Leucadia Rallies as CEO Vows Return to Trading Profitability

  • Investment-banking gains contribute to earnings rebound
  • Bond-trading revenue plunges 83%, equity trading down 22%

Leucadia National Corp. rallied the most in almost four years on speculation Jefferies Group, the investment bank it purchased in 2013, will succeed in reducing balance-sheet risk and reversing declines in its bond-trading business.

Fixed-income trading will return to “normal profitability” in 2016 after suffering from a rout in global energy prices and weakening demand for riskier assets ahead of a long-anticipated increase in U.S. interest rates, Chief Executive Officer Richard Handler said in a statement Tuesday announcing Jefferies’s fourth-quarter results. The company is also taking steps to lower volatility and risk by reducing its balance sheet $6 billion from the end of last year, to $38.5 billion, and dropping its leverage to the lowest level in about seven years.

“We have made significant changes and are committed to improving our performance in 2016,” Handler, 54, said in the statement. “We have methodically implemented a range of changes which we believe will result in less volatility and risk, greater efficiency and better returns, all with no meaningful impact to our clients or our ability to generate revenues.”

Leucadia rose 5.5 percent to close at $16.96 in New York, the biggest jump since January 2012, and the second-largest increase in the 87-company Standard & Poor’s 500 Financials Index. Since purchasing Jefferies in March 2013, Leucadia has fallen more than any other company on that index as bond trading slumped.

Revenue from trading stocks and fixed income dropped 36 percent to $132.1 million in the three months ended Nov. 30, led by an 83 percent plunge in bond trading, according to the statement. While revenue at the New York-based company slipped 2.2 percent, gains from investment banking and lower costs helped push net income to $24.7 million, compared with a loss in the prior year’s fourth quarter.

“It was a dreadful year and a dreadful quarter on some levels, but not worse than expected and there’s every reason to expect next year will get better,” Chris Kotowski, an analyst at Oppenheimer & Co., said by phone from New York. “Their balance sheet is better than it was a year ago and they’ll live to fight another day.”

Investors watch Jefferies for clues about trading at the bigger investment banks, which report results next month. Top officials at Bank of America Corp., Citigroup Inc., and Morgan Stanley have suggested in recent weeks that the worst might be behind them after Wall Street struggled with lower trading revenue for years, cutting costs and jobs.

Several banks have acknowledged doubts about how quickly the bond-trading business will bounce back after revenue fell by more than half since 2009, though JPMorgan Chase & Co. Chief Financial Officer Marianne Lake said an expected increase in interest rates could benefit those businesses next year.

Handler, 54, said Jefferies cut its exposure to distressed-energy trading to $39 million from $70 million at the end of August. The company’s losses in the sector had totaled $90 million through the end of the third quarter, he said in September.

“It’s not just that the trading results were pressured, but also as they’re de-risking the balance sheet, as they’re selling inventory into a challenging market, that’s further impacting the results in the sense that they may have to sell at lower prices,” Nathan Flanders, an analyst at Fitch Ratings, said in a phone interview.

Despite a 48 percent decline in revenue from bond underwriting, total income from investment banking rose 18 percent to $372.9 million, led by Jefferies’s advisory business.

Before it's here, it's on the Bloomberg Terminal.