Update: PaineWebber's Profit Slides, but It Exceeds Estimates

Updated from 10:09 a.m. EDT

PaineWebber(PWJ) said Wednesday that its third-quarter earnings quarter slid 1.7%, as the brokerage firm's weaker investment banking revenue offset gains from trading and asset management.

Net income dropped to $135.8 million, or 85 cents a share, from $138.2 million, or 86 cents a share, a year earlier. But the results in the latest quarter surpassed analysts' lowered consensus forecast of 83 cents a share, according to First Call/Thomson Financial.

New York-based PaineWebber, which employs nearly 23,000 people, said revenue, including net interest, rose 16.6% to $1.4 billion in the quarter ending Sept. 30, up from $1.2 billion in the comparable quarter of last year.

Revenue from investment banking, the business of advising companies on mergers and acquisitions and underwriting stock offerings, declined 20% to $107.5 million from $134.2 million a year earlier.

"For investment banking, we expected it would come in flat to slightly down," said Lauren Smith, who follows the company for Keefe Bruyette & Woods, which has not done any underwriting for PaineWebber. "The third quarter is always slow, so you see a lackluster underwriting environment."

Smith, who rates the company's stock a market perform, noted that investment banking makes up a relatively small part of PaineWebber's overall revenue. Sensing a slowdown in business for PaineWebber, analysts recently lowered their profit predictions. Smith adjusted her forecast several weeks ago to 80 cents a share from 90 cents a share.

Trading revenue, meanwhile, increased 22% to $287.9 million from $235.9 million, while asset management revenue climbed 33% to $314.1 million from $235.7 million.

At the same time, the company, which in July agreed to be acquired by the Swiss banking company UBS AG(UBS), reported that non-interest expenses increased 20% to $1.2 billion from $1 billion a year earlier.

In addition, the number of households using PaineWebber's Edge online brokerage service increased 25% to 312,000 from 248,000 in the comparable quarter of last year, while assets invested with the service rose 23% to $225.8 billion from $183.7 billion.

"With the Edge, they're going after the upper echelon of households," Smith said, "and they're clearly doing a lot on that front." .

PaineWebber finished Wednesday regular trading down 69 cents, or 1%, at $67.56.

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