First quarter results offer hope

There was some cheer offered last week by the first round of first-quarter results from the US broker-dealers, with Lehman Brothers, Goldman Sachs and Morgan Stanley all reporting numbers that were marginally better than expectations. The positive news was reflected in gains in the firms’ stock prices as well as falls in their CDS levels.

But all three had further write-downs to report. Goldman took a charge of US$1bn on residential mortgage loans and securities, as well as a further US$1bn in its leveraged loan business (US$1.4bn before hedges).

Quarterly revenues fell 35% from the previous year to US$8.3bn, with pre-tax profits dropping 56% to US$2.1bn. Together with last year’s US$1bn charge in leveraged loans, the firm has written down a total of US$3bn related to the credit crisis.

Lehman Brothers had gross quarterly write-downs of US$4.7bn – the vast majority of which were related to mortgage activity – but this figure plummeted to a net US$1.8bn after hedging and offsetting gains in the fair value of debt liabilities. Total write-downs for the firm since the start of the crisis are now US$3.3bn.

On a call to analysts, CFO Erin Callan highlighted the dramatic difference in the ease of hedging residential mortgages and commercial mortgages. Hedges reduced residential mortgage write-downs from US$3bn to US$800m, while commercial losses only fell from US$1.1bn to US$700m.

Revenues for the whole firm fell by 31% from the previous year to US$3.5bn, while profits dropped by 61% to US$663m.

Morgan Stanley wrote down some US$2.3bn, of which US$1.2bn was in the mortgage business and US$1.1bn from the marking-to-market of loans. The figures took the firm’s total to US$13.1bn, putting it in fourth place globally behind Merrill Lynch, Citi and UBS.

The firm saw revenues drop 17% from the same period in 2007 to US$8.3bn, with profits falling 36% to US$2.2bn.

All three firms stressed strong client-based revenues in sales and trading. At Morgan Stanley, equity sales and trading revenues were a record US$3.3bn, up 51% from the same period in 2007.

Fixed income sales and trading had its second-best quarter ever, with record revenues from interest rate, credit and currency products. Revenues outside the US across the entire firm hit a record US$4.5bn, up 15% from last year.

At Goldman Sachs, the blots on the copybook were in principal investments and investment banking. The firm has traditionally done well out of its astute proprietary investments, but recorded a loss of US$532m in the quarter after losing US$135m on its ICBC stake, as well as losses on other holdings. That was a marked difference to the same division’s performance in the first quarter of 2007, when it clocked up gains of US$1.7bn.

Goldman’s investment banking revenues in the quarter were down 32% from the same period in 2007, with financial advisory down 23%, equity underwriting down 35% and debt underwriting falling 43%. In all, the division brought in US$1.1bn, down from US$1.7bn a year earlier.

The firm said that the drop in debt underwriting was chiefly attributable to falls in leveraged and mortgage activity. And it said that its equity and financial advisory performance reflected lower industry activity.

But that lower activity didn’t appear to hit the investment banking franchises of Lehman and Morgan Stanley in the same way. Financial advisory revenues rose by 34% at Lehman, while equity underwriting grew 23%. Debt revenues fell 25% but the banking division registered a 2% gain overall.

At Morgan Stanley, financial advisory revenues were up 19%, with the firm highlighting the contrast with the 35% drop in industrywide completed M&A volumes. Equity revenues fell 13% and debt dropped by 23%.

Meanwhile, Credit Suisse last week disclosed that the final impact of the recently discovered mispricing of ABS positions was SFr2.86bn (US$2.65bn). That total was SFr200m less than had been feared, but resulted in a restatement of figures for the fourth quarter of 2007. Net income at the firm for the quarter fell by SFr789m to SFr540m, taking full-year 2007 income to SFr7.76bn.

In spite of the SFr1.68bn that will be recorded against the first-quarter 2008 numbers, the firm remained profitable through to February, but it said that it was likely to sink to a loss for the whole quarter.