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Huge job cuts help Merrill boost earnings
Wednesday January 22, 4:45 pm ET
By Gary Silverman in New York
Merrill Lynch warned on Wednesday of more pain ahead for the securities business as it revealed that 2,300 job cuts had helped it boost operating earnings 25 per cent last quarter. The largest US brokerage has reduced staff by 21,700, or 30 per cent, since the third quarter of 2000. To put that number in perspective, Merrill's job cuts are greater than the entire current staff of Goldman Sachs, an investment banking rival that lacks Merrill's army of stockbrokers. Tom Patrick, Merrill's executive vice chairman, said his company was trying to position itself for a new era. He said a 20-year period marked by falling interest rates and a resulting market boom was ending, and that banks were struggling to figure out how big they should be. Mr Patrick pointed to the experience of the 1930s as an example of how long it can take for financial markets to regain their footing after a long boom. "We have an industry that got sized for Nasdaq 5000," Mr Patrick said in an interview. "We are in uncharted waters. We have come off a giant change in the markets. Something else is going to happen. I don't know what it is." In the near term, Mr Patrick told analysts that Merrill remains cautious and expects market conditions "to remain unsettled for some period of time". Merrill began cutting staff drastically following the appointment of Stan O'Neal as chief operating officer in the summer of 2001. At the time, Mr O'Neal and his team of managers were seen by some observers as ruthless. Wednesday's earnings reports suggested they had their reasons. Merrill reported net earnings of $603m, compared with a loss of $1.3bn last year. Its operating earnings of $615m compared with $491m last year. Merrill's net results reflected a $65m charge for costs directly associated with the December settlement of multiple investigations into Wall Street conflicts of interest. Unlike competitors such as Citigroup, however, Merrill has decided against setting up reserves for the potential cost of civil litigation. Mr Patrick told analysts: "Nobody admitted we did anything [wrong] and we remain of that view, and we will not put up anything until it becomes...quantifiable." The bulk of Merrill's job cuts last quarter were in its brokerage side, reflecting its decision to combine US and international private client operations. Separately on Wednesday, Bank of New York reported a 70 per cent fall in net profits for the fourth quarter as it booked a charge against its exposure to UnitedAirlines and increased bad loan provisions.
The US bank wrote off $240m to cover aircraft leases held by United, which is currently operating under bankruptcy protection and seeking to renegotiate terms with creditors.
BoNY bolstered its pre-tax reserves for problem loans to $390m, a 41 per cent increase from the year-ago quarter.
"The fourth quarter results are in line with our prior guidance and reflect a persistently weak market environment," said Thomas Renyi, chairman and chief executive officer. In December, BoNY warned it would take a charge.
Net profits for the quarter fell to $100m, or 14 cents per share, from $331m (45 cents), in the year-ago period.
Total income from loans, securities and other interest-bearing revenue streams dropped 15 per cent to $628m. Non-interest income was down 18 per cent at $833m, reflecting weak currency markets and trading conditions, as well as losses on securities. The bank's return on common equity was also lowly - 5.99 per cent.
BoNY, which has $6,800bn under custody, announced this month that it would buy the Pershing clearing unit of Credit Suisse First Boston for $2bn. For BoNY - a power in securities servicing - the Pershing acquisition is a classic attempt to benefit from economies of scale. Pershing is an industry leader in clearing, which involves making sure stocks are smoothly passed to the correct owners.
Factoring in the acquisition, the bank predicts it will report earnings between $1.69 and $1.84 per share for the year. |
