NEW YORK--(BUSINESS WIRE)--Jefferies Group LLC (Jefferies) today reported improved fiscal second-quarter 2015 (2Q15) earnings relative to the prior two quarters, driven, in Fitch Ratings' view, by increased investment banking and equity sales and trading activity. This outpaced the continued pressure on fixed income sales and trading activity as well as the drag of on-going costs associated with the exit of the Bache futures and commodities business.
Fitch views 2Q15 performance as improved relative to both 1Q15 and 4Q14. Fitch notes that 1Q15 was impacted by significant weakness in Jefferies' investment banking and fixed income sales and trading businesses, and in 4Q14 by $112 million of goodwill and intangible asset write-downs and provision expenses associated with Bache. That said, Fitch believes the inherent volatility and market sensitivity of Jefferies' business model could affect performance in future quarters, and the company has also indicated that it expects additional pre-tax costs associated with the Bache exit of $48.6 million over the remainder of 2015. On April 9, 2016, Jefferies announced the sale of most of Bache's activities to Societe Generale S.A.
The current results do not have an immediate impact on Jefferies' 'BBB-/F3' ratings or Stable Outlook, which were affirmed on March 5, 2015, as the ratings take into account the firms' earnings volatility and the inherently cyclical nature of its business. However, sustained underperformance in core business segments that suggests more of a structural shift in performance rather than a cyclical one could lead to negative rating pressure. For additional details on Fitch's rating rationale, please see the rating action commentary titled ' Fitch Affirms Jefferies Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable'; dated March 5, 2015.
Quarterly net revenues of $791.6 million were up 9.5% from the prior year period on a GAAP basis and 12.6% on an adjusted basis, excluding losses in the Bache business. In the sales and trading businesses, equities continued to exhibit strength (up 12.1% sequentially and up 28.8% on a linked-quarter basis), while fixed income remained pressured (up 21.7% from a very weak 1Q15 but down 29.5% on a linked-quarter basis). Investment banking exhibited continued improvement in both capital markets and advisory, and management indicated that its backlog remains unchanged from the prior quarter. Performance in the asset management segment remains variable, but is a small contributor to overall performance.
Jefferies' 2Q15 net income of $59.8 million was an improvement over the prior two quarters, but was down 2.4% from the prior year period. The Bache business reported a wider operating loss of $38.4 million in 2Q15, compared to a loss of $12.7 million in 1Q15, driven primarily by increased severance and retention costs associated with the Bache staff.
The firm's risk appetite remained relatively consistent in 2Q15, as evidenced by a fairly stable balance sheet and Value at Risk (VaR). Jefferies' average assets increased 2.3% to $51 billion, while firmwide VaR decreased to $12.8 million from $13.3 billion. Post quarter, Jefferies reported the sale of $91.5 million of its ownership position in KCG Holdings, Inc. (KCG), which has historically had a meaningful impact on Jefferies' VaR. Jefferies still retains approximately $214 million in KCG shares, but with the reduced exposure, VaR impacts should decline commensurately, all else equal. Jefferies-calculated adjusted leverage, defined as assets excluding securities borrowed, reverse repurchase agreements, cash and goodwill, and intangibles divided by tangible equity, increased to 10.2x as of May 31, 2015 from 10.1x as of Feb. 28, 2015. Fitch continues to view Jefferies' leverage and VaR levels as relatively conservative.
Jefferies-calculated liquidity, which includes cash, cash equivalents, high-quality government securities and reverse repurchase agreements collateralized by high-quality government securities, increased to 11.2% of total assets at 2Q15, from 10.6% from 1Q15. The increase follows what tends to be a seasonally lower period of liquidity in the first quarter as a result of cash bonus payments.
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 May 31, 2015, Jefferies had U.S. GAAP total assets of $44.1 billion and shareholders' equity of $5.5 billion (including non-controlling interests and $1.9 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 likely role it will play in the combined company's future strategic direction.
Additional information is available on www.fitchratings.com