September 20, 2007 / 12:47 PM / 12 years ago

UPDATE 4-Bear Stearns net falls 61 pct, but says worst over

(Recasts, adds comment from Bear Stearns CFO)

By Tim McLaughlin

NEW YORK, Sept 20 (Reuters) - Bear Stearns Cos Inc BSC.N posted a 61 percent drop in quarterly profit on Thursday on bad bets on subprime mortgages and disrupted fixed-income trading, but its shares rose after the firm said the worst was largely over.

The U.S. investment bank’s profit badly missed the estimates of analysts after the collapse of two hedge funds triggered about $200 million in losses and expenses. Industry giant Goldman Sachs Group Inc (GS.N), meanwhile, thrived where Bear Stearns stumbled, posting a 79 percent gain in profit.

Shares of Bear Stearns, down 27 percent this year, rose nearly 3 percent to $119.05 after Chief Financial Officer Sam Molinaro said its problems were largely behind the company.

“We believe the earnings capacity of our fixed income franchises are firmly intact,” Molinaro assured analysts on a conference call.

Seen as a leader in packaging home loans into mortgage-backed bonds, Bear Stearns’ bread-and-butter business, fixed-income, saw its revenue plunge 88 percent to $118 million. Revenue from trades with Bear Stearns’ money fell nearly $800 million in the quarter.

“They were definitely hurt by the mortgage problems and credit markets,” said Meg McMullen, president of Boston’s New England Research & Management. “And they are the least diversified among the major investment banks.”

Net income was $171.3 million, or $1.16 a share, in the third quarter ended Aug. 31, down from $438 million, or $3.02 a share, in the year-earlier period.

Analysts on average looked for Bear Stearns to earn $1.78 a share, according to Reuters Estimates

Total net revenue fell 38 percent to $1.3 billion.

“Bear Stearns is a big fixed income shop, and when things got frothy in those markets they weren’t ready for things to turn in the other direction,” said Adam Compton, director of global financials research at RCM Global Investors in San Francisco, which has about $150 billion of assets.

The hedge fund collapse flowed through the results of Bear’s wealth management division, which reported $226.5 million in pre-tax losses after posting an $18 million profit in the year-ago period.

Bright spots for Bear were a 53 percent gain in equities trading revenue and a 30 percent gain in global clearing services revenue, which includes fees from hedge fund clients.

Investment banking revenue fell 9 percent amid a global credit squeeze that slowed dealmaking and leveraged buyouts.

Bear Stearns also said it increased the size of its share buyback plan to $2.5 billion, up from the previous authorization of $2 billion.

Bear Stearns shares are down 27 percent this year, underperforming the 2 percent decline on the Amex Securities Broker Dealer Index .xbd (Reporting by Tim McLaughlin), Reuters messaging: ((Editing by Dave Zimmerman; tim.mclaughlin.reuters.com@reuters.net; +1 646 223 6033))

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