Merrill Lynch & Co. merged its thrift and bank groups last month as part of a companywide downsizing.
At least four executives in the financial institutions practice were laid off.
In addition Merrill said it won't renew its contract with a longtime managing director, James Donohue. The firm is reportedly negotiating to retain Mr. Donohue as a consultant.
The firm last week denied a widespread rumor that it had abandoned the thrift sector, and particularly mutual thrift conversions.
Still, the staff reduction is widely seen as a reaction to the dwindling demand for capital markets and advisory work in the thrift sector.
Some observers said Merrill had all but conceded the sector was no longer profitable.
Merrill now has only one full-time investment banker left from the thrift group, Henry Michaels - though the firm points out that bank advisers are now also responsible for thrifts.
Nonetheless, Merrill's thrift focus clearly appears diminished.
"The challenge is the pie is shrinking and we have to look at ways to increase it, and we have taken the tack that a lot of (new business) is coming from overseas," said Dirk Stuurop, managing director and head of financial institutions M&A at Merrill.
Merrill recently hired Goldman, Sachs & Co.'s director of Latin American financial institutions M&A, Jesse Casso.
He will replace Michael Smith, who held a similar position at Merrill Lynch but was also laid off. Richard Buchan, who had been advising domestic banks with Merrill, will be transferred to Mr. Casso's division.
The pressures Merrill faces have reverberated across Wall Street, as a plunging underwriting business and tighter fee margins on bank and thrift advisory work have shrunk financial institutions groups.
Bear, Stearns & Co. recently laid off two executives in its mortgage advisory group.
And Salomon Brothers' longtime West Coast investment banker, Peter H. Peracca, has "gone limited," meaning he is no longer a managing director, though he will remain with the firm as a consultant.
Two general partners in Goldman's financial institutions group, Charles Davis and Howard Silverstein, went limited late last year .
"In general, Wall Street firms are reassessing their commitment to financial institutions work," said Paul R. Haklisch, a principal with Sandler O'Neill & Partners, which advises smaller, middle-market banks and thrifts.
"In part it reflects the changing commitment of business overall," he said. "The larger firms will target larger transactions, global transactions, while the middle-market business is not typically their forte."
At the beginning of the decade, the average value of a bank deal was $60 million, while today it is half of that, he explained.
At Merrill, the three layoffs hit the commercial banking advisory and capital markets units, and the mutual thrift conversion team.
Mr. Donohue, who has been with the firm for nearly 30 years and is highly regarded in the thrift business, will remain as a consultant, Mr. Stuurop said.
However, Mr. Donohue has contacted several other firms, sources said.
Mr. Donohue was unavailable for comment. He said through a spokesman that he agreed with Mr. Stuurop's comments.
In the past, Wall Street has been criticized for being too slow to respond to changes in the market.
By cutting and pruning, firms like Merrill are looking to respond quickly to the shift to overseas markets.