Lehman’s Profit Rises
Lehman Brothers Holdings Inc. was posted slightly stronger-than expected results, but its shares fell 2.6 percent as investors worried about the investment bank’s subprime mortgage exposure. Lehman, the fourth-largest U.S. investment bank by market value, stated that net income rose to $1.15 billion, or $1.96 a share, for the three months ended February 28, from $1.1 billion, or $1.83 a share, a year earlier. According to Reuters Estimates these results beat out the average analyst estimates by only a penny. However, the company’s shares fell more than 3 percent, to $69.76, in early trading, hurt by concerns about how Lehman’s securitization business, among others, will be affected by recent high defaults in subprime mortgages. “Goldman Sachs yesterday had good results, but the market didn’t care, and their shares fell. And in the case of Lehman, you have more subprime exposure,” said Adam Compton, head of research for U.S. financial equities at RCM Global Investors in San Francisco.
Lehman’s net revenue was $5 billion, up 13 percent from the same quarter last year. In the company’s fixed-income trading business, revenue rose nearly 3 percent to $2.164 billion, rising because of strength in areas including credit products. But the increase was offset by weakness in the U.S. residential mortgage sector and interest-rate products, the company said in a statement. “Growth in that area was weak. I suspect subprime mortgages had a lot to do with that,” said Amit Kumar, an analyst at FAF Advisors, which owns Lehman shares.
Subprime mortgage defaults have risen dramatically in recent quarters across the industry, hurt by bad underwriting, slowing housing price growth, and rising interest rates. The ratio of Lehman’s profit compared to revenue, assets, and other items fell, which may imply the company is operating slightly less efficiently as it grows. Lehman Brothers, traditionally seen as a bond house, has invested heavily in asset management and investment banking in recent years. The company’s investment management segment posted record revenues of $695 million in the quarter, up 20 percent from $580 million in the same quarter last year. Assets under management grew to $236 billion from $188 billion a year ago. Lehman on Tuesday said it had bought a 20 percent stake in D.E. Shaw Group, one of the largest hedge fund managers in the world.
Lehman’s pretax margin fell 1.1 percentage points to 33.7 percent, its return on average common equity fell 2.3 percentage points to 24.4 percent, and it return on average tangible common equity fell 3.6 percentage points to 29.9 percent. Lehman’s shares have been hit hard recently on concerns that turmoil in the subprime mortgage market could cut into its securitization business and force it to write down assets. Lehman’s shares reached an all-time high closing level of $85.80 in early February, but through Tuesday’s close were down 16 percent. The Amex Securities Broker-Dealer index fell 12 percent during that period.