As the slump in equity markets continues to gnaw at the major U.S. investment banks’ bottom lines, they are looking increasingly to foreign markets for relief.

On Wednesday, Bear Stearns Cos., Lehman Brothers, and Morgan Stanley Dean Witter & Co. all reported sharp declines in profits and all blamed the slowdown in equity underwriting and advising, as well as retail investors’ wariness of market turbulence. As a result, these firms, like many others on Wall Street, are clamping down on expenses and looking abroad — especially Europe — for growth opportunities. Morgan Stanley, which recently closed its deal for the British asset management company Quilter Holdings, pointed to Europe as a bright spot, and Lehman Brothers and Bear Stearns said they will continue to pursue opportunities in select markets across the Atlantic.

“One of our key strategies is to grow our geographical coverage. The challenge now is to grow across the Continent,” said David Goldfarb, chief financial officer at Lehman Brothers, which already operates in Italy, Germany, Spain, France, and the Netherlands.

The market doldrums took the biggest toll on Bear Stearns, where profits for the period that ended Feb. 28 fell 40%, to $166 million, from the year-ago period. The New York investment bank reported earnings per share of $1.10, 18 cents below the analyst consensus.

The news was also bleak at fellow New York houses Morgan Stanley and Lehman Brothers, which had profit erosion despite beating analysts’ estimates.

Morgan Stanley said that profits for its fiscal first quarter fell 34%, to $1.01 billion, from the year-earlier period, while Lehman said its profits tumbled 22% for the same period, to $375 million. Goldman Sachs Group Inc. this week reported a 13% decline in profits.

Robert G. Scott, president and chief operating officer at Morgan Stanley, said during an investor conference call Wednesday morning that the company is “reviewing each of our businesses in light of market conditions.”

Mr. Scott said that the firm would continue to review staffing levels and hinted at a possible reduction in head count in the United States, although Morgan Stanley’s ranks could have “modest growth” in Europe. Last year the company’s head count grew 14%, to 60,000 globally, and was slated to grow another 5% this year. However, head count will likely end the year flat, Mr. Scott said.

“Within particular businesses you will see redeployment,” he said.

Lehman, too, is reining in expenses. Mr. Goldfarb said the company will save $40 million a year by pulling its equity clearing in-house, after severing a relationship with Bear Stearns. “We will largely try to use that as a way to fund our selective growth,” Mr. Goldfarb said.

Bear Stearns should save $30 million a year from its latest cost-cutting measure — layoffs in information technology announced in early March. The $8 million severance associated with the reduction will be counted in its second-quarter earnings, chief financial officer Samuel Molinaro said during his company’s conference call.

Bear Stearns beefed up staff in Europe in the third and fourth quarters and will add people there in equity sales and trading, fixed-income sales and trading, capital markets, investment banking, and research, Mr. Molinaro said.

Bear Stearns, Lehman, and Morgan Stanley all “continued to expand into Europe,” Ken Worthington, an analyst at CIBC World Markets, said. “That’s where the big opportunities for growth are over the next three to five years.” But it is also where a lot of the brokerages’ expense increases will come from, he said.

Diana Yates, an equity analyst with A.G. Edwards & Sons, St. Louis, said, “I think Europe is an area they’re hoping will do better than the U.S.,” but “in reality it’s probably a small number and not enough to save the U.S. if there’s a recession.”


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