Stock turmoil dents financial profits

Merrill suffers from a fall in equities trading

Profits at both Merrill Lynch and Charles Schwab have been dented by the recent turmoil in the stock markets.

Merrill Lynch has reported a 41% slide in its profits during a weak second quarter, while the discount and online brokerage Charles Schwab has suffered a 51% drop in profits.

Merrill's fortunes were knocked because few companies wanted to sell shares in the current market.

Similarly, retail investors, who make up a large part of Schwab's business, were reluctant to risk investing money in stocks under such dreary conditions.

Merrill's slipping profits

Merrill posted profits of $541m, compared with $921m a year ago.

Thomas H. Patrick, Merrill's chief financial officer, also warned that the bank's third quarter profits could be even lower.

"The revenue outlook remains uncertain through what is normally a seasonally slow summer period," he said.

The dip in profits was sharper than that experienced by rivals Goldman Sachs and Morgan Stanley, but slightly better than analyst forecasts.

On Monday this week, the credit-ratings agency Standard & Poor's downgraded its assessment of all three firms.

"Their underwriting prowess and advisory expertise are no longer sufficient to win attractive fees from their corporate clients," said S&P.

Schwab faces uncertain future

Schwab reported profits of $97m and net income of $102m.

"While the securities markets showed intermittent signs of strengthening during the quarter, the economic environment remained uncertain and our clients' trading activity continued to slow," said chairman and chief executive Charles Schwab in a statement.

Nevertheless, Schwab did manage to attract $11bn in new client money.

The total value of customer money declined by 8% to $858bn by the end of the quarter.

Deteriorating profit margins

Merrill's pre-tax profit margin for the quarter was 15.3%, compared with 20.7% in the second quarter of 2000.

"Our second-quarter performance underscores the difficult market conditions, particularly in our secondary equity business," said David H Komansky, Merrill Lynch chairman and chief executive officer.

Merrill's results were particularly poor because, unlike some its competitors, it was unable to benefit fully from a revival in the bond market.

In recent years, the bank has cut back its bond trading operation.

Hit by equities slump

The sharp decline in equity trading particularly hurt the bank.

Pre-tax profits for the bank's Corporate and Institutional Client Group, which includes this area, were down 49%.

One bright spot was Merrill's investment management arm, called Merrill Lynch Investment Managers.

This business reported $106m in pre-tax profits, 23% below the 2000 second quarter, but up 3% from the first quarter of this year.

Merrill's shares fell 2% to $51.98 in early trading, while Schwab climbed four cents to $14.49.