Pre-tax profits for 1998 fell to pounds 169m from pounds 177m in 1997 - the first profits decline at Schroders for five years - as a result of a near doubling of loan loss provisions for Asia to pounds 43m.
However, the profits were still ahead of City forecasts and Schroders' shares rose 47p to 1,311p yesterday. Underlying profits were up by pounds 6m to pounds 275m, reflecting the strong performance of Schroders' corporate advisory business, which came second only to Morgan Stanley in the UK merger and acquisition tables last year.
There were, however, signs of pressure on the asset management side, where profits fell from pounds 154m to pounds 147m last year.
The deputy chairman, Peter Sedgwick, said: "We are pleased that, despite the strength of the American competition, we can maintain our position as the leading British-based investment bank."
The total dividend for the year was also up by 8 per cent at 16.5p, reflecting the firm's more upbeat outlook for the year ahead.
Schroders said that, having taken action to tackle the problems in Asia, and with more than 100 per cent of non-performing loans now provisioned, further bad debt provisions were unlikely this year.
Win Bischoff, the chairman, said the business was well placed to take advantage of opportunities arising from corporate restructuring in Europe, although he admitted the firm had some way to go to break the stranglehold of the Americans over transatlantic mega-mergers.
"We have never found our size to be any impediment," he said. "We have a good, balanced business. It has allowed us to take terrible market conditions in our stride."
He added: "Independence has to be earnt and you earn that by providing a return both for those within the firm and for shareholders.
"1998 was not an easy year. Among our competitors, only Morgan Stanley and Lehman have done better. There is a raft who have done a whole lot worse than that."
Late last year the firm reorganised the asset management business, appointing Nicola Rawlston to manage the operation on a day-to-day basis. This followed several highly publicised defections by UK pension funds to passive or index-tracking firms last year.
David Salisbury, head of investment management, said the firm believed that its commitment to active management would be vindicated.