Lehman kicks off Wall Street bumper bonus season

Lehman Brothers has increased expectations among Wall Street bankers for a bumper bonus season by reporting its best ever quarterly profits yesterday, driven by strong fees from advising on deals.

Kicking off the merchant banks' December reporting season, Lehman unveiled investment banking revenues of $817m (£462m) for the fourth quarter, a 34 per cent increase on a year ago. The growth was propelled by a 54 per cent increase in fees from mergers and acquisitions and a 48 per cent increase in equity underwriting fees.

Profits were up 41 per cent to $823m in the three months to 30 November from a year ago, above Wall Street's expectations.

Results from Goldman Sachs and Bear Stearns tomorrow, and Morgan Stanley and Merrill Lynch later this month are also expected to strong.

The results are expected to confirm what Wall Street watchers have known for some weeks. This year's Christmas bonus season is set to be the best in recent years, reflecting a pick up in corporate deals, as well as strong equity and bond markets.

Wall Street's largest securities houses are in line for almost $ 19bn in profits this year, up 8 per cent on 2004, which was itself an all-time high, according to Thomson Financial. Bankers and traders usually find out the size of their bonuses two weeks after the end of the fiscal year.

The most successful bankers are likely to take home bonuses of 12 times their basic pay, while the most modest windfalls will still be double basic salary, according to the executive search firm Options Group. A global mergers chief could take home between $8m and $9m, up about 25 per cent from a year ago, Options predicts.

Lehman said it could be looking for an acquisition to bolt on to its business, adding that it would be interested in doing a deal if it could find a business to buy which would add to its earnings by the second year.

While profits were at a record high, Lehman's revenue fell 4 per cent from the third quarter, led by a 14 per cent drop in its historically strong fixed-income trading. Its return on equity, a measure of how effectively a firm uses reinvested earnings to generate profit, also declined from the third quarter, to 20.9 per cent from 23 per cent. It rose from 17 per cent a year earlier.

Lehman's shares fell 1.6 per cent, to $126.11 in morning trading in New York. The stock has outperformed rivals this year, rising 50 per cent.

In the past few years Lehman's chief executive, Richard Fuld, has been trying to diversify the bank, one of the strongest players in the fixed income market, by focusing on equities, mergers advice and asset management. Lehman acquired the New York-based money manager Neuberger Berman in 2003 and has poached high-profile bankers, such as Joseph Gatto, who joined in October from Goldman Sachs as chairman of mergers and acquisitions.