Lehman Profit Beats Estimates as Equities Offset Mortgage Woes
By Yalman Onaran
Sept. 18 (Bloomberg) -- Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds, said profit fell less than expected as fees from equities trading and investment banking offset some losses from subprime home loans.
Net income fell 3 percent to $887 million, or $1.54 a share, in the third quarter from $916 million, or $1.57, a year earlier, the New York-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was $1.48 a share.
Chief Executive Officer Richard Fuld's efforts to reduce the reliance on fixed income by expanding stock trading and merger advice solidified earnings as contagion in the credit markets spread, led by defaults among home-loan borrowers with poor credit histories. Lehman is cutting about 2,000 mortgage-related jobs. Revenue from equities jumped 64 percent to $1.37 billion.
``Lehman has done a better job of diversifying away from the fixed income and hedge fund dependency,'' said Peter Kovalski, who helps manage $12 billion, including Lehman shares, at Alpine Woods Investments in Purchase, New York. ``They have been investing more in their international business.''
Revenue from fixed-income trading fell 47 percent to $1.06 billion in the quarter, while investment banking revenue rose 48 percent to $1.07 billion. Asset management and retail brokerage fees jumped 33 percent to $802 million. Revenue outside the U.S. accounted for 53 percent of the total.
Return on equity decreased to 17 percent as of Aug. 31 from 21 percent a year ago.
Saudi Basic, Home Depot
Lehman is the first of the five biggest U.S. securities firms to post third-quarter profits. Morgan Stanley reports results tomorrow, followed by Goldman Sachs Group Inc. and Bear Stearns Cos. on Sept. 20. Merrill Lynch & Co.'s earnings will be published next month.
Lehman advised on $107 billion of corporate takeovers in the past three months, up 11 percent from a year earlier, and underwrote $5.5 billion of stock offerings, up 35 percent, data compiled by Bloomberg show.
General Electric Co. used Lehman for the sale of its plastic division to Saudi Basic Industries Corp. for $11.6 billion. Lehman also advised on Home Depot Inc.'s $8.5 billion sale of its construction-supply unit to a buyout group.
``Lehman's franchise has ample product and geographic diversification to offset some of the slowdown in mortgage and areas in credit such as leveraged lending,'' said UBS AG analyst Glenn Schorr in a Sept. 11 report to clients. ``Lehman's stock is undervalued relative to the long-term earnings power of the franchise.''
Lehman, which fell 88 cents yesterday to $58.62 in New York Stock Exchange trading, has declined 25 percent this year, the second-worst performance after Bear Stearns among the industry's five largest firms.
$75 Billion Commitment
The subprime mortgage market ground to a halt after U.S. foreclosures rose to a record high in the second quarter. Lehman makes money lending to homeowners and packaging mortgages into bonds. Revenue from that business has dropped as investor appetite for such securities dwindled. Subprime home loans are made to borrowers with bad credit scores or heavy debt loads.
Subprime losses spread to other credit markets in July as investors fled from high-risk, high-yield corporate debt to U.S. Treasuries. Lehman may have to fund $16 billion of loan commitments to leveraged buyouts at a loss because investors are reluctant to buy that type of debt, Citigroup Inc. analyst Prashant Bhatia estimated last month.
Sales of U.S. asset-backed securities, such as bonds that repackage subprime loans or credit card debts as well as collateralized debt obligations, fell 73 percent from a year earlier to $30 billion last month, according to estimates from analysts at Deutsche Bank AG.
``The corporate credit crunch will resolve itself over the next few weeks,'' said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC, in a Sept. 5 report. ``A big disconnect between market concerns and Lehman's actual experience continues.''
To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net .
Last Updated: September 18, 2007 08:11 EDT
|
Thread abonnieren
ETF-Sparplan