This summary is based on the third quarter fiscal 2007 earnings call conducted by Bear Stearns Inc. (BSC: chart) on September 20, 2007.
Investor Relations: Elizabeth Ventura
Chief Finance Officer: Sam Molinaro
Key Investors Issues
- The firm managed to reduce counterparty exposures and hedge remaining assets in view of the subprime lending crisis with net exposures remaining low.
- The acquisition of the Williams Power portfolio will be concluded in early October.
- The total share repurchase authorization was increased to $2.5 billion, including $1 billion for corporate share buybacks.
- Regular quarterly cash dividends on common stock and preferred stock tranches declared.
Third Quarter Highlights
Net revenues fell to $1.33 billion, a 38% decline from $2.1 billion in 2006, reflecting substantial decline in fixed income revenues and a reduction in revenues from the asset management business.
- Fixed income activity suffered as transaction volumes declined and inventory valuations came under severe pressure.
- Investor concerns over the sub-prime mortgage market spread to the CDO market causing concern over all ratings-based structured credit products.
- Uncertainty with conduit holdings of residential mortgage-backed securities assets led to commercial paper outstanding, declining by over $200 billion, forcing the liquidation of approximately $20 billion of AAA-rated mortgage assets.
- The supply/demand imbalance in the leverage loan market caused investors to demand greater credit protection and improved pricing, which has served to substantially restrict the market''s ability to distribute the loans.
Repricing of credit risk in the non-investment grade corporate debt market caused leverage finance pipelines to become frozen and resulted in write-downs of leverage commitments.
- Revenues attributable to U.S. mortgage and leverage finance areas declined, reflecting inventory revaluations and lower activity levels.
- Difficult global market conditions and the July failure of BSAM-managed high grade structured credit funds caused asset management revenues to turn to a loss of $186 million.
- Losses associated with the failure of the high grade funds, representing the write-off of the investment and fees receivable, amounted to $200 million.
- Weaker operating performances from alternative investment products resulted in the reversal of previously accrued performance fees and losses on various hedge fund investments.
Revenues from institutional equity and global clearing service areas increased to $719 million and $332 million, respectively on increased customer volumes and volatility as well as average quarterly customer balances and transactions.
- Net revenues from international activities increased 98% to $537 million, from $271 million in 2006, reflecting record equity in interest rate derivative revenues and a substantial increase in Asian-based revenues.
- Indicative of prospective growth outside the U.S., international headcount increased over 2,000 people across equity and fixed income franchises in Europe and Asia.
Net income decreased by 62% to $168 million, or $1.16 per share, from $449 million, or $3.02 per share in the prior year, primarily as a result of weaker revenues despite lower expenses.
- Total expenses were $1.16 billion, down 21% from the prior year, due to lower employee compensation and benefits expenses.
- Non-compensation expenses were $492.4 million, up 13%, following increased transaction-related costs associated with higher business volumes, as well as higher occupancy, communications and technology costs.
- Advertising and market development cost and professional fees also rose 29% to $49 million, reflecting increased business activities as well higher recruiting-related expenses.
Market Risk Statistics
- Firm-wide Value at Risk (VaR) increased 20% to $34 million despite reduced positions and risks during the quarter.
- The increase on VaR is primarily the result of the increase at market volatility.
Liquidity Management
- Liquidity position was enhanced by a reduction in balance sheet, reducing commercial paper outstanding, and increasing cash liquidity pool, ensuring that the firm is able to meet all short term unsecured debt maturities without issuing new debt or liquidating assets.
- Commercial paper outstanding was $3.6 billion from $20.7 billion on November 30, 2006, while the parent company liquidity pool was $19 billion.
- Readily available secured and unsecured committed bank lines were $8 billion.
Stock Repurchase Program and Cash Dividends Declared:
- A total of 3.5 million shares of common stock were repurchased at an aggregate cost of $495 million.
- The board approved an increase in the total share repurchase authorization to $2.5 billion, including $1 billion for corporate share buybacks.
- A quarterly cash dividend of 32 cents per share of common stock was declared.
- Quarterly preferred cash dividends of $3.075 a share were also declared on the 6.15% Cumulative Preferred Stock, Series E, $2.86 a share on the 5.72% Cumulative Preferred Stock, Series F, and $2.745 per share on the Cumulative Preferred Stock, Series G.
Segment Perfomance Highlights
Capital markets:
- Revenues decreased 36% from $1.65 billion in the prior year to $1.05 billion, following a decline in revenue from fixed income and investment banking.
- Institutional equities revenues increased 53% to $719 million from $471 million in the prior year on increased customer volumes, gaining over 50% on market share.
- Structured equity product revenues were up by $225 million, reflecting gains in the structured notes portfolio, following the issue of dynamically hedged notes.
