Goldman Sachs, Lehman shine

Strong results bode well for financial services

September 22, 2004|By BLOOMBERG NEWS

NEW YORK - Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. said yesterday that their fiscal third-quarter earnings rose more than expected, led by gains in bond and commodities trading and higher fees from mergers and acquisitions advice.

Net income at Goldman, the No. 3 securities firm by capital, rose 30 percent as revenue from fixed-income and commodity trades increased by almost $1 billion. Profit rose 5.2 percent at Lehman, the fifth-biggest firm. The reports helped lift shares of both New York-based companies, the first on Wall Street to announce quarterly results.

Goldman retained its ranking as the top takeover adviser, and benefited from price swings in commodities such as oil. Lehman reported higher revenue from trading bonds such as mortgage-backed securities. Both firms weathered the slowest three months of stock trading in more than two years.

"These businesses are showing they are more resilient than many expected," said James Ellman, president of Seacliff Capital LLC, which holds shares of Lehman, Merrill Lynch & Co. and Bear Stearns Cos. "The results bode well for Morgan Stanley and Bear Stearns."

Morgan Stanley, the second-biggest securities firm, and Bear Stearns are to report earnings today. Both are expected to report profit declines.

Goldman's and Lehman's results may spur analysts to revise their forecasts for industry profits. The Securities Industry Association had predicted that Wall Street earnings would decline 22 percent this year to $18.9 billion.

Goldman's shares climbed $3.22, or 3.5 percent, to close at $94.90 yesterday and Lehman's shares added $3.73, or 4.9 percent, to $79.75, both on the New York Stock Exchange.

Goldman said net income for the quarter that ended Aug. 27 increased to $879 million, or $1.74 a share, from $677 million, or $1.32, a year earlier. Analysts had expected the company to earn $737 million, or $1.43 a share.

"We benefited once again from the breadth of our franchise," Goldman Chief Executive Officer Henry Paulson, 58, said in a statement.

Oil prices soared to record highs, helping revenue at Goldman's fixed-income and commodities unit more than double to $1.87 billion.

"The commodities business had a terrific quarter," Goldman Chief Financial Officer David Viniar said in a conference call with reporters. "It was a very good environment."

Goldman's investment-banking revenue climbed 30 percent to $890 million from $687 million a year earlier, buoyed by a 48 percent gain in takeover fees.

Lehman's earnings rose to $505 million, or $1.71 a share, from $480 million, or $1.81, a year earlier. Analysts had expected Lehman to earn $474 million, or $1.55 a share.

Revenue increased 12 percent to $2.6 billion. Revenue from Lehman's capital market business climbed 2 percent to $1.7 billion, led by a 16 percent gain in trading revenue from mortgage-backed bonds and other fixed-income securities.

"Our businesses performed well during the third quarter, despite the pressures of a more challenging market environment," said Richard Fuld, Lehman's chief executive.

Revenue and net income at both companies was lower than in the prior two quarters, when profits swelled to a record amid the lowest lending rates in more than four decades and a stock market rally.

Analysts started scaling back their profit estimates after May and June, when trading on the NYSE slowed about 11 percent and the Federal Reserve raised its key interest rate by a quarter-percentage point to 1.25 percent.

The downward revisions also followed reports showing that the U.S. economy grew at an inflation-adjusted annual rate of 2.8 percent in the second quarter, the lowest in more than a year.

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