Fitch: Jefferies' 2Q16 Earnings Rebound in More Stable Trading Environment
Jefferies' quarterly net revenues of $719 million were up 140% from $299 million in 1Q16 but down 9% from the year prior. Equities sales and trading revenues were $223.5 million (up from $1.7 million in 1Q16) driven by mark to market gains of $60 million on Jefferies' two largest equity positions (one of which was disclosed as being KCG Holdings Inc.), compared to $82 million of mark to market losses on these two positions in the first quarter.
Fixed income revenues improved to $238.5 million from $56.8 million the prior quarter and $153.4 million the prior year. Fixed income performance improved across all regions as trading activity increased and Investment Banking benefited from increased advisory business, but capital markets issuance activity remained muted. Fitch views this increase positively, especially given that these results were achieved with lower overall balance sheet risk from a year prior.
Investment banking net revenue was $253 million, up 10% on a linked-quarter basis and down 37% compared to the prior year. Advisory revenues improved year on year but capital markets revenues remained subdued, with Jefferies' citing slow activity in new issue equity capital markets and leveraged finance. Performance in the asset management segment was lower, but is a small contributor to overall performance. While total net revenues were down 9% from the year prior, total non-interest expense was reduced 13%, in part due to reduced headcount, leading to quarterly earnings before taxes of $102.6 million, up 21% from the prior year.
In 2Q16, Jefferies maintained its strong risk and capital positions. The balance sheet increased slightly to $37.1 billion from $35.2 billion a quarter prior, but remained well below $44.1 billion from the year ago period. Jefferies' reported firm-wide VaR for the quarter was $8.25 million, down 35% from $12.8 million in 2Q15.
Jefferies-calculated adjusted leverage, defined as assets excluding securities borrowed, reverse repurchase agreements, cash and goodwill, and intangibles divided by tangible equity, was estimated at 9.0x at May 31, 2016, up from 8.5x at February 29, 2016. Fitch views Jefferies' balance sheet, leverage and VaR levels as reasonable for the rating category, although it is expected that over time Jefferies may modestly redeploy capital and risk capacity.
Jefferies-calculated liquidity, which includes cash, cash equivalents, high-quality government securities and reverse repurchase agreements collateralized by high-quality government securities, remained solid at 13.1% of total tangible assets at 2Q16 (up from 12.9% of total tangible assets at 1Q16). Despite the repayment of $350 million of debt maturing in March 2016, Jefferies continued to maintain ample cash-on-hand, measuring $2.8 billion as of May 31, 2016, up from $2.6 billion as of Feb. 29, 2016.
Jefferies, a Delaware-incorporated holding company, is a full-service investment banking and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies LLC, holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At May 31, 2016, Jefferies had U. S. GAAP total assets of $37.1 billion and shareholders' equity of $5.3 billion (including non-controlling interests and $1.9 billion of goodwill and intangibles). Fitch considers Jefferies to be a core subsidiary of Leucadia National Corp. (Leucadia, 'BBB-', Outlook Stable) based on Jefferies' significance relative to Leucadia's equity and the role it is expected to continue playing in the combined company's future strategic direction.