NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N said on Tuesday its first-quarter earnings dropped 57 percent as it wrote down bonds, but its shares surged after the bank said it has more than enough capital to do business in the current environment.
Lehman's better-than-expected results, helped by strong revenue in merger advisory and asset management, came two days after a run on the bank forced Bear Stearns Cos BSC.N to sell itself to JPMorgan Chase & Co (JPM.N)
The news sent Lehman's shares up 46 percent to $46.49, their best trading day on record.
"Investor expectations were so low that this was a breath of fresh air," said Matt McCormick, portfolio manager at Bahl & Gaynor in Cincinnati, Ohio.
Lehman, the fourth largest U.S. investment bank, said it has not lost any access to the repo markets, a crucial source of short-term financing. Speculation that Lehman was losing access to this funding and that it could also face a run on the bank torpedoed its shares on Friday and Monday.
Despite investors' relief, Lehman Chief Financial Officer Erin Callan struck a cautious note during a conference call.
"We don't think this extremely challenging period is going to end in the near term," she said.
But, she added, "We believe we have the leadership, the experience, the risk management discipline, the capital strengths, and certainly the liquidity to ride out the cycle."
The rest of the year could be difficult, but 2009 may look up, Callan told Reuters.
Lehman said it earned $489 million, or 81 cents a share, in the quarter ended Feb. 29, down from earnings of $1.15 billion, or $1.96 a share, in the same period a year earlier.
Wall Street analysts had on average expected earnings of 73 cents a share, according to Reuters Estimates.
Declining securities values cut into results to the tune of $4.7 billion, or $1.8 billion after accounting for benefits from a decline in the value of liabilities.
Callan said that declines in asset values represented market changes, which Lehman sees as "more temporary in nature," rather than permanent drops in the expected cash flow of the assets.
Many investors had expected much bigger write-downs, as the the weakening U.S. housing market weighs on market prices of mortgage assets previously seen as strong.
Lehman had about $68 billion of commercial and residential mortgage-backed securities on its balance sheet as of Feb. 29, and another $12.9 billion of real-estate related investments.
The Federal Reserve is trying to pump liquidity into the U.S. financial system, and it cut interest rates by 0.75 percentage point on Tuesday to 2.25 percent.
Two of the strongest parts of Lehman's business were merger advisory, where revenue rose 34 percent to $330 million, and money management, where revenue was up 39 percent to $968 million.
Merger revenue was helped by Lehman's role in advising Britain's Imperial Tobacco Group PlcIMT.L on its 12.6 billion euro ($19.9 billion) acquisition of Franco-Spanish Altadis and on MGI Pharma Inc's acquisition by Japan's Eisai Co Ltd (4523.T) for $3.9 billion.
But the volume of investment banking deals that have not closed will likely decline, Callan said, echoing comments from Goldman Sachs Group Inc (GS.N) CFO David Viniar.
Lehman Chief Executive Dick Fuld has piloted the company through difficult markets before, most notably during the Long-Term Capital Management crisis of 1998. Over the last decade, the investment bank has boosted its ability to readily access cash.
The fourth-largest U.S. investment bank said as of the end of the quarter it had $34 billion of liquid assets and access to another $163 billion of assets that could be sold to meet cash needs.
Lehman can also borrow directly from the U.S. Federal Reserve as of Monday. The Fed typically lends only to commercial banks but is allowed to lend to investment banks to protect the stability of the financial system.
Net revenue fell 31 percent to $3.5 billion, hurt by bond-trading revenue that fell to $262 million from $2.2 billion a year earlier.
Lehman Brothers, which was long seen as a bond house, is now more diversified.
Reporting by Dan Wilchins, editing by Mark Porter, Gerald E. McCormick and Toni Reinhold