slow-moving economic recovery in the U.S.
Mr. Handler called the second-quarter investment-banking
performance "respectable," adding that "momentum appears to be
building for our third and fourth quarters, as our backlog is
strong and improving."
In other matters, Jefferies also said it corrected its
first-quarter results to account for an $8.5 million overstatement
in investment banking and filing fees related to the Leucadia
deal.
The firm said the so-called professional services expense should
have been $24.1 million, not $32.6 million as it previously
reported.
The mistake understated Jefferies' first-quarter profit by $5.3
million, so it revised the earnings to $80.1 million. The
restatement means Jefferies's first-quarter net income rose from
$77.1 million in the year earlier period, instead of a previously
disclosed decline.
On the compensation front, Jefferies paid out 57.8% of its net
revenue in compensation and benefits in the second quarter, down
from 59.6%, a year earlier. The company set aside $373.9 million
for its compensation expense, down from $423.5 million, a year
earlier.
Jefferies's total headcount at May 31 was 3,785, down 24
employees from a year earlier and down 1.5% from the first
quarter.
-Saabira Chaudhuri contributed to this report.
Write to Brett Philbin at brett.philbin@dowjones.com
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