updated 12/14/2006 11:30:12 AM ET 2006-12-14T16:30:12

Bear Stearns Cos. said Thursday quarterly net income soared 38 percent, helped by gains from fees for merger advice and underwriting debt.

A Wall Street powerhouse in packaging home loans into mortgage-backed bonds, Bear Stearns said it turned in its best quarter ever, easily beating Wall Street expectations. It was the investment bank’s fifth straight year of record profit.

Net income was $563 million, or $4 a diluted share, for the fourth quarter ended Nov. 30, compared with $407 million, or $2.90 a diluted share, in the year-earlier quarter. The average estimate was $3.36 a share, according to Reuters Estimates.

Net revenue rose to $2.41 billion over the year-earlier period. Compensation expenses fell 2.6 percentage points to 43.6 percent of net revenue.

Prudential Equity Group analyst Michael Mayo said the lower-than-usual compensation expense may have helped earnings by as much as 33 cents a share. That was partly offset by a higher tax rate, driven by increased profits.

Investment banking net revenue climbed 58 percent to $364 million on higher underwriting and merger-and acquisition-transaction volumes.

Bear Stearns Chief Financial Officer Sam Molinaro said the company’s M&A backlog was at a record level at the end of the quarter.

Credit derivatives, distressed debt and leveraged finance pushed up fixed income net revenue 25 percent to $1.1 billion.

“Evidence continues to mount that (Bear Stearns’) fixed income trading business is meaningfully diversified beyond the domestic mortgage-backed security markets,” Sandler O’Neill Partners analyst Jeff Harte said in a research note. He has a “buy” rating on the stock.

Bear Stearns’ results also got a boost from hedge fund activity, which helped increase asset management net revenue by 66 percent to $112 million in the quarter.

“The boom in the hedge fund business has been great for Bear. They’re on both sides of trades,” said Scott Armiger, a portfolio manager at Christiana Bank & Trust in Delaware, which manages $400 million in investments. “It gives them a little more stability in earnings.”

On Tuesday, Goldman Sachs Group Inc. kicked off the earnings season for Wall Street’s investment banks with quarterly earnings that nearly doubled to $3.15 billion. Goldman’s profits in 2006 were more than the previous two years combined.

Bear Stearns’ stock was up $1.78 to $157.67 in Thursday’s trading on the New York Stock Exchange.

Before Thursday, Bear Stearns shares were up 38 percent this year, beating the 24 percent gain on the AMEX Securities Broker Dealer Index.

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