The results impressed analysts, but Warburg's share price fell 20p to 857p because over a quarter of the banking side's profits came from market-making and proprietary trading. Banking will fall back if markets subside.
Warburg yesterday published details of revenues and costs for the first time. While the bank's income rose 22 per cent to pounds 489.6m, costs also rose by just under pounds 100m to pounds 340.8m, boosted by big performance-related bonuses and deferred compensation.
Fees and commission increased by 42 per cent to pounds 302.5m, 'due principally to increased advisory, issuing and distribution revenues', the bank said.
Lord Cairns, chief executive of Warburg, said the UK mergers and acquisitions market was 'not particularly active, but there were a lot of reconstructions'. Warburg had been involved with ICI, Rothmans and Minorco, for instance.
Market-making and proprietary trading profits increased by roughly three and a half times from pounds 39.8m to pounds 140.6m, 'as a result of higher turnover and securities prices'.
Lord Cairns said market-making had done well out of Warburg's international presence, in acting for US pension funds investing money overseas and UK international diversified funds.
He said that overall the figures were 'clearly substantially better than last year. It shows our ability to take advantage of kindlier markets when kindlier markets we have.'
He added that he expected the bank to increase its proprietary trading in London. Along with market making, the trade already contributes half of all Warburg's Wall Street earnings.
Most proprietary trading by Warburg is on behalf of customers, particularly in the fixed-interest market, Lord Cairns said. 'It's not at all saying: 'Gee, we think the market is going up today, let's have a few.' We're not taking positions we think will seriously damage our bottom line.'
He said that the growth in this business should not be interpreted as 'a move by Warburg towards (becoming) a glorified hedge fund'.
Philip Gibbs, merchant bank analyst at BZW, increased his full- year forecast for Warburg yesterday from pounds 260m to pounds 305m, while leaving that for Mercury Asset Management unchanged at pounds 110m.
Mr Gibbs said: 'It's a very good set of figures. They have made an awful lot out of market making, which is why the shares have been marked down.
'It could be difficult to maintain (profits) in the second half, but it's perfectly possible.'
Martin Cross of UBS thought the results were 'pretty good'. 'The 14 per cent increase in dividend (6p against 5.25p) shows the management have confidence in the second half. Warburg has levered itself up to a new plateau. Provided equities don't crash, the economy continues to recover and companies continue to raise capital, Warburg remains one of the strongest buys in the sector.'
Mercury Asset Management, Warburg's 75 per cent-owned fund management subsidiary, made pounds 50.4m before tax in its first half, a 42 per cent increase on a year ago, and declared a dividend one third higher at 4p a share.
Hugh Stevenson, the chairman, said that net new funds under management were pounds 1.1bn out of a total increase of pounds 5.8bn to pounds 55.5bn. Half the total rise was the result of rising markets.
Costs were higher than in the previous six months but down on a year ago, while earnings per share increased from 13.4p to 19.6p in a year.
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