A tumultuous quarter for subprime mortgages has not altered Merrill Lynch & Co. Inc.'s desire to participate in that business, according to Jeffrey Edwards, its chief financial officer.
"This is an asset class that will be significant in the U.S. and worldwide, and the strategic impact of the First Franklin acquisition was clearly evident this quarter as having both origination and servicing capabilities enabled us to see trends emerge sooner and enabled us to adjust underwriting standards and pricing rapidly," Mr. Edwards said Thursday during his company's quarterly earning conference call.
In the fourth quarter Merrill bought First Franklin Financial Corp., a San Jose originator of loans through brokers, from National City Corp. for $1.3 billion.
First Franklin is the fourth mortgage company (but the first U.S. originator) Merrill has acquired in the last two years.
Since the acquisition dozens of companies that lend to borrowers with low incomes or poor credit have stopped operating or filed for bankruptcy protection.
Mr. Edwards said that revenue in the business line declined in the quarter, but that Merrill chose to capitalize on the market "dislocation" by recruiting talent from competitors.
"We fully expect to emerge from this cyclical downturn even better positioned," he said.
Despite market conditions and uncertainty about when the First Franklin purchase will be accretive to earnings, Merrill will continue to look for acquisitions to expand its mortgage business globally, Mr. Edwards said.
"It is important to understand that mortgage activities are part of a global initiative on our part," he said. "There are opportunities, and we continue to make an effort in Europe and Asia, and that continues to be an important part of our strategy. In the U.S., we are continuing to focus on executing the First Franklin acquisition and making sure the integration goes seamlessly to maximize the benefits of that platform."
Merrill announced stronger-than-expected results for the first quarter. Profits increased more than fivefold from a year earlier, to $2.11 billion, or $2.26 a share. Excluding the $1.2 billion of compensation expenses the company reported for the first quarter of last year, profits rose 31% and revenue increased 24%, to $9.85 billion.
The average estimate of analysts polled by Thomson Financial called for Merrill to report earnings of $1.97 a share on $9.06 billion of revenue.
Mr. Edwards said Merrill had a "record" pipeline in its investment banking business at the end of the quarter.
Revenue from Merrill's investment banking rose 47%, to $1.35 billion. This included a 55% increase in merger advisory fees, to $399 million.
Even though it was a difficult quarter for First Franklin, it still set origination records in January and February, Mr. Edwards said.
"The trends show signs of positiveness," he said. "It is too early to say much about the second quarter, but we did our first securitization earlier in the week for $2 billion. Investors have begun to re-engage."
Merrill continued to generate strong results from its other business lines.
First-quarter revenue from global markets and investment banking rose 43%, to $6.5 billion, and revenue from global wealth management increased 16%, to $3.4 billion.
Mr. Edwards said Merrill continued to develop its different business lines in the quarter. In January it announced it would pay $1.8 billion in cash and stock for First Republic Bank, a high-end San Francisco mortgage lender and private banking company.
Mr. Edwards said the acquisition of First Republic should close in the third quarter.
Merrill generated 39% of its first-quarter revenue outside the United States, and that figure could move higher, he said.
"We continue to believe that profit pools in international markets will grow faster than in the U.S. in the foreseeable future and therefore we continue to make investments that are necessary to build out our platforms broadly in these markets," Mr. Edwards said.
During the quarter Merrill opened institutional offices in Turkey, Russia, and Dubai.
