Bear Stearns 1Q profit up 8 percent

Bear Stearns Cos., Wall Street's largest underwriter of mortgage securities, on Thursday reported first-quarter profit rose 8 percent despite turmoil in the subprime lending sector.

Its profit after paying preferred dividends rose to $548.5 million, or $3.82 per share, for the three months ended Feb. 28 from $508.7 million, or $3.54 per share, a year earlier.

Revenue rose to $2.48 billion from $2.19 billion last year.

Wall Street expected earnings of $3.80 per share on revenue of $2.49 billion, according to analysts surveyed by Thomson Financial.

Its shares rose $2.81, or 1.9 percent, to close at $148.10 on the New York Stock Exchange.

Bear Stearns, the fifth-biggest investment bank on Wall Street, said the recent meltdown in the subprime mortgage industry had a minor impact on its performance. It not only originates loans, but packages loans into securities and sells them to investors.

The New York-based company said that "residential mortgage-related revenue decreased from the prior year period, reflecting weakness in the U.S. residential mortgage-backed securities market."

However, it had little effect on its fixed-income business, where revenue rose 27 percent to $1.1 billion during the quarter. Revenue from equity sales and trading rose 3 percent to $513 million.

"Clearly the subprime issues were not devastating, both because of Bear Stearns' careful risk management, and because mortgages overall don't carry as much of the firm as many seem to think," said Merrill Lynch analyst Guy Moszkowski.

Revenue from investment banking grew 3 percent to $303 million, as strong stock underwriting and acquisition advisory business was offset somewhat by weakness in merchant banking. This has been one of the businesses the company has targeted for growth to take advantage of booming acquisition activity.

It said revenue from its capital markets segment rose 15 percent to $2 billion from $1.7 billion. It had a sharp increase in revenue from trading distressed debt, or debt of companies that have filed for or face the likelihood of bankruptcy. Trading in credit derivatives, which help investors protect themselves against swings in the value of debt, was also strong, Bear Stearns said

"We are pleased with this excellent performance, revenues for the first quarter were up for every business segment," said Chairman and Chief Executive James E. Cayne in a statement. "Growing the company remains a core focus as we continue to invest in our domestic and international franchises with successful results."

Bear Stearns is the third of the four big Wall Street firms to report earnings for their fiscal first quarter. Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. already reported strong numbers, while Morgan Stanley is expected to report on March 22.

Lehman on Wednesday said "weakness" in the mortgage market stemmed revenue growth, but did not see subprime problems spreading to other parts of its business. Goldman said it has limited risks in mortgages.

Concern about rising mortgage delinquencies from borrowers with risky credit histories has sent a ripple-effect through the entire banking industry. New Century Financial Corp., which had been a major provider of loans to people with risky credit, said it has lost support from its financial backers and is being delisted from the NYSE.

Sam Molinaro, Bear Stearns' chief financial officer, said the company's exposure to subprime loans represents about 3 percent of its mortgage business. He has not seen any of the difficulties so far evident in subprime spreading to lower-risk prime loans.

"Last year, we reduced our exposure in the subprime market, cutting our origination and securitization almost in half," he said. "We think we've done a good job navigating what have been very difficult markets conditions. We're feeling comfortable where we are."

In fact, Molinaro expects to see large bulk sales of troubled mortgages over the next several months as mortgage lenders are pressured. This will provide an opportunity for Bear Stearns to profit by acquiring these mortgages, and turning them around.

"Dislocation is an opportunity for us," he said.

On Tuesday, Bear Stearns and UBS Securities were ordered by Massachusetts Secretary of State William F. Galvin to turn over documents concerning stock recommendations on subprime lenders. Galvin said upgrades to some mortgage lenders came as New Century, and others, began to hemorrhage.

Scott Coren, an analyst with Bear Stearns, upgraded New Century's stock to "peer perform," or hold, from "underperform," or sell, on March 1. The rating change came after the mortgage lender said it was restating past results because of accounting errors.

Bear Stearns said on Wednesday its analysts' research was mischaracterized as being "upbeat," and said it would cooperate with the inquiry.

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AP Business Writer Dan Seymour in New York contributed to this story.