Analysts aren't expecting larger investment bank rivals to match the swings Jefferies Group LLC reported in its fixed-income trading and equity underwriting businesses.
Jefferies reported Dec. 19 that its combined underwriting and advisory revenue increased 27.4% year over year to $528.7 million thanks in part to equity capital markets revenue increasing 97.2% to $122.4 million in the company's fiscal fourth quarter. During the same period, Jefferies' trading revenue fell 11.1% to $289.1 million driven by fixed-income trading dropping 36.6% to $94.7 million.
Jefferies, a subsidiary of Leucadia National Corp., ends its fiscal year Nov. 30 and typically reports quarterly results roughly a month before most of its investment banking peers. Analysts often view Jefferies' results as an indicator to earnings results that other investment banks will report.
Fitch Ratings Senior Director Justin Fuller said he doubted the larger investment banks would see as large of a jump in equity underwriting as Jefferies did during its fourth quarter because initial public offering activity has been underwhelming.
"The IPO market continues to kind of be quiet," Fuller said in an interview.
He also expects the larger investment banks to report a challenging fourth-quarter environment for fixed-income trading because of low volatility. Fourth-quarter trading revenue results face a difficult year-over-year revenue comparison because the aftermath of the U.S. election results boosted activity during the end of 2016.
In a Dec. 19 report, JMP Securities LLC analyst Devin Ryan noted that the trading activity in the fourth quarter of 2016 was an aberration, but he doubts many others will report as big of a decline in fixed-income trading revenue as Jefferies. Still, Ryan anticipates year-over-year fixed-income trading declines of more than 20% for larger peers in the fourth quarter.
Recent commentary from executives of larger banks suggests that the bigger peers might see a greater decrease in overall trading revenue and smaller increase in overall investment banking revenue compared to what Jefferies reported.
For instance, Bank of America Corp. Chairman and CEO Brian Moynihan and JPMorgan Chase & Co. CFO Marianne Lake both said at a Dec. 5 investor conference that their respective companies had seen an increase of less than 10% for investment banking revenue year over year quarter-to-date. Each executive also said trading revenue was down about 15% year over year through the first couple months of the fourth quarter.
During a Dec. 6 investor conference presentation, Citigroup Inc. CFO John Gerspach said his company had seen a drop "in the high teens percentage" for its combined fixed-income and equities trading business. "With our business, we are more heavily weighted towards fixed income in our trading business than equities," he said according to a transcript.
Morningstar Inc. analyst Michael Wong said low volatility and the flattening of the yield curve has negatively impacted fixed-income trading. He noted that short-term interest rates have come up recently, and a hope is that moves by the Federal Reserve can help increase longer term rates.
"The Fed unwinding its balance sheet and some ancillary events could get the long end to lift up a bit," he said in an interview. "And then that could be better for investment banks."
But while the lower rates and volatility might hurt fixed-income trading, they do improve the debt issuance backdrop, which can help boost underwriting business for investment banks. Jefferies reported that its fiscal fourth-quarter debt underwriting revenue increased 35.6% year over year to $174.5 million. In equities trading, Jefferies saw a year-over-year revenue increase of 10.5% to $194.4 million in its fiscal fourth quarter.
In a Dec. 19 report, Credit Suisse Securities (USA) LLC analyst Susan Roth Katzke said Jefferies' banking and equities results "are generally stronger than what we've observed quarter to date."