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Global Gains Drive Merrill

The big brokerage shrugs off subprime-exposure worries.

Merrill Lynch


rose modestly Thursday after its first quarter showed strong gains in its investment banking, fixed income and equity markets businesses.

The New York-based brokerage giant posted diluted earnings of $2.26 a share on revenue up 24% from a year ago to $9.9 billion. The numbers soared past the Thomson Financial analyst estimates of $1.97 a share in profit on revenue of $9.06 billion.

"This was a terrific quarter in an environment which was volatile at times. We took full advantage of market opportunities and delivered value to our clients and our shareholders," said CEO Stan O'Neal, in a written statement. "Our product capabilities and geographic reach are stronger and broader now than at any point in our history and we continue to make investments to further enhance our franchise," he added.

In global markets and investment management, the brokerage firm recorded revenues of $6.5 billion -- 43% higher than a year ago.

Merrill's investment banking business saw net revenues increase 47% year over year to $1.4 billion. Gains were strongest at its debt origination business as well as in fees from its merger and acquisition advisory unit, which was up 55% year over year to $399 million.

Merrill's private client and high net worth business saw revenue jump 16%. Its global investment management business benefited from the company's 50% investment in


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last year.

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Projected private client growth is expected from Merrill's planned purchase of

First Republic

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for $1.8 billion. Internationally, the firm is also expanding its footprint in Japan and India.

"The company's global markets and investment banking division now derives more than 50% of its revenues from offshore sources," comments Punk Ziegel analyst Richard Bove in a research note. "Growth in these markets is much faster than in the United States. The division had record results in many of its subdivisions," he continued.

Squashing any fears of a subprime slipup, CFO Jeff Edwards said that Merrill's diversified platform more than offset its limited exposure in loans provided to borrowers with shaky credit quality. The brokerage's fixed income generated net revenue growth of 36% to $2.8 billion.

"In this market there are going to be periods of dislocation. . . . It's important to react to that but as part of a portfolio you can see the fixed income business just powered right through that," he said, responding to an analyst question.

"Revenues from subprime comprise less than 2% of net revenues for five quarters," he said, noting that the figure includes Merrill's acquisition of mortgage origination and servicing firm First Franklin.


Subprime is an asset class that will continue to be significant," Edwards said. Ownership in First Franklin gave the company an advantage, he added, noting that it was able to increase origination and tighten underwriting at First Franklin. Merrill debuted a $2 billion First Franklin securitization of mortgage loans recently, he noted. "Our risk management capabilities are better than ever and crucial to us navigating turbulent markets," he said.

"We believe the issues in this narrow slice of the market remain contained," Edwards commented.

Shares rose 59 cents to $91.25.