Lehman profit tops forecasts

Lehman profit tops forecasts
Investment bank helped by increase in mergers, offerings and trading activity.
December 14 2006: 10:30 AM EST
NEW YORK (Reuters) -- Investment bank Lehman Brothers on Thursday said fiscal fourth-quarter profit rose 22 percent with record revenue from virtually every business line, but investors expecting even better results sent its shares down in premarket trade.
Lehman (Charts), the fourth-largest U.S. securities firm by market value, said net income rose to $1 billion, or $1.72 a share, for the three months ended Nov. 30, from $823 million, or $1.38, in the year-ago period. Net revenue rose 23 percent, to $4.5 billion.
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The results exceeded the average analyst earnings forecast of $1.68 a share, according to Reuters Estimates, but it did so by the smallest margin in six quarters. At the market open, Lehman shares rose 25 cents, to $76.70.
"The majority of the upside was driven by higher fixed-income trading results and M&A revenue, offset slightly by higher compensation and non-comp expenses," Citigroup brokerage analyst Prashant Bhatia said in a research note.
Wall Street firms in the quarter rebounded from a sluggish summer to cap off a record year amid robust M&A and leveraged buyout activity, stock and debt offerings and trading. For the year, Lehman reported record profit of $4 billion with all-time high revenue and a return on equity of 22.3 percent.
Lehman's trading revenue rose 28 percent to $3 billion, fueled by its second-best quarter ever in fixed income markets. Results were driven by customer activity and an increase in asset-based securities, muted by weaker interest rates and currency businesses.
It was a strong performance, surprising investors who still regard Lehman as a bond trading house with a heavy reliance on mortgage markets.
The equities business also had its second-best quarter, rising 8 percent to $900 million on greater market activity and growth in prime brokerage services to hedge funds. These results include private equity gains, which aren't disclosed.
Lehman's investment banking revenue rose 5 percent to a record $858 million, driven by strong debt and stock underwriting activity. Fees from merger and acquisitions, however, fell 7 percent even as the industry wraps up a record year in M&A activity.
Money management and wealth management revenue surged 26 percent to a record $640 million, as managed assets grew to $225 billion from $207 billion in the third quarter. Lehman's book value, watched closely by investors, rose 5 percent to $33.87 a share.
Analysts said Lehman's costs were higher then expected, with compensation and benefits comprising 49 percent of revenue. Salaries and bonuses, reflecting the tremendous growth in revenue, rose 24 percent to $2.24 billion.
Other expenses rose 15 percent, reflecting the company's expansion into new businesses and markets. Headcount worldwide surged 13 percent to 25,936 employees over the past year.
These results, though impressive, paled when compared with Goldman Sachs (Charts), which on Tuesday reported a 93 percent jump in quarterly profit, record annual earnings and an ROE of 34 percent. Bear Stearns (Charts), which also reported results Thursday, said its profit rose 38 percent.
Yet investors are growing more cautious as they look ahead, concerned that Wall Street earnings may have peaked.
"We understand 2006 has been such a great year for M&A, a great deal year," said Scott Armiger, a portfolio manager at Christiana Bank & Trust in Delaware. "We do see the economy slowing and that's got to factor in the investment banks' earnings next year."