DealBook: Jefferies Reports $39 Million Profit

Jefferies has been whipsawed by investor fears over its European exposure.

The Jefferies Group reported a $39 million profit for the fourth quarter on Tuesday, as it grappled with choppy markets that have crimped once highly lucrative trading operations.

Jefferies’ earnings for the three months ended Nov. 30, which exclude some onetime accounting gains, amounts to 17 cents a share. Analysts, on average, had expected the bank to earn 14 cents a share, according to data from Bloomberg.

For the year, the firm earned $232 million, a slight improvement from the $224 million it earned last year.

The quarterly results were anxiously awaited by analysts and investors, hoping to scrutinize how well Jefferies had fared after weeks of pressure over its European sovereign debt holdings.

In recent months, the firm has been whipsawed by investor fears over its European exposure. The bank’s shares have tumbled nearly 20 percent since Oct. 31, when MF Global filed for bankruptcy protection after its outsize bets on European bonds prompted a run on that firm.

Eager to avoid becoming the next victim of a European scare, Jefferies detailed its sovereign holdings, then drastically cut its inventory of such debt to demonstrate the liquidity of its balance sheet. Top executives have also stridently battled purported rumormongers allegedly spreading lies about the firm’s financial position.

“We are proud of our 3,851 employee-partners who successfully navigated an extremely challenging fourth quarter that included continuing global volatility compounded by a November filled with a barrage of misinformation about Jefferies,” Richard B. Handler, the chief executive, said in a statement.

Analysts have praised Jefferies’ candor and risk management as signs of a firm both stronger and more careful than MF Global. But some of these same analysts have added that they were concerned that Jefferies might have taken those lessons a bit far, shedding too much risk to build up a safety cushion.

Jefferies “appears to be significantly deleveraging its balance sheet in addressing those concerns, which could further crimp profitability,” analysts at Bank of America Merrill Lynch wrote in a research note on Nov. 28.

In other respects, Jefferies is expected to foreshadow what lies ahead for its larger peers. While banks have said the fourth quarter reflected a rebound from a particularly ugly third quarter, both investment banking and trading businesses are expected to post only modest improvements.

Jefferies’ core trading business reported $286 million in revenue for the fourth quarter, down 25 percent from the period a year earlier, amid a continued slowdown in debt and equity trading. The drop was most noticeable in the firm’s principal transactions group, where revenue plunged 81 percent as Jefferies pulled back from its European sovereign bets.

The investment banking unit reported a drop of about 11 percent, to $261.3 million.

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