Analyzing Wall Street Broker Results- GS, BSC, LEH, MS & MER

By Yaser Anwar, CSC of Equity Investment Ideas

• The 4th Q saw strong investment banking and positive trading results. Commodities performed well for most of these firms and the historical seasonal weakness of trading results in the 4th Q didn’t rear its ugly head.
• 2006 was a great year on Wall Street, with average revenue growth of 34%. The strongest growth was seen in Sales and Trading, with another strong year for Fixed Income, which was up 38%. Equities Sales and Trading saw an exceptional year too with top-line growth of 37%, revenues were up about 18% in cash equities.
• Most of the growth driver being areas like Equity Derivatives, Prop Trading, and Prime Brokerage, where average top line growth was more like 80%. Investment banking fees grew 30% led by M&A fees, up 31%, followed by equity underwriting, up 27%, and debt underwriting, up 24%.
• Now to my favorite part- Compensation. $58 billion in total comp expense translates into average compensation per Wall Street firm of $365,560, up 19% from 05. At the high end, the average GS employee will make $658,000 up 23% from 2006 (much to Gary Weiss & the Media’s dismay), MS’s average employee will see the largest average increase in the group of 26% to $329,000 & ML’s average increase of 15% to $271,000.
• At the end of FY 06, GS’s net revenues had increased 51%, to $37.3 billion, driven by improvements of more than 50% at both the Investment Banking and Trading and Principal Investments businesses. The growth in net revenues reflects strong growth across all its operating segments: Investment Banking, up 87.2%, Trading & Principal Investment, up 147.5%, and Asset Management & Securities Services, up 36.7%.
• Besides Goldman, the other standout firm this Q was Bear Stearns. Bear reported a 13% increase in sequential revenues (not including one time gains) and a 28% increase from last year’s 4th Q. Both of these figures are the second highest among the 4 banks that reported Q4 ’06 results.
• Bear’s pretax income was up 34% sequentially and 49% YoY, benefiting from a lower compensation ratio at 44.5%. Morgan Stanley and Lehman Brothers both posted 8% sequential growth in net revenues and expenses in Q4.
• Lehman Brothers’ sequential pretax income growth of 9% just slightly beat that of MS’s 8% growth. However, when compared to last year’s levels, Morgan Stanley posted a 35% improvement in pretax income, while Lehman recorded a 22% increase.
• The Discover spin-off will no longer be a drag on MS’s ROE. The spin-off makes the competitive positioning of MS more clear. On its own the unit will have the flexibility to improve performance or become part of a larger entity at some future date.

• MS’ net revenues increased 48.3% vs previous year quarter to reach a record level. The growth was primarily driven by record net revenues in the Institutional Securities segment, which accounted for approximately 55.4% of the total net revenues and 81.9% of the overall increase in net revenues in Q2 FY06.
• The overall increase in net revenues also benefited from higher revenues in the Global Wealth Management, up 14.2% to $1.40 billion, and Asset Management, up 12.6% to $723.00 million. Net revenues in Institutional Securities segment the up 71.4%, benefited from strong revenue growth across all businesses- S & T, equity up 54.0% and fixed income up 95.0%, Underwriting up 77.0% and Advisory up 8.0%.
• Check which funds hold each of the stocks- GS, LEH, BSC, MS & MER.

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