Dominion Bond Rating Service has confirmed the ratings of the Bear Stearns Companies Inc., but notes that their long-term ratings are limited.

The ratings are supported by DBRS’s view that Bear Stearns continues to make progress towards its strategy for a balanced business mix (through fixed income, global clearing business, and institutional equity sales and trading), which provides a base of stability to its earnings.

“BSC demonstrates ongoing depth in its fixed income franchise, including selectively investing in higher margin niches, and BSC’s ability to manage expenses relative to revenue growth,” it notes. “During the past year, BSC demonstrated depth of its fixed-income franchise as growth in high yield, interest rate, currency, and credit derivatives due to customer volume helped to more than offset declines in mortgage-backed securities revenues, which DBRS believes is one of BSC’s competitive advantages.”

Fiscal 2005 was also a pivotal year for the European businesses with respect to generating revenue and pre-tax operating income, DBRS adds, “The result of BSC leveraging its U.S. strengths in fixed income, institutional equity sales and trading, equity derivatives, global clearing, and right-sizing certain businesses.” DBRS believes the firm is better positioned today than in prior periods to capture the expected growth in Europe, but it says, “The degree of success in the long term remains to be seen, given the strength of existing competitors in these markets, including other global investment banks and regional players.”

DBRS believes long-term ratings are limited by the firm’s lower degree of diversification and lower operating scale, especially in overseas businesses, relative to its industry peers. Its low level of geographic diversification relative to some of its peers constrains the ratings, although the differential should improve over time as revenue and profit contribution from its European businesses increase, it adds.

“Another challenge facing BSC is structural changes that could impact profitability. Similar to its peers, litigation risk remains a concern. The outcome of class action suits is difficult to predict, but DBRS continues to believe settlement costs will not be of a magnitude that will impact ratings,” it concludes.