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Lehman Profits Slightly Above Estimates

Lehman Brothers said fiscal fourth-quarter profit rose 22% with
record revenue from virtually every business line, but investors expecting even better results kept Lehman shares to small gains in morning trading.

Lehman, 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%, to $4.5 billion.

The results exceeded the average analyst earnings forecast of $1.68 a share, according to Thomson Financial, but it did so by the smallest margin in six quarters.

"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%.

Lehman's trading revenue rose 28% 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 rate 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% 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% to a record $858 million, driven by strong debt and stock underwriting activity. Fees from merger and acquisitions, however, fell 7% even as the industry wraps up a record year in M&A activity.

Money management and wealth management revenue surged 26% 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% to $33.87 a share.

Analysts said Lehman's costs were higher then expected, with compensation and benefits comprising 49% of revenue. Salaries and bonuses, reflecting the tremendous growth in revenue, rose 24% to $2.24 billion.

Other expenses rose 15%, reflecting the company's expansion into new businesses and markets. Headcount worldwide surged 13% to 25,936 employees over the past year.

These results, though impressive, paled when compared with Goldman Sachs which on Tuesday reported a 93% jump in quarterly profit,
record annual earnings and an ROE of 34%. Bear Stearns
which also reported results this morning, said its profit rose 38%.

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 into the investment banks' earnings next year."

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