Investment bank Bear Stearns Cos. Inc., one of the nation's largest mortgage bond underwriters, said on Thursday quarterly earnings fell by a third as trouble in the mortgage market hurt bond trading revenue and it wrote down assets at a stock trading venture.
The write-down was expected but results still fell short of forecasts, and Bear Stearns shares were lower in early trading.
The firm's business is much less diversified than many of its competitors. Challenging conditions in the mortgage market, where a rising number of borrowers with weaker credit are defaulting on their home loans, pulled Bear Stearns' fixed income sales and trading revenue down 21 percent.
Mortgage exposure has not been a good thing recently, said Jim Huguet, co-chief executive at Great Companies Inc., which does not own Bear Stearns shares.
Weakness in bond trading helped reduce net income to $361.7 million, or $2.52 a share, for the fiscal second quarter ended May 31, from $539.3 million, or $3.72 a share, in the same quarter last year.
Excluding a non-cash charge of $227 million, or 88 cents a share, related to the write-down of intangible assets linked to its Bear Wagner Specialists unit, earnings were $3.40 a share. On that basis, analysts on average had forecast $3.49 a share, according to Reuters Estimates.
Revenue rose 0.5 percent to $2.512 billion. Analysts' average forecast was $2.317 billion, according to Reuters Estimates.
Bear Stearns said in May it was writing down $225 million from its 2001 investment in Bear Wagner, a New York Stock Exchange floor trading firm, as electronic systems siphon more business away from human traders on the exchange floor.
Concerns about U.S. mortgage exposure have weighed on Bear Stearns shares since February. Since mid-February, the shares have fallen 10 percent, while the Amex Securities Broker-Dealer index has risen more than 3 percent.
The shares were down $1.18 to $148.31 in early trading on the New York Stock Exchange.
Market sources said on Wednesday that Bear Stearns was looking to sell nearly $4 billion of asset-backed securities supported by subprime loans, or loans to people with shaky credit.
Press reports have said a Bear Stearns hedge fund and a sister fund are scrambling to sell bonds to raise cash for redemptions and expected margin calls. The funds are mainly run for outside investors. Bear Stearns and some of its executives have only about $40 million of exposure, The Wall Street Journal reported.
Goldman Sachs Group Inc.'s chief financial officer said on Thursday that we have not seen the bottom of the U.S. subprime mortgage market.
But Lehman Brothers Holdings Inc.'s chief financial officer said on Tuesday that there are some signs the market is improving, including rising trading market activity.