Wall Street I-Banks Show Outstanding 2006 Results

I've conducted an analysis on Wall Street broker results from 2006, specifically concerning Goldman Sachs (GS), Bear Stearns (BSC), Lehman Brothers (LEH), Morgan Stanley (MS) and Merrill Lynch (MER).

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%, and revenues were up about 18% in cash equities.

Most of the growth driver was in 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 and 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 and principal investment, up 147.5%, and asset management and 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 four 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.

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Morgan Stanley's 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 the 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%.

My advice? Check which funds hold each of the stocks.