Expenses take toll on Merrill Lynch's Q4 earnings

Expenses take toll on Merrill Lynch's Q4 earnings
Bank of America Merrill Lynch took a hit in the fourth quarter due to rising expenses and lower interest income, though CEO Brian Moynihan offered a vote of confidence that brokerage chief John Thiel is managing expenses well.
JAN 20, 2015
Bank of America's Global Wealth and Investment Management segment took a hit in the fourth quarter, as rising expenses and lower interest income sliced about 9% from earnings, which dropped to $706 million in the quarter from $778 million in the same quarter one year ago. As a result, annual profits were down to $2.974 billion last year from $2.977 billion in 2013. The quarterly pre-tax profitability for the unit, which includes Merrill Lynch and the firm's private banking business, U.S. Trust, dropped to just under 25% from almost 27% in the same quarter 2013. The number was well behind the executives goals of 30% margins in the next couple years, although still above numbers for some of its rivals, such as Morgan Stanley, which reported 22% margins at the end of the third quarter last year. SUPPORT COSTS Bank of America's chief financial officer, Bruce Thompson, said on an earnings call that “support costs” were a main contributor to the rise in expenses, and cut into margins by about 200 basis points, or 2%. Overall expenses were up around 5% from the same quarter the previous year, hitting $3.4 billion in the fourth quarter. A decline in net interest income, which measures in large part how much the firm makes from lending, also hurt profitability. But much of that was likely due to a charge in another segment of Bank of America, according to Mr. Thompson. “Charges in net interest income get pushed out to all the businesses,” Mr. Thompson said on the call. “So some elements of that really aren't in the business' control.” Loans in the wealth management unit were at $129 billion in balances, up 8.4% year-over-year. VOTE OF CONFIDENCE Still, executives maintained that the firm could reach the 30% profit margin target, as Bank of America CEO Brian Moynihan offered a vote of confidence in brokerage chief John Thiel's work toward keeping expenses “in-line” with revenue. “We talked about that last quarter, and John Thiel and the team, especially at Merrill Lynch, are doing a good job of getting after that,” Mr. Moynihan said. He added that the possibility of a rise in interest rates and the wearing off of “some deferred compensation” and other programs in 2016 could also help. Many of the firm's retention bonuses given out to legacy Merrill Lynch advisers after the 2008 acquisition by Bank of America are set to expire around the end of the year. HEADCOUNT Despite the departure of a number of large, veteran teams in the fourth quarter, Merrill Lynch reported that it had added a net of 85 registered brokers in the fourth quarter to hit 14,085, and that overall adviser attrition was at 5% — better than the previous record low of 5.5% attrition at Merrill Lynch in 2007. The firm said it added 73 experienced advisers during the year who brought in more than $12 billion in assets, according to data provided by spokeswoman Susan McCabe. Merrill Lynch advisers were still some of the most productive among the firm's wirehouse peers and brought in an average of $1.070 million in revenue during the fourth quarter, just slightly below the industry record set by UBS Wealth Management in the third quarter of $1.079 million per adviser. MANAGED ACCOUNTS The firm and its advisers continued to benefit from the growth of managed accounts, as fee-based income now comprised 45% of total revenues of $4.6 billion in the quarter, up from 40% in the year-ago quarter, in which the firm reported revenues of just below $4.5 billion. Assets under management hit $2.03 trillion for Merrill Lynch, up from $1.9 trillion a year ago, despite a quarterly decline in asset management flows. The firm brought in $9.1 billion in the quarter, which marked a significant drop from $15 billion a year ago. Asset flows, however, are cyclical, analysts say, and usually a slower quarter is not an indicator of a broader trend of decline unless it continues. This article has been updated to indicate that Merrill Lynch's record low of 5.5% attrition was in 2007, not the second quarter. It also corrects Bank of America CEO Brian Moynihan's name.

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