Updated from 1:55 p.m. EDT
on Thursday swung to a first-quarter loss on continued deterioration of structured finance products and the U.S. mortgage market.
The firm reported a net loss from continuing operations of $1.97 billion, or $2.20 a diluted share, vs. a net profit of $2.03 billion, or $2.12 a diluted share, in the year-ago period. Analysts polled by Thomson Financial had expected a loss of $1.99 a share.
Merrill posted net revenue of $2.9 billion, down 69% from a year ago. Analysts had expected revenue of $2.7 billion.
The losses were fueled by writedowns of roughly $6.6 billion for the quarter, the firm said on a conference call with analysts. Merrill also plans to reduce staffing levels by 4,000, or 10% of the workforce from global markets and investment banking businesses. The cuts will exclude financial advisors and investment associates.
"Despite this quarter's loss, Merrill Lynch's underlying businesses produced solid results in a difficult market environment," Chairman and CEO John Thain said in a company statement. "The firm's $82 billion excess liquidity pool has increased from year-end levels, and we remain well-capitalized. In addition, our global franchise is positioned strongly for the future, and we continue to invest in key growth areas and regions."
Thain reiterated on the company's conference call that the brokerage firm remains well capitalized and does not have plans to raise additional common equity. Still Thain told a group of reporters that the brokerage firm may issue preferred shares,
CFO Nelson Chai said on a conference call that the positive trading environment drove fixed income trading revenues of $1.9 billion, which excluded marks of $6.6 billion and fair value debt gains of $1.4 billion.
Merrill shares, which initially fell as much as 3.7% Thursday, climbed $1.82, or 4.1%, to $46.71 by the close. But Punk Ziegel analyst Dick Bove, for one, was at a loss to explain why.
"It would be disingenuous of me to indicate that I understood what has happened at Merrill Lynch in the first quarter or that I had any rational way to estimate what the company's earnings are likely to be going forward," he wrote in a note to clients Thursday. "Brokerage firms generally do not provide enough information for anyone to forecast their results. This time it appears to me that the company has provided bits and pieces of data sprinkled through its relatively sparse press release that almost tries to make it more difficult than normal to figure out what has happened."
While a breakdown of the firm's writedowns is not easily discerned from its earnings release, an analysis by
found a net writedown of $6.92 billion. That number is derived by $9.08 billion in writedowns to CDOs, leveraged finance, mortgage exposure, hedges to guarantors, investment banking products and other factors, offset by $2.15 billion in writeups to fixed income clearing, equity markets and commercial real estate.
A more complete picture of the firm's writedowns will not be available until Merrill files its next 10-Q with the Securities and Exchange Commission.
The company's Global Markets and Investment Banking unit, which includes the company's fixed income, investment banking and equities markets businesses, posted a pre-tax loss of $4 billion for the first quarter on revenue of negative $690 million.
Fixed income was particularly hard hit, as revenues totaled negative $3.4 billion for the quarter impacted primarily by losses associated with the ABS CDOs as well as the credit valuation adjustments related to the hedges with financial guarantors. The losses also reflect, to a lesser extent, the writedowns related to leveraged loans and its mortgage exposure.
Investment banking revenues dropped 40% to $805 million reflecting the lower business as debt and equity origination, deal volumes for leveraged finance and initial public offerings significantly slowed.
Still the company's bread-and-butter business -- its global wealth management arm -- performed well, reporting "record" net revenues of $3.6 billion.
Merrill already laid off 1,100 of the 4,000 employees it is targeting in its planned cuts in the first quarter, primarily through the discontinuation of mortgage origination at First Franklin and the sale of ML Capital. The staff downsizing will result in annual cost savings of approximately $800 million a year. The firm also expects to record a restructuring charge of $350 million in the second quarter.
"It's a very targeted headcount reduction," Thain said on the conference call. "We are not in any way pulling back from our fundamental strategy. We are not changing our view that we need to invest in the faster parts of the world. The headcount reduction will made be in those slower growing areas that are not the focus of our global strategic growth."
Despite the writedowns, Thain said the company is seeing some improvement in the credit markets, leveraged loans for example, where there is "some improvement in spreads."
Octavio Marenzi, head of Celent, a Boston-based financial research and consulting firm, says the writedowns "are a stark reminder that we are not out of the woods yet in terms of the credit crisis.
"There is more pain to come and the pressure on earnings is going to continue," he says.
The earnings loss at Merrill proved to be in stark contrast to that of
reported a profit of $2.4 billion, or 68 cents a share, on Wednesday.
JPMorgan's earnings, while not immune to the credit crisis engulfing most banks and brokers these days, shows how it was able to navigate through the poor environment better than others such as Merrill and Charlotte-bank
, which reports earnings Friday, is another financial titan expected to provide dismal results.
Moody's Investors Service placed Merrill's long-term ratings on review for downgrade. The company's short term ratings were affirmed, the ratings agency said.
The review will focus on Merrill's ability to "strengthen its capital ratios and continue de-risking its balance sheet in light of reduced earnings prospects for the firm in 2008 and continuing difficult conditions in many fixed income markets," Moody's said.
The markdowns on these positions and additions to counterparty credit reserves were a major contributor to the $2 billion loss reported by Merrill Lynch. Previously Moody's had expected
Merrill to be profitable throughout 2008," it added. After conducting stress tests of its super-senior and CDO portfolio and its related hedges, Moody's forecasts potential further markdowns of approximately $6 billion beyond the charges recognized by Merrill Lynch in the past three quarters.
"Management at Merrill Lynch is focusing on the right issues for the rating -- liquidity, capital and de-risking the balance sheet, however the mortgage market is not cooperating" said Peter Nerby, a senior vice-president at Moody's.
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