updated 12/14/2006 11:44:15 AM ET 2006-12-14T16:44:15

Investment bank Lehman Brothers Holdings Inc. on Thursday said its fourth-quarter profit surged 22 percent on record revenue from almost every business line, but the results fell short of the bar set earlier this week by rival Goldman Sachs.

Lehman, the No. 4 U.S. securities firm by market value, said net income rose to $1 billion, or $1.72 a share, for the three months ended Nov. 30, from $823 million, or $1.38, in the year-ago period. Net revenue rose 23 percent to $4.5 billion.

The results exceeded the average analyst earnings forecast of $1.68 a share, according to Reuters Estimates, but it did so by the smallest margin in six quarters. They also paled next to Goldman, which on Tuesday posted a 93 percent jump in quarterly profit and 34 percent return on equity for the year.

“They did a great, great job in a difficult environment,” said Michael Holland, a fund manager and head of Holland & Co. “But they suffered by comparison with the results from Goldman, which were extraterrestrial. The expectations for Lehman were higher because of Goldman.”

The reaction from investors was mixed in early trade, as Lehman’s share price swung between modest gains and declines of as much as 1.4 percent. In midmorning trading, the stock was up 8 cents to $76.45.

Wall Street firms in the quarter rebounded from a sluggish summer to cap off a record year amid robust M&A and leveraged buyout activity, stock and debt offerings and trading. For the year, Lehman reported record profit of $4 billion with all-time high revenue and a return on equity of 22 percent.

It was a strong performance, surprising investors who still regard Lehman as a bond-trading house with a heavy reliance on mortgage markets.  

Lehman’s trading revenue rose 28 percent to $3 billion, fueled by its second-best quarter ever in debt markets even as U.S. housing prices and mortgage demand cooled. Results were driven by customer trading activity and growth in asset-based securities, muted by interest rate and currency businesses.

The equities business also had its second-best quarter, rising 8 percent to $900 million on greater market activity and growth in prime brokerage services to hedge funds. These results include private-equity gains, which aren’t disclosed.

Lehman’s investment banking fees rose 5 percent to a record $858 million, driven by strong debt and stock underwriting activity. Debt issuance continues to soar thanks to the mergers boom and low interest rates.

Fees from merger and acquisitions, however, fell 7 percent even as the industry wraps up a record year in M&A.

Money management and wealth management revenue surged 26 percent to a record $640 million, as managed assets grew to $225 billion from $207 billion in the third quarter. Lehman’s book value, watched closely by investors, rose 5 percent to $33.87 a share.

Analysts said Lehman’s costs were higher then expected, with compensation and benefits comprising 49 percent of revenue. Salaries and bonuses, reflecting the tremendous growth in revenue, rose 24 percent to $2.24 billion.

Other expenses rose 15 percent, reflecting the company’s expansion into new businesses and markets. Headcount worldwide surged 13 percent to 25,936 employees over the past year.

Bear Stearns Cos., which also reported results Thursday, said its profit rose 38 percent.

Yet investors are growing more cautious as they look ahead, concerned that Wall Street earnings may have peaked.

“We understand 2006 has been such a great year for M&A, a great deal year,” said Scott Armiger, a portfolio manager at Christiana Bank & Trust in Delaware. ”We do see the economy slowing and that’s got to factor in the investment banks’ earnings next year.”

Copyright 2012 Thomson Reuters. Click for restrictions.

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