Lehman wows Wall Street

NEW YORK (CNNMoney.com) -- Embattled investment bank Lehman Brothers surprised investors Tuesday by reporting better-than-expected earnings, allaying fears about the wallop that the mortgage crisis may inflict on Wall Street.

Lehman (Charts, Fortune 500) shares jumped more than 3 percent in pre-market trading on the news, after finishing 1.5 percent lower on the New York Stock Exchange on Monday.

New York-based Lehman said its net income fell to $887 million, or $1.54 per share, during the third quarter ended Aug. 31, from $916 million, or $1.57 a share, a year earlier.

But the reading was better than expected as analysts had forecast a steeper decline in profit to $1.47 a share, according to earnings tracker Thomson Financial.

Net revenue climbed 3 percent to $4.3 billion, meeting expectations.

"The Lehman franchise proved itself this quarter," said Morningstar analyst Ryan Lentell.

Lehman's closely watched fixed-income unit, which handles, among other things, the mortgage-backed securities that imploded in the wake of the subprime mortgage meltdown, emerged in better shape than many on Wall Street had anticipated.

The company reported $700 million in writedowns due to its mortgage-related and leveraged loan investments. But Lehman's fixed-income losses were largely offset by strength in its investment management business, as well as its investment banking and equities capital markets divisions.

"It just shows how diversified their business is now - their ability to absorb that and post strong earnings" said Lentell.

Lehman's upbeat earnings announcement comes after a brutal summer. Since June, the company shuttered subprime mortgage unit BNC Mortgage and slashed more than 2,000 jobs worldwide. Its stock has dropped about 27 percent so far this year.

As the first big Wall Street bank to report this week, Lehman earnings were of particular concern to investors looking for signs about how hard the subprime and larger credit crisis had hit the financial sector.

Shares of Lehman rivals, including Merrill Lynch (Charts, Fortune 500) and Goldman Sachs (Charts, Fortune 500), were higher on the news in pre-market trading. Merrill Lynch is slated to report quarterly earnings next month, while Goldman is due to report on Thursday.