Lehman Profits Rise 5.6%, Matching Forecasts

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Lehman Brothers, the nation's fourth-largest investment house, said Wednesday robust trading and overseas expansion drove its first-quarter profit up 5.6%, matching Wall Street expectations.

Quarterly profit after paying preferred dividends rose to $1.13 billion, or $1.96 a share, for the three months ended Feb. 28 from $1.07 billion, or $1.83 a share, in the year-ago period.

Revenue grew 13% to $5.05 billion from $4.46 billion a year earlier.

Wall Street expected earnings of $1.96 per share and revenue of $4.97 billion, according to analysts surveyed by Thomson Financial.

"The brokers are still showing impressive revenue growth and profitability," said David Easthope, a senior analyst with financial research and consulting firm Celent LLC.

Despite relatively robust results, investors sent shares down in afternoon trading. Wall Street has been concerned that financial companies will be slammed if the meltdown among subprime mortgage lenders begins to spill over into other markets.

And there was some evidence of that in Lehman's first-quarter results.

Lehman, primarily known as Wall Street's biggest bond trading house, said its fixed-income revenue rose 3%, the lowest growth-rate since last year's first quarter. To blame was "weakness in the U.S. residential mortgage sector," according to Chief Financial Officer Chris O'Meara.

He said Lehman's subprime business accounts for 3% of total revenue, and that the company's positions are "well protected" against subprime trouble through hedges. Some 25 percent of its own mortgage origination is subprime, he said.

Concern about rising mortgage delinquencies has sent a ripple-effect through the entire banking industry. Financial institutions such as Lehman originate loans, which are then packaged into securities and sold to investors.

New Century Financial, which had been a major provider of loans to people with risky credit, announced on Monday it lost support from its financial backers and lost its listing on the NYSE. Lehman was not a major lender to New Century.

Despite being weighed down by its subprime portfolio, Lehman reported fixed-income trading rose to $2.16 billion during the quarter. Revenue from stock trading, buoyed by its hedge fund clients, advanced 42% to $1.34 billion, while advising on mergers and securities sales rose 8 percent to $247 million.

Chief Executive Richard Fuld has tried to remake Lehman's image from being one of the biggest underwriters and traders of bonds.

Recent years have seen an expansion into mortgage lending through about five acquisitions. O'Meara said despite the subprime headwinds, Lehman could make further acquisitions, or buy portfolios, because the dislocation will create opportunity.

Lehman has also heavily expanded its investment banking capacities in Europe and Asia, and has built up its asset management capabilities. Its business trading and arranging financing for hedge funds have also picked up - just this week Lehman took a 20% stake in D.E. Shaw Group, one of the world's largest hedge fund managers.

The New York-based investment bank is the second of four big Wall Street firms to report earnings in the next two weeks. Goldman Sachs beat Wall Street expectations on Monday, while Bear Stearns is on tap to report earnings on Thursday and Morgan Stanley will post results on March 22.