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Earnings Fall at Merrill, J.P. Morgan

Brokerages: Slump in investment banking business helps drag down first-quarter profits and revenues at the two financial giants, but shares rise.

April 18, 2002|From Bloomberg News and Times Staff Reports

Two of the nation's biggest financial companies reported lower first-quarter earnings Wednesday as Wall Street continues to struggle with the fallout from stocks' bear market, the economy's slump and Enron Corp.'s failure.

Merrill Lynch & Co. said first-quarter earnings fell 26% from a year earlier, as merger-advisory and underwriting fees dropped. But profit margins rose to their highest level in a year as the biggest securities firm cut costs.

J.P. Morgan Chase, the nation's No.2 commercial bank and also a major investment bank, said profit fell for an eighth quarter, dragged down by a slump in underwriting fees and losses on investments. But Morgan's consumer-banking business posted strong results.

Merrill Lynch said it earned $647 million, or 67 cents a share, in the quarter, compared with $874million, or 92 cents, in the year-earlier period. Revenue totaled $5.1 billion, down 21%.

The company's profit exceeded the 65-cent average estimate of Wall Street analysts surveyed by Thomson Financial/First Call. That helped the stock edge higher: It gained 2 cents to $48.37 on the New York Stock Exchange.

Merrill has been slashing expenses to offset declining revenue in its brokerage, investment banking and asset management units. The firm's work force has declined by 1,000 since the beginning of the year, bringing the number of employees to 56,400, compared with 70,300 a year ago.

The firm "is doing as well as we can expect given the environment," said Paul Stocking, an analyst at American Express Financial Advisors, which owned 1.2 million shares of Merrill at year-end. "Merrill can't turn a bad environment into a good one."

Helped by cost cuts, Merrill's first-quarter pretax profit margin widened to 19.9% from 15.2% in the fourth quarter.

Merrill is facing another big challenge: New York State Atty. Gen. Eliot Spitzer last week accused the firm's analysts of promoting shares of Internet companies in 2000 and 2001 to try to snare investment-banking business from the subject companies.

Merrill and Spitzer are meeting this week to try to negotiate a settlement that would allow the firm to avoid criminal charges.

Meanwhile, J.P. Morgan Chase said net income dropped 18% in the first quarter to $982 million, or 48 cents a share, from $1.2 billion, or 58 cents, a year earlier.

Operating earnings, excluding certain one-time items, totaled $1.15 billion, or 57 cents a share, down from $1.53 billion, or 74 cents a share a year earlier. Total operating revenue fell 8% to $7.9 billion.

Analysts were encouraged because the company's consumer banking arm showed robust results. Consumer banking, which includes 530 Chase branches, posted a 25% rise in profit, to $526 million. By contrast, the firm's investment-banking fees plunged 21% in the quarter.

The consumer division's results helped drive Morgan's shares up $1.89 to $37.27 on the NYSE, a three-month high.

But J.P. Morgan was a major lender to Enron, and is embroiled in lawsuits seeking to recoup the bank's money.

A much smaller brokerage on Wednesday reported record earnings: Jefferies Group Inc., an institutional stock trader and investment bank, said first-quarter earnings rose 13% as investment banking revenue more than doubled.

Net income rose to a record $17.7 million, or 65 cents a share, from $15.7 million, or 63 cents, a year earlier, even though total revenue was off 7% to $195.3 million.

Jefferies shares rose rose 88 cents to $48.19 on the NYSE.

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