Wall Street Firms' Profits Tumble
By Brian Kelleher
NEW YORK (Reuters) - Falling stock markets cut into fiscal first-quarter profits at three of Wall Street's top independent firms, as Morgan Stanley Dean Witter & Co. (NYSE:MWD - news), Lehman Bros. Holdings Inc. (NYSE:LEH - news) and Bear Stearns Cos. Inc. (NYSE:BSC - news) on Wednesday all reported declines in investment banking and trading
results.
Stock offerings and merger activity -- two main drivers of investment banking revenue -- dried up during the quarter, sending profits lower. A prolonged stock market slump included a 22-percent Nasdaq Composite Index (.IXIC) decline in February, the technology-stock-dominated market's third-worst month ever.
Bear Stearns' quarterly profit fell 40 percent for the three months ended in February, while earnings at Morgan Stanley were down 30 percent. Lehman profits fell 29 percent. On Tuesday, rival investment bank Goldman Sachs Group Inc. (NYSE:GS - news) said its fiscal first-quarter net income fell 13 percent.
``The industry as a whole is experiencing challenging market conditions,'' Bear Stearns' Chief Executive James Cayne said in a statement.
Analysts had been trimming their quarterly estimates in anticipation of flagging investment banking and trading revenue, and Morgan Stanley and Lehman managed to beat reduced estimates.
Bear Stearns, which said earlier this month it would have a tough time meeting forecasts, missed the First Call/Thomson Financial earnings per share estimate by 14 percent.
DEALS FELL OFF THE CALENDAR IN THE FIRST QUARTER
Initial public offerings (IPOs) and mergers and acquisitions (M&A), which carry fees that feed Wall Street revenues, were down dramatically for the three months through Feb. 28, roughly the same period as the fiscal first quarters of the three investment banks.
The value of announced mergers fell by more than half, down to $482.5 billion from a staggering $1.07 trillion, according to market research firm Thomson Financial Securities Data.
IPOs have been yanked by companies scared away by plunging markets. By last Friday, 63 companies had withdrawn or postponed their deals this year, compared with only 21 withdrawn IPOs between January and March 2000.
All three companies felt the hit as investment banking revenues dropped dramatically, but their shares all traded higher on the New York Stock Exchange after the announcement of their results.
Morgan Stanley shares were up $1.50 at $58.06, while Lehman shares were $1.86 higher at $67.76. Bear Stearns shares gained $1.19 to $47.94.
MORGAN STANLEY BANKING REVENUE DOWN, BOOKS PORTFOLIO LOSS
Morgan Stanley, which is the No. 2 U.S. full-service brokerage and also issues the Discover credit card, reported earnings of $1.08 billion, or 94 cents a share before an accounting change, for the three months ended Feb. 28.
That compared with profits of $1.54 billion, or $1.34 a share, in last year's first quarter and edged the consensus analysts' estimate of 93 cents a share.
The company's portfolio took a hit from gloomy stock markets. Morgan Stanley booked a loss of $46 million on principal investments, compared with a gain of $431 million a year ago, when markets were higher.
Total net revenue fell to $6.39 billion from $7.43 billion because of a 28-percent decline in investment banking revenue and a 25-percent decline in trading revenue.
``We're very focused on reducing expenses,'' Chief Executive Philip Purcell and President Robert Scott said in a joint statement.
The firm is trying to trim non-compensation expenses and will keep headcount roughly flat after increasing staff by 14 percent last year, Scott said in a conference call.
LEHMAN PROFITS BEAT LOWERED EXPECTATIONS
Lehman, which has about 11,925 employees worldwide, reported net income of $387 million, or $1.39 a share, for the three months ended Feb. 28. That compared with earnings of $541 million, or $1.84 a share, for last year's fourth quarter.
The results beat Wall Street forecasts of $1.37 a share. The consensus forecast had been lowered by 5 cents since March 6.
Investment banking revenue was off 21 percent to $471 million, and revenue from helping companies sell stock plunged 60 percent to $105 million. Capital markets revenue, which includes stock and bond trading gains, was down to $1.21 billion from $1.34 billion.
BEAR STEARNS' PROFITS SINK ON BANKING DECLINE
Bear Stearns, which on March 6 said it cut more than 3 percent of its work force, posted net income of $166 million, or $1.10 a share before an accounting change, for the three months ended Feb. 23. That compared
with net income of $278 million, or $1.89 a share, last year.
Total net revenue fell to $1.21 billion from $1.51 billion a year ago. Investment banking net revenue dropped 59 percent to $120 million. The firm blamed the decline on fewer stock offerings and said M&A revenue was also down.
Bear Stearns also said it will keep tight control of its expenses, although it said difficult market conditions
produce opportunities to hire new talent as other firms cut back on staff.
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