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September 28, 2006

Brokers Rack Up Big Gains as Equities Roar into Second Half

By Peter Chapman

The equities business is off to a roaring start this year.

During the first half of the year, Wall Street's 11 largest investment banks saw their gross revenues surge 62 percent over the same period last year.

All the firms reported record grosses except for Banc of America Securities, which reported little growth over 2005.

"Business has been very strong on the equity side of the house," Sam Molinaro, Bear Stearns' chief financial officer, told analysts on the most recent quarterly conference call. "We think it's a direct result of the investments we've made over the last several years."

Bear Stearns' institutional equities businesses took in a little more than $1 billion in the first half, up 48 percent from the prior year period. Molinaro singled out derivatives and international trading for praise. "We're continuing to gain market share and continuing to be recognized in the European markets," he told analysts.

In general, these banks' institutional equities businesses encompass the sales and trading of cash equities, derivatives and convertibles in the U.S. and abroad. They also include proprietary trading.

Some firms include other types of revenues in the data, such as gains from their private equity investments. This year, gains on sales of New York Stock Exchange seats were also included.

While the firms break out their revenues by division, they do not break out their operating profits.

As with Bear Stearns, Morgan Stanley also singled out its derivatives and European operations for praise. David Sidwell, Morgan Stanley's CFO, noted in his talk with analysts, "the growth characteristics have been very strong, relatively, in Europe and Asia."

In the second quarter, Morgan Stanley's equity derivatives group turned in its best results since 2000, according to execs there. They credited "client flows" and "successful risk positioning" for a 50 percent increase over the 2005 quarter.

All told, Morgan Stanley took in $3.4 billion in equity sales and trading in the first half of the year. That was a 45 percent increase over the same period in 2005.

As for Morgan Stanley's arch-rival Goldman Sachs, it continues to surge ahead of its competitors. The giant trading house reported that, for the equities group, the second quarter was the "second best quarter we ever had."

Goldman saw its grosses shoot up 81 percent to $4.8 billion in the first half over last year's first half. The surge was broad-based "across all regions and in shares and derivatives," Goldman reported.

Equity derivatives were a strong suit for Lehman Brothers as well, making its second quarter its second best ever. "Client hedging and trading activity increased with the repricing of risk premiums," CFO David Goldfarb told analysts.

The cash equities business did well too, according to Goldfarb, "as client activity remained strong." Supporting equities at Lehman was growth in prime brokerage. Execs there reported a 40 percent increase in prime brokerage balances from last year, due to the addition of 100 new customers.

All told, Lehman's equities business raked in $1.8 billion in the first half of the year. That's up 66 percent over the same period last year.

At Credit Suisse, the numbers were equally impressive. The big Swiss bank grossed $2.5 billion from its equities businesses in the first six months of the year, an increase of 55 percent.

In particular, Renato Fassbind, Credit Suisse's CFO, singled out the bank's Advanced Execution Services (AES) group for praise. AES reported "record revenues" in the second quarter, Fassbind told analysts. Convertibles and derivatives were also significant contributors to growth, Fassbind said.

Deutsche Bank racked up big gains over last year, but reported difficulties on the proprietary side in the second quarter due to the market downturn. Deutsche grossed $2.8 billion in the first half of the year, up 56 percent.

Despite the industry's good news, at least one analyst is forecasting a downturn for two of the biggest shops. Meredith Whitney, an analyst with CIBC World Markets, cut her earnings estimates for Morgan Stanley and Goldman Sachs for the third quarter. Whitney blames a weaker stock market for the decision.