Merrill Lynch & Co. will continue to add financial advisers, despite concerns about the current quarter, its chief financial officer said Tuesday as the company reported record third-quarter earnings.
“We will focus on growing our financial advisers and growing assets; those are things we can control and grow,” said Jeffrey N. Edwards. “If we grow these, then in ensuing quarters we will see strong activity.”
Merrill Lynch said its profit rose 49% in the third quarter, compared with the year earlier, to $1.38 billion, or $1.40 per share. Revenue grew 38%, to $6.69 billion.
Pretax earnings of $1.9 billion were 60% above the year earlier. Merrill said the quarterly earnings per diluted share, pretax earnings, and net earnings are the highest it has ever generated.
Third-quarter net revenue was up 6% from the second quarter on growth in all three Merrill business segments.
Merrill’s 17.2% return on common equity in the quarter was “perhaps the biggest story” in the profit report, Fox-Pitt Kelton analyst David Trone told the Dow Jones news wire. ROE rose almost five percentage points from a year earlier and almost three points from the previous quarter.
Mr. Edwards said he is wary about the fourth quarter, however, because it can be “seasonally slower.”
“It is always a challenge to make a statement that is well-informed when you are two weeks into a quarter, but certain indices are down,” he said.
Brad Hintz, an analyst at Sanford C. Bernstein & Co., said trading profits industrywide had declined in the fourth quarter of the last seven years. “The reason profits have slowed is not anything seasonal,” he said. “Bonuses are set in the middle of October or in early November, and really there is no motivation for brokers to take a huge risk in the fourth quarter.”
He expects trading revenues to decline in the fourth quarter, Mr. Hintz said, but that is “par for the Street.”
The number of financial advisers at Merrill increased 1.87% during the quarter, to 14,690, as the brokerage continued to actively recruit and train, Mr. Edwards said.
Merrill, the largest U.S. brokerage firm, prospectively added 515 financial advisers last month when it agreed to buy Advest Group Inc., the U.S. retail brokerage arm of the French insurer Axa. But Mr. Edwards said the increase he cited in financial advisers last quarter does not include those involved in the Axa deal. Advest, which is based in Hartford, Conn., will be earnings neutral or slightly positive for Merrill in its first year, he said, but its adviser group will develop more wallet share as they are integrated onto Merrill’s platform.
Merrill’s retail brokerage arm had a 16% increase in sales, and assets under management climbed 8%, to $1.4 trillion. Revenue grew 22% at the mutual fund arm, Merrill Lynch Investment Managers. And revenue from trading more than doubled as the stock market strengthened in the quarter. Investment banking revenue, however, fell 5%.
The company has spent a lot in the last two years to build its business after shrinking and selling certain businesses, said Richard Bove, an analyst at Punk, Ziegel & Co. It returned to the commodities markets in the third quarter and raised its profile in Japan through a joint venture with Mitsubishi Tokyo Financial to serve high-net-worth investors. In Europe it closed a deal for the internal investment management units of Royal Philips Electronics NV, which added $16 billion of pension assets.
Mr. Edwards said he expects growth to continue both organically, through recruitment of financial advisers, and through deals as long as the environment remains favorable. “I strongly believe that the success we have seen is not only driven by a more active trading environment but [also by] investments we have made in the past two years to build new business across a number of segments,” he said.
