Lehman Brothers has reported record quarterly profits after a surge in revenues from stock trading outweighed a slump in earnings from its mortgage bond underwriting business.

The Wall Street firm declared a 5.5 per cent rise in its first-quarter net income to $1.15 billion (£594 million) as revenue from equity trading leapt 42 per cent to $1.34 billion.

However, revenue from fixed-income trading rose by only 3 per cent, to $2.16 billion, as “weakness in the US residential mortgage sector” took its toll of the bottom line, the company said. This was the bank’s lowest bond trading growth since the first quarter of 2006.

Although Lehman’s profits came in slightly ahead of expectations, its shares fell by more than 3 per cent in midday trading on fears that its mortgage-related businesses could be hit hard this quarter.

The firm continued to benefit from the booming market for mergers and acquisitions with deal advisory revenues rising 9 per cent to $247 million as the bank advised on about $22 billion of transactions.

Lehman Brothers reported its figures for the three months to February 28 one day after Goldman Sachs opened this earnings season by reporting record quarterly revenues and profits.

Adam Compton, an analyst for RCM Global Investors, said: “Goldman Sachs had good results, but the market didn’t care, and their shares fell. And, in the case of Lehman, you have more sub-prime exposure.”

Defaults on US sub-prime mortgages, for borrowers with poor credit ratings, have hit a seven-year high and more than 20 lenders have shut or sought buyers since the start of 2006.

Lehman’s investment management business also reported record revenue, of $695 million, for the quarter, up 20 per cent on the year-earlier period.

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