Lehman: Profits dip, beat forecasts

Lehman Brothers suffered another hit in its fixed-income division, the company said Thursday, despite reporting better-than-expected earnings.

NEW YORK (CNNMoney.com) -- Lehman Brothers reported a decline in quarterly profits Thursday that nonetheless topped expectations despite a $830 million hit in its fixed-income division.

Lehman shares initially fell on the news, as investors digested a warning from the New York-based investment bank that its fixed-income unit could suffer another writedown.

Net income at the bank fell 12 percent, to $886 million, or $1.54 a share, during the fourth quarter ended Nov. 30, from $1 billion, or $1.72 a share, a year earlier.

Analysts had forecast a decline in profit to $1.42 a share, according to earnings tracker Thomson Financial.

Net revenue fell 3 percent to $4.39 billion, but came in above Wall Street expectations.

Chris O'Meara, Lehman's global head of risk management, said he was encouraged by the company's results despite recent market volatility, ongoing credit fears, and other challenges.

"Although we did not emerge unscathed, we believe we have done good job of managing risk," O'Meara said in a conference call following the earnings announcement.

As in the third quarter, Lehman suffered another knock to its fixed income division. The bank took a $830 million writedown as the value of mortgage security and real estate assets fell.

The last time Lehman reported earnings, it wrote down $700 million of mortgage-related and leveraged loan investments.

Some analysts were surprised by the $830 million writedown. "I thought they were better hedged than that," said Ryan Lentell, an analyst at Morningstar.

Erin Callan, Lehman's recently appointed chief financial officer, told analysts she did not expect further writedowns as high as $830 million, but did not rule out more "value adjustments" through the first half of 2008.

"We are not calling the bottom here," she said. "We are not suggesting there won't be further reductions."

That news sent Lehman (LEH, Fortune 500) shares over 2 percent lower in midday trading on the New York Stock Exchange and pressured the broader financial sector. Shares of rivals Bear Stearns (BSC, Fortune 500) and Morgan Stanley (MS, Fortune 500), both of whom are expected to report results next week, saw their shares decline about 4 percent.

Offsetting the troubling news were strong results from its equities division, which saw its revenue more than double from a year ago, helped by gains from private equity and the company's investment in the hedge fund GLG Partners.

Lehman also said its investment banking business experienced a modest decline, although key areas like mergers and acquisitions bucked the trend, experiencing higher revenue.

The company's asset management business also improved, Lehman said, as its assets grew to a record $282 billion.

As the first big investment bank to report fourth-quarter earnings, Wall Street was closely watching Lehman's results for signs of what rival like Morgan Stanley, Bear Stearns and Goldman Sachs (GS, Fortune 500) might report when they deliver their results next week.