Investment Banks Post Record 2006 Profit
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By JOE BEL BRUNO
AP Business Writer
Published December 14, 2006, 10:20 PM CST
NEW YORK -- Lehman Brothers and Bear Stearns sent a not-so-subtle message to Wall Street on Thursday when announcing 2006 results -- the word "record" appears a combined 37 times in their earnings reports.
Surging stock and bond markets, coupled with an unprecedented level of takeover activity, has turned the big investment houses into corporate cash machines. It is also delivering stratospheric bonuses to top employees, with Goldman Sachs Group Inc. doling out a staggering $16 billion this year.
For all of fiscal 2006, Lehman Brothers Holdings Inc. reported record net income of $4 billion, up 23 percent from the previous year. Bear Stearns Cos.'s profit for the year soared 40 percent to $2.1 billion. Goldman Sachs said Tuesday its full-year profit soared 70 percent to $9.4 billion, and Morgan Stanley Inc. is set to deliver strong results when it reports next Tuesday.
For chief financial officers, closing the books on 2006 has been an eye popping experience. They remain enthusiastic about 2007, though don't expect to see a repeat as the economy begins to moderate.
"We look out and believe we're having terrific performance, and you see it building throughout the year all across the board ... you can't help but feel good about where you're going," said Lehman CFO Chris O'Meara. "It's hard to predict where we'll be next year, but I will tell you we have some high quality people, and that sets us up for good things next year."
His counterpart at Bear Stearns, Sam Molinaro, said he could tell this was going to be a bumper year for Wall Street. "All you had to do was look at what's going on in the stock market, and the level of interest in taking companies public and making acquisitions," he said. "You have to say that the outlook for corporate America is strong right now, its in a growth mode and looking to build."
The fourth quarter was emblematic of this.
Bear Stearns reported profit attributable to common shareholders rose 38 percent to $557.6 million, or $4 per share, during the three months ended Nov. 30, while Lehman said profit rose 22 percent to $987 million, or $1.72 per share.
Both easily sailed past Wall Street projections, according to analysts polled by Thomson Financial. However, not by as wide a margin as Goldman's 93 percent jump in quarter profit on Tuesday -- the highest quarterly profit ever recorded for a Wall Street firm.
Both Lehman and Bear Stearns are renowned globally for their strength, and sometimes dependence, on the fixed-income market. The bond market has seen strength this year, as Treasury yields dipped to multiyear lows and companies increasingly raised debt to finance acquisitions.
"The quality of the earnings was quite good with merger and acquisitions being the clear standout in terms of performance upside," said Credit Suisse analyst Susan Roth Katzke "It was another solid quarter with full year profitability above average."
Fixed-income trading revenue for both companies rose 25 percent from the year-ago period, and at a faster pace than seen during the third quarter. Instruments such as derivatives were linked to everything from stocks to weather, or credit-default swaps that let investors hedge against bond defaults.
Investment banking was another area that both investment houses have been trying to expand in the U.S. and internationally. Bear Stearns' investment banking business rose 58 percent to $364 million. Lehman said its investment banking business rose only 5 percent to $585 million, and that fees from advising on corporate deals fell 7.2 percent to $256 million.
Six straight months of gains by the Standard & Poor's 500 index, with the Dow Jones industrial average reaching a new all-time high, was a boon for Wall Street.
Bear Stearns reported that revenue from its institutional equities business rose 7 percent to $397 million, while its money management and wealth management revenue jumped 33 percent to $245 million.
Lehman said revenue from equity sales and trading rose 22 percent to $900 million in the fourth quarter, compared with $2.14 billion in revenue from bond trading. Its money management and wealth management revenue grew 26 percent to a record $640 million.
Both Wall Street firms also outlined their bonus scheme for the period, which was far below the $622,000 per employee being paid out by Goldman Sachs.
Lehman said it would pay its employees an average of $335,441 this year -- paying 25,936 workers a total of $7.7 billion in salary, bonuses and other benefits. At Bear Stearns, staff would receive an average of $321,740 in compensation.
Copyright © 2006, The Associated Press |
