For Jefferies, the last big broker-dealer standing after the global financial crisis a decade ago that saw Morgan Stanley and Goldman Sachs transform themselves into banks, the coronavirus crisis has hit close to home.
In March, the firm lost chief financial officer Peg Broadbent to the virus, a tragedy that shocked its staff and those that used to work there.
Financially, however, the picture is far from gloomy. The biggest Wall Street banks are set to begin reporting 2020 earnings this week, with JPMorgan and Citi due to announce on Friday. And last week’s numbers from Jefferies have set the season up for records in some investment banking and capital market business lines.
Jefferies Group, which houses the Jefferies investment banking, capital markets and alternative asset management businesses, on January 4 announced record revenues and profits for its fiscal year to the end of November, with an enviable return on tangible equity (ROTE) of 20.4%.
And unlike rivals more burdened by traditional banking costs, its lean model shows up in equally appealing operating leverage. In the past five years, revenues have risen 110% while expenses are up only 70%. Net earnings were up 258% in 2020 to $875 million.
For shareholders, too, things are rosier than at some other firms, with Jefferies unencumbered by the restrictions on paying dividends or buying back stock that hamper returns elsewhere.
Jefferies Financial Group, the broker-dealer’s parent, returned nearly $1 billion to investors in the 2020 fiscal year, taking its total over the three years – in which it has been particularly focused on returning capital to shareholders – to $3.4 billion, equivalent to 44% of 2017’s tangible equity.
And growth during that period means that for all the capital returned, tangible equity still stands where it did three years ago.
2020 was a seminal year for Jefferies – and more is yet to come
Rich Handler and Brian Friedman, Jefferies
For Jefferies, getting to this point has been a marathon rather than a sprint. Last year, Euromoney dug deep into the firm’s Asian business, where success has finally followed decades of investment, for example.
Writing in its annual letter to shareholders last week, CEO Rich Handler and president Brian Friedman said that the firm’s strong showing in 2020 was no “overnight miracle”, but the result of decades of investment and hard work.
“We believe 2020 was a seminal year for Jefferies and more is yet to come,” they added.
The firm’s stock barely moved immediately after the announcement of the results after markets closed last Monday, although by the end of the week it had risen more than 6%. It trades at about 0.7 times book value, better than many, but a level that management reckons is undervalued.
“We continue to believe that the stock market has neither fully appreciated the uniqueness and momentum of the Jefferies core operating platform, nor the sum of the value of our businesses and assets,” Handler and Friedman told shareholders.
Everything up
Judging by 2020’s figures, that core platform looks strong – albeit its record numbers have come at a time of extraordinary capital-markets activity that also bodes well for the firm’s peer group, as they report earnings during the next few weeks.
In advisory and in equity capital markets (ECM), Jefferies posted record annual revenues that rose 37% and 149%, respectively, from the previous year, with advisory revenues passing through the $1 billion mark.
Debt capital markets was not a record result, but rose 34% nonetheless. Fixed income and equities sales and trading also posted records, up 97% and 45% and both soaring past $1 billion for the year.
More encouraging still for the read-across to peers is the fact that Jefferies’ fourth quarter year-on-year investment banking and markets performance was even more stellar than its full-year gains.
With the exception of fixed income trading – where the biggest performance gain was to be had earlier in the credit market recovery – the fourth quarter was the best of the year for every business and saw bigger increases than for the full year.
Equity underwriting revenues of $340 million for the quarter were more than three times the same period in 2019. Debt underwriting doubled and advisory was up 80%.
Jefferies advised on 199 M&A deals that closed in the 12 months to end-November, according to Dealogic, one deal more than in the previous period. However, it clocked up its revenue increase despite a 34% fall in the total value of those deals, meaning that it is securing better-paying mandates.
A sizeable chunk of Jefferies’ ECM bookrunner credit for the year came from initial public offerings (IPOs) of special purpose acquisition companies (Spacs), vehicles that saw an explosion of listing and acquisition activity in 2020 as volatility made mergers with Spacs more appealing than traditional routes to market for companies looking to list.
Spac IPOs in the US raised more than five times as much in 2020 as they did in 2019. Jefferies ranked fourth in Spac IPO bookrunner rankings in 2020, behind Credit Suisse, Citi and Goldman Sachs, according to Dealogic.
Away from its core investment banking business, one drag on Jefferies has been its legacy merchant-banking portfolio, a hodge-podge of stakes, some of which it acquired through its merger with Leucadia in 2013. However, it has been busy offloading non-core businesses since then, selling 11 and raising $4.7 billion.
For 2020, the division posted a pre-tax loss of $25 million, attributed to the $145 million write-down it took in the first half of the year on investments in WeWork, JETX and HomeFed, which was only partly offset by gains from Idaho Timber and Vitesse Energy, as well as some $60 million from hedges in the first quarter.
“We believe there is solid upside in the remaining portfolio,” wrote Handler and Friedman. The firm estimates fair value for its investments at $2.6 billion, but carries them on its books at $1.9 billion.
Adapting
As at rivals, Jefferies faced challenges to adapt to the rapidly shifting conditions in 2020. Its 41 global offices morphed into a network of 3,822 individual home offices, made possible by what Handler and Friedman called its “secret weapon” – the firm’s technology and support teams.
As far as the pandemic is concerned, the executives see 2021 as a dangerous year in which premature celebration at the arrival of vaccines must be avoided.
From the perspective of the firm itself, Jefferies is consulting with its staff on the future of its working environment. However, it has already concluded that people can be completely effective even when working from home and caring for their families.
“We wish it didn’t take a pandemic to show us this was possible, but we certainly aren’t going to let any of these newfound insights go to waste,” they added.
