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Merrill Results Improve Despite Bank of America's Q3 Loss

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Bank of America Corp. (BAC) reported Tuesday a net loss of $7.3 billion, or $0.77 per diluted share, in the third quarter of 2010. The loss came largely from a non-tax deductible goodwill impairment charge of $10.4 billion in the bank’s credit card unit due to federal regulations limiting debit fees.

Excluding this charge, net earnings were $3.1 billion, or $0.27 per diluted share, compared with a net loss of $1.0 billion, or $0.26 per diluted share, in the third quarter of 2009. Analysts’ expectations were for earnings per share of $0.16. 

In contrast, the global wealth and investment management, or GWIM, unit reported total revenues of $4.07 billion, up from $3.87 billion in ’09 but down from $4.33 billion in the previous quarter. Net income was $313 million vs. $234 million last year and $356 million in the second quarter.

GWIM's largest contributor, Merrill Lynch, reported that as of Sept. 30, it included 15,340 financial advisors, up from 14,979 a year ago and 15,142 in the previous quarter.

The number of U.S. Trust wealth advisors is 2,128, giving the global wealth and investment management unit (or GWIM), a combined 16,790 financial advisors. This puts it close to Morgan Stanley Smith Barney, which had 18,087 FAs as of June 30; the Merrill rival reports its third-quarter earnings on Wednesday.

“Despite a challenging market, Merrill Lynch financial advisors have been strong contributors to the overall company’s revenue stream,” said Mark Elzweig, an executive search consultant in New York. “The advisor numbers verify the fact that Merrill Lynch has been a successful player in the wirehouse recruiting wars – and has shown it can increase its headcount by hiring high-end professionals.”

Merrill's Sales Per Rep

In terms of annualized advisor revenues (or GDC), Merrill FAs averaged $851,000 in sales in the recent quarter vs. $853,000 in the second quarter and $837,000 a year ago. Based on the first nine months of 2010, the advisors have annualized sales of $841,000 vs. $825,000 in the same period of 2009.

In contrast, Morgan Stanley’s advisors had annualized sales of $679,000 as of the second quarter.

Sales at Merrill Lynch hit $3.10 billion vs. $3.08 billion last year and $3.12 billion in the second quarter.

The GWIM unit reported total revenues of $4.07 billion, up from $3.87 billion in ’09 but down from $4.33 billion in the previous quarter. Net income was $313 million vs. $234 million last year and $356 million in the second quarter.

Client assets for the GWIM unit totaled $2.17 trillion in the third quarter, down slightly from $2.23 trillion a year ago but up a bit from $2.09 trillion in the earlier quarter.

Assets at Merrill Lynch came to $1.52 trillion vs. $1.44 trillion a year ago and $1.46 trillion in the second quarter.

A subset of GWIM assets, brokerage assets – which include fee-based assets — were up slightly both year over year and sequentially to $1.44 trillion.

GWIM asset flows, however, were in negative territory, with outflows of $1.5 billion in the third quarter, mainly due to outflows within non-Merrill Lynch segments (such as BofA Global Capital Management and BofA’s investment in BlackRock). Still, this is an improvement over outflows of $17.8 billion a year ago and $7.4 billion in the second quarter.  

“The fact that Merrill Lynch production and assets are up slightly year over year, when other segments are lagging somewhat, are other indicators of its success,” Elzweig said. “In terms of recruiting, Merrill offers advisors good deals and a good brand name.”  

Overall, BAC said in its Q3 2010 release, operating profit rose due to improving credit conditions for both businesses and consumers. Credit costs declined for the fifth consecutive quarter while Tier 1 capital ratios continued to strengthen and the wealth management business reported strong asset management fees.

"Our results this quarter demonstrate continued traction with each customer group – consumers, businesses, and institutional investors," said BAC President and CEO Brian Moynihan said in a statement. "Our strategy is to leave nothing to chance in our goal of doing everything we can for each of our customers. We are adapting to the regulatory environment, credit quality continues to improve, and we are managing risk and building capital.”

BAC stock after the earnings release was trading near $12.30 per share on above-average volume vs. Monday’s close of $12.34.

Specifically, the BAC earnings release said the write-down resulted from the limits to be placed on debit interchange fees under the financial reform legislation enacted in July 2010, which will reduce future revenues in the Global Card Services business.

“As a result of the legislation and other changes in the environment, the company is changing the way its consumer bank does business, focusing on a relationship enhancement strategy designed to incent customers to bring more business and to make pricing more upfront and transparent,” according to the release. “This change moves away from a dependence on penalty fees, which the industry had adopted over the years, and provides the customer with a better banking experience. These changes are expected to result in additional revenue.”

Highlights reported in the third quarter included:

  • Approximately 200,000 loan and deposit products sold to Bank of America Merrill Lynch customers. In addition, referrals between Global Wealth and Investment Management and the company's Global Commercial Bank and Global Banking and Markets businesses totaled approximately 3,500 in Q3 and approximately 10,700 year to date. The company's retirement business continues to win more business.
  • Strong growth in client assets driven by higher market prices and increased inflows into higher-yielding products reported by Global Wealth and Investment Management. These included a $14 billion increase in deposits and a $6 billion increase in long-term assets under management. Global Wealth and Investment Management increased the number of its client-facing associates for the fifth consecutive quarter.
  • Bank of America Merrill Lynch ranked No. 2 in global investment banking revenues with a 7% market share, according to Dealogic's third-quarter 2010 league tables. The company has No. 1 positions in both global and U.S. rankings in leveraged loans, syndicated loans, mortgage- and asset-backed securities, and high-yield corporate debt.

Read about Bank of America’s Q2 2010 earnings at