Wall St. bellwether Jefferies posts record investment banking results

Jefferies CEO Richard Handler. Photographer: Peter Foley/Bloomberg

Investment bank Jefferies, a bellwether for Wall Street, reported record fourth-quarter results on Tuesday, and it highlights an investment banking boom but also a trading slowdown.

For the quarter ended November 30, Jefferies saw net earnings come in at $90 million compared to $87 million in the prior year’s fourth quarter. Total net revenues jumped than 10.9%, coming in at $823 million versus $742 million in the same period a year ago.

Investment banking posted a record quarter, with net revenues of $529 million versus $415 million a year ago, a 27% increase. For the year, investment banking revenue came in at $1.76 billion versus $1.19 billion for the prior year, a 48% increase.

Jefferies, whose parent company is Leucadia National (LUK), the holding company that’s often referred to as a “Baby Berkshire Hathaway,” has often been viewed as a bellwether for other Wall Street banks. That’s because Jefferies reports on a slightly different fiscal quarter that’s a month before the other banks. Jefferies ranks No. 1 this year for LBO loans in the U.S. with 91 deals, up from the No. 8 spot in 2016, according to data compiled by Bloomberg.

To be sure, Jefferies is becoming a little less of a bellwether these days as the firm has deemphasized its fixed income, balance sheet-driven businesses and ramped up its investment banking business.

“We have been building and diversifying our Investment bank since 1990 and have been even more aggressive these past ten years since the crises,” Jefferies CEO Rich Handler told Yahoo Finance in an email. “At this point, we have every product and service our clients need and we combine it with deep industry expertise across all the major industries. Our results reflect all this investment and our revenues were strong across the board in debt, equity, and convertible underwriting and advising on mergers, acquisitions, and restructurings.”

In the last half of 2017 alone, Jefferies posted over $1 billion of investment banking revenue. Mergers-and-acquisitions business and leveraged finance business were particular bright spots.

A trading slump

The results from trading stocks and bonds might provide another clue for the rest of the Street, which has struggled amid low market volatility. Jefferies’ revenue from trading stocks and bonds came in at $289 million compared to $325 million a year prior, a 12% decrease.

Breaking it down, equities net revenues for the fourth quarter climbed 10% year-over-year coming in at $194.4 million compared to $175.9 million a year ago, which should bode well for others. Meanwhile, fixed income dropped off, coming in at $94.7 million compared to $149.4 million in the same period a year ago, a 36% decrease.

“Equities was solid and fixed income started off strong but then was very slow after the first quarter,” Handler said. “This is a function of reduced volatility, tight bid-ask spreads, and low volumes. We also made a concerted effort two years ago to resize our fixed income balance sheet. The emphasis has been on building the bank and using the trading divisions to support that growth.”

On Wall Street, fixed income trading is still slow, so it’s not a surprise that other firms have been talking down their fourth-quarter results. Earlier this month, JPMorgan (JPM) and Bank of America (BAC) said their trading revenues had slumped 15% in the quarter.

Looking ahead to 2018, Handler expects corporate tax reform to bode well for businesses.

“Aside from some inevitable one-time write-offs due to the change in value of NOLs, we see this as a very big positive,” Handler said. “It will help the earnings of many of our clients as well as our own on a go forward basis.”

As for the cryptocurrency craze with bitcoin (BTC) continuing to touch new highs, the firm is keeping an eye on it.

“Many smarter people than us seem to think this is real and will be the currency of the future and others equally smarter than us believe it will end badly. We are paying attention and learning,” Handler said.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.