Jefferies profit beats estimates as trading revenue surges

December 18, 2012 04:38 AM

Jefferies Group Inc., the investment bank that agreed to be acquired by Leucadia National Corp., said fiscal fourth-quarter profit rose 48 percent, beating analysts’ estimates, as trading revenue surged.

Net income for the three months ended Nov. 30 was $71.6 million, or 31 cents a share, from $48.4 million, or 21 cents, a year earlier, the New York-based firm said today in a statement. Earnings per share excluding some items was 35 cents, compared with the 32-cent average estimate of nine analysts surveyed by Bloomberg. Profit for the fiscal year fell to $282.4 million from $284.6 million a year earlier.

Jefferies, run by Chief Executive Officer Richard Handler, said last month it would be acquired by its largest shareholder, Leucadia, in a $2.8 billion deal. The purchase, which both companies said would help Jefferies weather market turmoil, gives investors 0.81 Leucadia share for each Jefferies share they own, less 81 cents a share for the spinoff of a wine business. Handler, 51, will become CEO of the combined firms.

“Trading markets and volumes were reasonably robust during September and most of October, but slowed for the U.S. election for the remainder of our fiscal year,” Handler said on a conference call after results were released. “Activity and volumes have been solid for the first few weeks of December.”

Jefferies gained 0.9 percent to $18.41 at 10 a.m. in New York. The shares have advanced 34 percent this year.

Trading Revenue

Sales and trading revenue surged 64 percent in the quarter to $469.6 million from a year earlier. Driving the increase was revenue from fixed-income trading, which more than doubled to $293 million. Equities revenue rose 42 percent to $176.6 million.

The Federal Reserve’s quantitative easing program, where it buys $40 billion in mortgage debt each month, has resulted in “reasonably robust” trading volume, Handler said on the call.

“Across the products within fixed income, I think we’re gaining market share,” Handler said. “The fact that the Fed is cooperating is added gravy.”

Revenue from investment banking was $283 million, an 8.3 percent jump from a year earlier. Capital markets revenue rose to $198.7 million from $89 million, while advisory revenue fell 51 percent to $84.3 million.

Total revenue for the year ended Nov. 30 was $3.87 billion, a 9.7 percent increase from the previous fiscal year.

Cash Bonuses

Jefferies has vowed to pay year-end bonuses in immediately available cash, according to a Dec. 7 memo obtained by Bloomberg News, distinguishing itself from larger Wall Street competitors that are paying more compensation in deferred stock.

The firm set aside $460.4 million, or 60 percent of net revenue, for compensation expense in the fiscal fourth quarter, compared with $308.1 million, or 56 percent, a year earlier.

The Leucadia deal, which may be completed in the first quarter, could help Jefferies bolster earnings without boosting risk -- something Handler has said he wants to avoid. The firm will be able to curb tax and dividend payouts so it can tap profits to boost capital, analysts said after the deal was announced.

Jefferies has pared assets by almost one quarter in the past year following investor concern that standalone investment banks are vulnerable to Europe’s sovereign-debt crisis and market upheaval. Like other Wall Street firms, Jefferies is under pressure to cut costs amid a trading slump that has forced smaller companies to close.

Bloomberg News

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