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Fitch: Jefferies' 4Q16 Results Improve on Strong Advisory and Improved Capital Markets Revenues
December 20, 2016 / 3:35 PM / 9 months ago

Fitch: Jefferies' 4Q16 Results Improve on Strong Advisory and Improved Capital Markets Revenues

(The following statement was released by the rating agency) CHICAGO, December 20 (Fitch) Jefferies Group LLC (Jefferies) today reported fiscal fourth-quarter 2016 (4Q16) profit of $87 million, which reflected strong advisory revenue and improved results in capital markets driven by better debt underwriting results over the course of the year. These results follow Jefferies' 3Q16 reports of a strong investment banking backlog with a number of transactions closing during the fourth quarter. Although positive, this quarter's results have no impact on Jefferies' 'BBB-'/'F3' rating or Stable Outlook, as the ratings incorporate the firm's earnings variability which is driven by Fitch's view of the inherently cyclical nature of its business. Overall, Jefferies' ratings continue to be supported by the company's maintenance of conservative balance sheet positioning, capital levels commensurate with the rating category, and what Fitch views as moderate risk levels. Jefferies' quarterly net revenues of $742 million were up 13% from $654 million in 3Q16 and up 45% from the year prior. Equities sales and trading revenues were $176 million, up 19% from $148.3 million in 3Q16 and up 43% from the year prior. It is important to note that 4Q15 was particularly weak, thus the favorable year-over-year comparison. Fixed income was good in Fitch's view, though quarterly revenues of $149.4 million were down 24% from a strong third quarter but up substantially compared to $9.4 million year-on-year when the firm sold down some troubled debt positions. Similarly, fixed income benefited from favorable year-ago comparisons, but Fitch acknowledges that this quarter's results mark the third consecutive quarterly increase in fixed income revenue compared to respective 2015 quarters. Fitch believes that securities firms likely benefited from an increase in market activity across all products in the fourth quarter following the U.S. election. However, the impact on Jefferies' quarterly results is likely limited by the November quarter end. Investment banking net revenues increased to $415 million, up 40% on a linked-quarter basis and up 11% compared to the prior year. The increase was driven by record advisory revenues of $224 million (up 45% from 3Q16) and $190 million in debt capital markets revenues (up 78% from 3Q16). Fitch believes that the economic and political uncertainty which constrained industry-wide investment banking activity during the first three quarters of 2016, abated somewhat in the fourth quarter. Total non-interest expense increased 12% quarter-on-quarter, commensurate with the increase in net revenues and driven primarily by increased compensation expense, leading to quarterly earnings before taxes of $96.5 million. This represented a 20% increase from the previous quarter and a significant increase from the prior year period, when results were impacted by losses in the fixed income business. In 4Q16, Jefferies' risk and capital positioning remained relatively unchanged. The balance sheet decreased slightly to $36.9 billion from $38.1 billion a quarter prior, driven by reduced financial instrument inventory. Jefferies' reported firm-wide VaR for the quarter was $8.44 million, up 27% from the prior quarter and down 13% compared to 4Q15. The quarterly increase was driven, in part, by overall higher market volatility during 4Q16. 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 8.6x at Nov. 31, 2016, down from 8.7x at Aug. 31, 2016. Fitch views Jefferies' balance sheet, leverage and VaR levels as commensurate with the rating category, although it is expected that over time the company may modestly redeploy capital and increase its risk appetite. Jefferies-calculated liquidity, which includes cash, cash equivalents, high-quality government securities and reverse repurchase agreements collateralized by high-quality government securities, remained solid, increasing to 15.1% of total tangible assets at 4Q16 (up from 13.4% of total tangible assets at 3Q16). Jefferies continued to maintain ample cash-on-hand, measuring $3.5 billion as of Nov. 31, 2016, representing 9.5% of total assets, up from $3.1 billion as of Aug. 31, 2016, representing 8.3% of total assets. 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 Nov. 31, 2016, Jefferies had U.S. GAAP total assets of $36.9 billion and shareholders' equity of $5.4 billion (including non-controlling interests and $1.8 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 to play in the combined company's future strategic direction. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Michael Dodge Associate Director +1-212-908-0379 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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