Investment bank Bear Stearns, one of the nation's largest mortgage bond underwriters, said quarterly earnings fell by a third as trouble in the mortgage market hurt bond trading revenue and it wrote down assets at a stock trading venture.
The write-down was expected but results still fell short of forecasts, sending Bear Stearns shares lower .
Bear Stearns Chief Executive James Cayne is adding hundreds of bankers and traders in Europe and Asia. But for now the investment bank generates most of its profits in the United States, where the mortgage market has been tricky.
A rising number of home-owner defaults has cut into underwriting volume in the mortgage-backed market, which for Bear Stearns helped pull fixed income sales and trading revenue down 21 percent.
"Mortgage exposure has not been a good thing recently," said Jim Huguet, co-chief executive at Great Companies, which does not own Bear Stearns shares.
Weakness in bond trading helped reduce Bear Stearns' net income to $361.7 million, or $2.52 a share, for the fiscal second quarter ended May 31, down from $539.3 million, or $3.72 a share, in the same quarter last year.
Excluding a non-cash charge of $227 million, or 88 cents a share, related to the write-down of intangible assets linked to its Bear Wagner Specialists unit, earnings were $3.40 a share. On that basis, analysts on average had forecast $3.49 a share, according to Reuters Estimates.
Revenue rose 0.5 percent to $2.512 billion. Analysts' average forecast was $2.317 billion, according to Reuters Estimates.
Bear Stearns said in May it was writing down $225 million from its 2001 investment in Bear Wagner, a New York Stock Exchange floor trading firm, as electronic systems siphon more business away from human traders on the exchange floor.
Concerns about U.S. mortgage exposure have weighed on Bear Stearns shares since February. Since mid-February the shares have fallen 10 percent, while the Amex Securities Broker-Dealer
index has risen more than 3 percent.
Tighter Mortgage Underwriting
Bear Stearns tightened its mortgage underwriting standards during the quarter, which cut into volumes of new home loan securities to underwrite, Chief Financial Officer Sam Molinaro said on an investor conference call.
Mortgage lenders have been scaling back their operations nationally as mortgage defaults reach record levels. Lehman Brothers Holdings is merging two lending subsidiaries, which will result in some 400 layoffs.
Bear Stearns also wrote down the value of some of its mortgage bond inventory, Molinaro said. The company is likely to continue to be affected by difficulty in the mortgage market, he said.
Market sources said on Wednesday and Thursday that Bear Stearns was looking to sell nearly $4 billion of asset-backed securities supported by subprime loans, or loans to people with shaky credit.
The sale will help raise cash for a Bear Stearns-managed hedge fund potentially facing high redemptions and margin calls, according to press reports. Any impact from that fund on the bottom line was limited to the second quarter, Molinaro said.