NEW YORK Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N on Tuesday said quarterly profits fell by more than half, but results for both investment banks topped forecasts, driving their shares to record one-day gains.
Though results covered a period that predated this month's seizing of credit markets and collapse of Bear Stearns Cos BSC.N, they provided relief to investors bloodied by mounting losses from mortgages and market illiquidity.
First-quarter profit declined 53 percent at Goldman, the largest Wall Street bank by market value, as $2.5 billion of losses on loans and other assets offset solid trading results.
At Lehman, Wall Street's fourth-largest bank, profit declined 57 percent as bond trading revenue plummeted, but improved results from merger advising cushioned the blow.
"Goldman's report was a good report and Lehman's was not the end of the world," said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey.
On the New York Stock Exchange, Goldman shares rose $24.57, or 16.3 percent, to $175.59, while Lehman soared $14.74, or 46.4 percent, to $46.49. The Amex Securities Broker-Dealer Index .XBD, which includes both, rose 11.6 percent.
Major U.S. stock indexes also rose bolstered by the results and a U.S. Federal Reserve decision to cut its main lending rate by 0.75 of a percentage point to 2.25 percent to boost market liquidity and shore up a faltering economy.
Lehman shares had fallen more than 19 percent on Monday, as investors worried it might be the next investment bank to collapse. A day earlier, Bear Stearns agreed to be acquired by JPMorgan Chase & Co (JPM.N) for $2 per share, nearly 99 percent below the 85-year-old firm's peak in January 2007.
Investment bank Morgan Stanley (MS.N), is expected to report first-quarter results on Wednesday.
Goldman said net income in the quarter ended February 29 fell to $1.51 billion, or $3.23 per share, from $3.20 billion, or $6.67, a year earlier. Revenue declined 35 percent to $8.34 billion.
Earnings fell by the most since Goldman went public in 1999. Nonetheless, analysts had been more bearish, and according to Reuters Estimates had on average expected Goldman to earn $2.57 per share on revenue of $7.29 billion.
"Goldman once again shines in difficult times," said Michael Holland, founder of money manager Holland & Co.
Trading and principal investments revenue fell 46 percent to $5.12 billion, while a slump in debt underwriting and stock offerings pushed investment banking revenue down 32 percent to $1.17 billion. Goldman said it advised on $124 billion of completed takeovers, less than half the year-earlier volume.
The investment bank took losses of about $1 billion on residential mortgages and another $1 billion on riskier corporate loans and related investments. It also suffered a $532 million loss from its stake in Industrial and Commercial Bank of China Ltd (601398.SS) and other corporate investments.
Chief Financial David Viniar said Goldman's cash position has never been stronger, but expressed caution about markets.
"Will it ever get better? Yes. 'When?' is a harder question to answer," he told reporters. "Until there is greater certainty and people start feeling better about the markets, I don't see (banking activity) picking up dramatically."
Goldman had largely sidestepped mortgage woes and profit rose 22 percent to a record $11.6 billion in fiscal 2007.
At Lehman, net income fell to $489 million, or 81 cents per share, from $1.15 billion, or $1.96, a year earlier. Net revenue fell 31 percent to $3.51 billion, hurt by an 88 percent decline in bond trading revenue.
Analysts on average expected profit of 73 cents per share on revenue of $3.3 billion.
Results benefited from a 34 percent increase in merger advisory revenue to $330 million while investment management revenue increased 39 percent to $968 million.
Some investors expected results to be far worse, in part because Lehman had about $80 billion of commercial and residential mortgage assets in the fourth quarter.
Chief Financial Officer Erin Callan assured investors that Lehman broadly has access to capital it needs, though she added: "We don't think this extremely challenging period is going to end in the near term."