'Cautious' Lehman posts 31% decline in Q2 profits

Lehman Brothers kicked off a week of reporting by Wall Street investment banks yesterday by showing that demand for the sector's services remained weak as quarterly profit fell 31 per cent.

But the investment bank's large bond trading business shouldered some of the weakness in merger and acquisition work and helped the firm to post a small increase in revenues compared with the first quarter.

David Goldfarb, chief financial officer at Lehman, said he remained "cautious" about prospects for the rest of the year.

Lehman cut 157 jobs, or 1.2 per cent of its staff, in the quarter to bring its head count to 12,694. The losses were light compared with the waves of redundancies at other banks.

Analysts are anticipating further lay-offs on Wall Street this summer as the fourth consecutive year-over-year profit slide coincides with Wall Street firms' worst year for revenue since 1997.

Lehman posted net income of $296m (£208m) for its fiscal second quarter ending 31 May compared with earnings of $430m this time last year. Total net revenue fell to $1.7bn from $2bn a year ago, but edged up 3.5 per cent from this year's first quarter.

Lehman's equity trading revenue plummeted 47 per cent to $324m in the quarter, and fees from stock offerings dropped 31 per cent to $109m.

Overall, Lehman's return on shareholders' equity, a measure of profitability, fell to 14 per cent from 23 per cent a year earlier. That was the lowest in at least six quarters, not counting the last three months of 2001, when business slumped after the 11 September terrorist attacks.

Its bond portfolio looked less gloomy. Revenues from bond trading rose about 2 per cent to $676m and fees from debt underwriting were flat at $266m.

Lehman is ranked third in US bond underwriting so far in the quarter ending 30 June. It was sixth a year earlier, underwriting $45.8bn of new bonds in the three-month period.

Mr Goldfarb said: "We continue to feel positive about the fixed income markets. We believe the Fed will move very slowly to hike rates, given low inflation, high productivity and relatively high unemployment."

Lehman's shares were off 25 cents at $62.40 in late morning trading.