Fitch Ratings has affirmed its outstanding ratings on the Bear Stearns Companies Inc. and its subsidiaries.

The firm says that the ratings reflect Bear Stearns’ solid franchises in global clearing and prime brokerage, and consider its prudent management of liquidity, funding and capital. The Stable Outlook reflects Fitch’s expectation that annual revenue and earnings growth can be resumed without assuming a higher risk threshold, or incurring disproportionately greater leverage.

Negative rating actions will be dictated by several factors, including: the extent of ongoing revenue declines and the severity of future negative valuation adjustments; increasing risk profiles; required versus actual liquidity; rising leverage to support a growing base of illiquid/less liquid assets; and/or
tangible equity erosion.

Bear Stearns is particularly vulnerable to adverse conditions in the domestic mortgage market, Fitch says. It notes that Bear Stearns has taken a number of measures to contain exposure, such as limiting ownership of subprime mortgages, imposing stricter underwriting standards, and employing hedges opportunistically. Fitch anticipates liquidity and pricing challenges to prevail in the market over the next 12-to-18 months, resulting in lower revenues (in select products/services), investment write-downs and/or fewer principal trading opportunities. However, Bear Stearns is expected to generate sufficient earnings and maintain adequate capital to successfully navigate through this cycle, it adds.

Increased diversity within its fixed income franchise beyond mortgages has been sought via credit products and derivatives. While these may be potential revenue sources, these products are also susceptible to many of the challenges facing the mortgage market, the rating agency says.

The firm’s efforts to grow the asset management business were bearing fruit through fiscal year-end 2006, Fitch says. However, its prospects have been dampened by the demise of two sponsored mortgage-backed securities hedge funds. These results will hinder near-term growth in AUM and related revenues, it adds.

Fitch believes Bear Stearns’ market risk appetite remains consistently and materially lower than peers based on disclosures of Value at Risk, distribution of trading profit and loss and Fitch’s calculations of volatility in trading revenues. However, Bear Stearns faces challenges to broaden its franchise geographically and by product, it notes. In addition, global competitors with larger capital bases will continue to exert pricing pressure on several of Bear Stearns’ key products (prime brokerage, sales and trading).