America’s credit crunch hit home at another major Wall Street firm yesterday as Bear Stearns announced its lowest quarterly profit in five years.

The group reported a 61 per cent drop in third-quarter net income to $171 million (£85 million), as it reeled from a $200 million charge relating to the collapse of two hedge funds in the summer that fell victim to America’s sub-prime mortgage meltdown.

Bear Stearns was knocked further by an 88 per cent slump in revenues at its fixed-income division, to $117.6 million, as a “general repricing of risk in the market” knocked the value of its credit-related investment portfolio and significantly reduced the volume of mortgage-backed bonds it traded, according to James Cayne, the group’s chief executive.

The group’s net revenue, or total revenue minus interest costs, fell by 37 per cent to $1.33 billion, as investment banking fees dropped by 9 per cent to $211 million.

But the group’s profits were helped by a strong performance from its equity sales and trading division, which reported a 53 per cent increase to a record $719 million.

Meanwhile, the clearing unit, which includes the provision of brokerage services for hedge funds, jumped by 30 per cent to $332 million, another record.

Bear Stearn’s results come a day after Morgan Stanley announced a $940 million charge relating to the credit crunch that took its third-quarter profit on continuing operations down by 7 per cent to $1.47 billion.

That followed the admission by Lehman Brothers on Tuesday that the credit crunch had cost it about $700 million in the third quarter, leaving net income at America’s biggest underwriter of mortgage bonds down by 3 per cent, at $887 million.

Shares in Bear Stearns have dropped by about 30 per cent this year because of its high exposure to America’s housing market and were down another 1.1 per cent, to $114.32, in midday trading, as the results came in below analysts estimates.

Sam Molinaro, the chief financial officer, said the company’s problems were largely over. “We believe the earnings capacity of our fixed income franchises are firmly intact,” he said.

The company’s board also yesterday approved a plan to buy back up to $2.5 billion of shares in a bid to bolster its flagging stock price.

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