Merrill's Profit Falls 41% While Third Quarter Looks Even Uglier

Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) reported second-quarter earnings that fell 41% below year-earlier levels as the near disappearance of investing banking hammered the firm's bottom line. And the current quarter could be even worse, Merrill said.

The firm posted net income of $541 million, or 56 cents a diluted share, beating the lowered Thomson Financial/First Call consensus estimate for 54 cents a share. Late last month, Merrill warned it would fall as much as 37% short of Wall Street's earnings estimate of 82 cents. The company's year-ago profit was $1.01 a share.

Merrill CFO Thomas Patrick said the outlook remains unpalatable. "Without a significant improvement in market conditions from June levels, it is likely that our third-quarter earnings would be lower than the second quarter." The company is expected to post earnings of 66 cents in the third quarter, compared with 94 cents a year ago.

A year ago, a flood of lucrative investment banking business translated into hefty IPO underwriting and merger advisory fees, fueling record growth for the brokerage houses. Now that the economy has slowed drastically and equity markets have dried up, companies are reluctant to go public or merge -- making year-over-year comparisons an ugly exercise.

Unlike some of its counterparts, such as Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks), Merrill's bond business is not large or strong enough to mask the current weakness in other business lines. "Our second-quarter performance underscores the difficult market conditions, particularly in our secondary equity business," CEO David Komansky said in a written statement.

The downturn in investment banking was most pronounced in equity trading revenue. Net revenue in Merrill's corporate and institutional client group tumbled 24% to $2.5 billion from year-ago levels.

Debt market revenue showed an increase from year-ago levels, though it was not enough to offset weakness elsewhere in Merrill's business. Revenue and profits also declined in the firm's private client group, down 14% and 6% respectively, a more modest drop than that seen in investment banking. Income also dropped in the firm's asset-management arm.