NEW YORK | Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, says robust stock trading and buyout business pushed second-quarter profit up 27 percent, in what may be a harbinger for other brokerage earnings due out this week.
For the three months ended May 31, profit after paying preferred dividends rose to $1.26 billion, or $2.21 per share, from $986 million, or $1.69 per share, a year earlier.
Gains from stock trading amid a record run on Wall Street, as well as fees charged to companies for advice on takeover deals, helped drive Lehman's business during the quarter. Revenue rose 25 percent to $5.51 billion -- half of that coming from overseas.
Results topped Wall Street projections for earnings of $1.88 per share on revenue of $4.97 billion, according to analysts polled by Thomson Financial.
"Lehman kicked off the investment bank reporting season with exceptional results driven across almost all businesses with the exception of fixed income trading," said Goldman Sachs analyst William Tanona. "We expect the other brokers to rally alongside these results."
Shares of the New York-based investment bank rose $1.57, or 2.1 percent, to $77.25. Lehman is the first of four U.S. investment banks to report results, with Goldman Sachs Group Inc. and Bear Stearns Cos. scheduled to report results on Thursday.
The surge in stock trading, and growth of overseas markets, is expected to help boost profits for the nation's investment banks. The industry has continued to outperform Wall Street projections, but growth has begun to weaken after nearly four years of record results.
Chairman and Chief Executive Richard Fuld, who has led Lehman since it was spun off from American Express in 1994, has transformed the company into one of Wall Street's biggest investment banks. While Lehman's bond business has traditionally been its biggest revenue stream, Fuld has steered the bank into more profitable businesses globally, such as merger and acquisition advisory.
Diversifying the firm has allowed Lehman to remain profitable even as some of its key businesses lag. For example, this year the company has been able to compensate for weakness in its mortgage banking business related to subprime loans.
Equity trading drove Lehman's capital markets business to $3.6 billion from $3.1 billion year-over-year, a gain of 17 percent. However, the fixed income segment of that business -- which includes bonds, derivatives and credit products -- fell 14 percent to $1.9 billion from $2.2 billion a year-ago because of "continued weakness in the U.S. residential mortgage business."
There has been continued concerns since the start of the year about how major Wall Street firms would deflect losses in their mortgage-backed securities business caused by the slump in the housing industry. Lehman is the biggest U.S. underwriter and purchaser of mortgage loans, which the company then packages into securities.
Top executives at the firm have said recently that its exposure to mortgage loans represents less than 3 percent of total revenue during the past 18 months. Lehman has spent most of this year trimming that exposure after anticipating weakness in the industry at the end of last year.
"We continue to believe the subprime challenges are, and will continue to be, contained," said Chief Financial Officer Chris O'Meara during a conference call with investors following Lehman's second-quarter earnings report. "Although we believe the subprime business faces headwinds in the near-term, we are seeing positive signs."
Lehman's investment banking unit posted revenue of $1.2 billion, up 55 percent from $741 million a year earlier. The flurry of takeover deals during the quarter caused many companies to seek financing, driving Lehman's debt origination up 87 percent to $530 million and equity origination up 60 percent to $333 million.
During the quarter, Lehman advised Tishman Speyer in its takeover of real estate investment trust Archstone-Smith Trust, a $22.2 billion deal including debt. It also advised CVS Corp. on its $21 billion acquisition of Caremark Rx Inc., and Altria Group Inc.'s spinoff of Kraft Foods.
O'Meara said Lehman remains well positioned for continued strength in its M&A business. This quarter it is advising ABN Amro on a possible sale, with bidders that include U.K. bank Barclays PLC and a group led by Royal Bank of Scotland.
