Wall Street bellwether sees trading revenues drop 50% following August rout
Wall Street bellwether Jefferies reported sales and trading revenue dropped close to 50% in the third quarter, which unfolded over an historically rocky trading rout in August.
The investment bank, which is fighting a sexual harassment lawsuit in the U.K., attributed the decline to a $14 million loss in its fixed income trading. The loss resulted in total sales and trading revenue of $184.9 million for the three months ended in August, down close to 50% from the $367 million reported in the third quarter of 2014.
Jefferies reported total adjusted revenues of $583 million on adjusted net earnings of $47 million, down from the same period in 2014 when Jefferies reported total net revenues of $843 million and net earnings of $84 million.
During earnings season, Wall Street regularly looks to Jefferies for insight on how the larger banks might perform in areas like investment banking and trading. Large trading losses at Jefferies are often an indicator that JPMorgan, Goldman and Morgan Stanley will report similar losses — and vice versa.
The loss comes as Jefferies is fighting a sexual harassment lawsuit from Dalal Alaoui Belghiti, a former saleswoman who is suing the bank for 3.5 million pounds, or $5.4 million. She claims women were treated as "sex objects" and that she was once excluded from a work ski trip so men could engage in "alcohol-fueled parties" and sexual activity.
Despite being "adversely affected" by the August trading rout, revenues rose in Jefferies' stock sales and trading business. The boutique bank, which is a wholly owned subsidiary of Leucadia National Corp. (LUK), said its core equities business earned $203 million for the three months ended in August, up from the $172 million earned in that business over the same time period last year.
Investment banking revenues of $390 million fell short, however, of the $467.7 million earned this time last year.
In its third-quarter earnings report, Jefferies CEO Richard Handler said the fixed-income loss, which hit its high-yield distress debt trading book, was due to volatility in the oil and gas industry, which kicked off last year but picked up in August.
Handler said the bank's third-quarter woes capped off losses totaling $90 million across more than 25 distressed energy positions over the last nine months. Over that time, the bank has seen average losses of about $8 million in its 10 largest individual loss-making positions, the bank said.
But, Handler said exposure in its distressed energy-trading business was nearly halved during the quarter, which should limit losses to this industry in the coming quarters.
"We believe that, with our exposures in distressed securities reduced to current levels, there should be no similar impact on our future results,” Handler said.
Earlier this month, Handler confirmed the bank had suffered “some pain” in its trading business due to the August turmoil that led to wild swings in stocks, commodities and currencies.
In the letter, Handler also predicted such losses may be widespread.
"Unfortunately there is company both at Jefferies, and in all likelihood at similar and other desks across the trading floors of our competitors,” Handler wrote in the letter, a copy of which was obtained by Paste BN.