Jefferies Equity Trading Slips Even as Volatility Increases

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(Bloomberg) -- Wall Street equities desks were hopeful that a February spike in volatility would bring some action as clients reacted to the moves. For one bank, it did the opposite.

Jefferies Group LLC said its equity-trading revenue fell slightly in its fiscal first quarter, driven by quieter volume in the first half of February. The investment bank said activity has picked back up since then, and fixed-income revenue was consistent across the quarter, which ended Feb. 28.

Volatility returned to markets last month as U.S. stocks had their worst single-day plunge in almost seven years and 10-year Treasury yields reached the highest level in more than four years. Banks including JPMorgan Chase & Co. and Citigroup Inc. have forecast higher trading revenue for their first quarters, which end in March.

Volume during first half of February was “more muted in a period of increased volatility following a sell-off in the global equity markets,” Jefferies Chief Executive Officer Richard Handler and Brian Friedman, chairman of the executive committee, said in a statement.

Jefferies typically books some of its own equity holdings in its stock-trading revenue. Since the value of those holdings fluctuates, it can be difficult to isolate how its equity traders fared each quarter.

Investment Banking

In investment banking, Jefferies said revenue climbed 5.3 percent from a year earlier to $433.8 million. That was a record for the first quarter but a decline from the previous three months.

“The pipeline remains healthy but you need the cooperation of the markets to get deals priced,” Charles Peabody, an analyst at Compass Point Research & Trading LLC, said in an email. “If we get increased volatility, it could abort some deals.”

Devin Ryan, an analyst at JMP Securities LLC, said in a note that the trends that started Jefferies’ fiscal year “are broadly consistent with activity we have been tracking over the past few months, including a continuation of healthy investment banking and mixed sales and trading.”

Those trends will probably show up in results from large investment banks when they report earnings next month, Ryan said.

Other key results:

  • Equities-trading revenue dropped 0.1 percent to $155.8 million
  • Fixed-income trading revenue declined 3.6 percent to $213.1 million
  • First-quarter net loss was $60.8 million largely because of an income tax expense. That compared with profit of $114 million a year earlier.
  • Tax impact:
    • $164 million charge due to tax law, with $108 million to write down deferred tax assets and the rest for a charge on repatriation of foreign earnings
    • Sees future benefit from lower U.S. corporate tax. Forecasts rate at about 27 percent versus fiscal 2017’s comparable rate of 36 percent

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