Jefferies' Epic Plunge In Bond Trading Revenues Shows Not All Is Well
The aspirational bulge bracket firm that is best known for issuing and trading $200 million or thereabouts-sized HY bonds, hiring all recently terminated UBS bankers, and writing highly confident letters for Carl Icahn, also happens to be a very useful early indicator of the general state of the banking industry. Since it is one of the very few original Investment Banks left that did not convert into a holding company, and shift its calendar to a December 31 year end (everyone remembers that stub month in 2008 when every bank took epic writedowns, padded their credit reserves for the next 5 years, and... effectively deleted it by moving from a November 30 to a December 31 calendar), Jefferies also provides a glimpse into general trading dynamics (and revenues) one month early. Unfortunately, if the Jefferies quarterly data released yesterday are any indication of what banks are set to report, then run far away.
The chart below summarizes what can only be described as an epic collapse in Jefferies' fixed-income trading revenue, which imploded by an unprecedented 88% Y/Y, and 84.5% from later quarter, to $33.1 million - the lowest since the same quarter in 2011 when the European collapse dragged everyone down, and sent Jefferies stock into the single digits over concerns about its European exposure, forcing Dick Handler to release a CUSIP by CUSIP disclosure of its European bond holdings.
Adding insult to injury, Equity trading also dropped 28% Y/Y, however at least Investment Banking revenue (in a quarter in which a blind monkey could underwrite a B2/B- Dividend recap PIK Toggle) offset these unprecedented losses somewhat by rising 23% to $319.3 million.
End result: profit crashed from $70.2MM in 2012 to just $11.7MM in the current year. Naturally, the collapse in revenue had an impact on bonus provisioning as comp and benefits expense dropped 33% to $293.8 million.
So what happened? It is unclear: here is what CEO Dick Handler had to say via WSJ:
"With the significant change in expectations regarding interest rates, we experienced a very challenging summer in our fixed-income businesses," said Jefferies and Leucadia Chief Executive Richard Handler in a statement. Still, he said that, since Labor Day, client flows have been stronger and fixed-income performance has "markedly improved to more normal levels."
Mr. Handler attributed the decline in fixed-income revenue to the rising-rate environment, spread widening, redemptions experienced by its client base which "heavily muted trading," and related mark-to-market write downs.
The last bolded sentence is what one would associated with a market plunging into a bear market... not trading at its all time highs.
Which begs the question: just how, if at all, are banks hedged or providioned for an increase in volatility and/or rates from these levels, if a mere 4% blimp in equity markets caused Jefferies to nearly write-down it entire bond-trading revenue for the quarter?
And now that Jefferies is in the record books, just how bad with bond trading results for the rest of the big banks be? We should know in about 4 weeks.
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