If analysts, asset managers and Merrill Lynch reps are to be believed, the fourth-quarter earnings reported today will indeed have been the worst of it for the nation’s largest brokerage. They better hope so.
Merrill Lynch said its private client division—its brokerage unit—earned $384 million in the fourth quarter, down 4 percent from this time last year. However, the firm reported that net revenue in the group dropped to $2.5 billion, down 12 percent from a year ago.
Assets in Merrill’s brokerage accounts declined 13 percent to $1.5 trillion, and commission revenue in the fourth quarter fell 23 percent to $1.2 billion. The firm's net revenue declined 24 percent to $4.8 billion in the fourth quarter, as income from mergers, stock underwriting and brokerage commissions declined.
Merrill’s results include a gain from the sale of its Canadian brokerage unit.
“Merrill has cut a lot of costs, and now it has to concentrate on growing the top line,” says CIBC World Markets financial analyst Kenneth Worthington. “But Merrill will need better market conditions in order to do that, and the market conditions are getting better.” He adds that the cost cutting should help improve profitability.
Overall, Merrill reported a loss of $1.3 billion in the fourth quarter on restructuring, its first loss since 1998. The firm spent $1.7 billion to cut 9,000 employees and close offices amid a slump in business. Merrill spokespeople have said previously they plan to have more financial advisors by the end of the year, but there are no specific numbers attached to that.
The restructuring is part of President Stanley O'Neal's effort to slash expenses and improve profitability. Merrill said the plan would save $1.4 billion a year.
Mark Bronzo, who owns Merrill shares among the $3 billion he invests for Groupama Asset Management, predicts Merrill’s revenue will increase and that compared to other Wall Street firms Merrill may likely have “the most dramatic improvement'' because of its slimmed-down cost structure. “I’m very impressed with Merrill’s return on equity,” he says. “It’s almost 12 percent in 2001. It will likely be in the mid to high teens this year, making it that much more attractive.”
Merrill Lynch brokers contacted for this story say they see the market improving and that the firm is on its way back to profitability.
“There’s no question that the market is bouncing back,” says a Merrill producer on the West Coast. “Clients are becoming more confident again and are reinvesting.”
Says a Merrill rep in the South: “I see nothing but positive things happening this year. My clients’ long-range financial planning outlook is outstanding.”
Earlier this month Merrill warned that it would take a pretax charge of $2.2 billion in the fourth quarter, partly to pay for the job cuts it said were necessary to reduce expenses. The workforce reduction (non-broker jobs) is part of a plan to cut costs by $1.4 billion a year, a move it hopes will boost profitability.
Overall, Merrill reported today that it lost $1.51 a share, vs. a profit of 44 cents a share, in the year-ago period. Excluding the $1.7 billion charge and costs related to the Sept. 11 bombings, Merrill had profit of $461 million, or 48 cents a share. Merrill’s net loss includes $30 million in expenses related to the Sept. 11 attacks, such as the write-down of damaged assets, costs for the repair and replacement of assets, and transportation, moving and related costs for displaced workers.