Merrill shines as the jewel in BoA's crown

CHARLOTTE, North Carolina Fri Oct 16, 2009 2:24pm EDT

CHARLOTTE, North Carolina (Reuters) - Merrill Lynch & Co's brokerage, the "crown jewel" that lured Bank of America Corp's chief executive into a takeover that ultimately cost him his job, is showing signs of a revival.

The former Merrill Lynch & Co wealth management unit, now led by former Citigroup Inc executive Sallie Krawcheck, will be a key driver behind Bank of America's ability to offset further losses from a business beleaguered by ongoing consumer credit woes, analysts say.

Both Merrill's brokerage and investment banking operations, where billions of dollars of trading bets gone bad forced the troubled company to seek refuge in a Bank of America takeover, showed signs of life in the third quarter. Merrill's wealth management businesses accounted for all Bank of America's wealth management profits during the quarter.

"Even with the marks the bank took on some of Merrill's assets, we see that the deal is already paying for itself," said Raymond James Financial analyst Anthony Polini.

Bank of America CEO Kenneth Lewis told investors the deal continued to be accretive to shareholders, and the Merrill Lynch businesses were critical to "offsetting core credit headwinds."

The bank's Merrill Lynch Global Wealth Management division, which is now home to the brokerage force dubbed the "Thundering Herd," posted third-quarter net income of $310 million on total revenue of $3 billion.

Bank of America's entire global wealth unit reported $271 million in net income during the quarter. It also includes U.S. Trust and Columbia Asset Management -- both of which posted losses.

Bank of America agreed to sell part of the Columbia business to Ameriprise Financial Inc for about $1 billion last month.

The wealth unit now oversees $1.9 trillion in total client assets and has $739 billion in assets under management.

As Merrill Lynch's legacy investment banking business topped $1.3 billion in the quarter -- split between the Global Banking and Global Markets business units -- the two units' performance nearly outpaced the other major divisions' combined.

Doug Dannemiller, a senior wealth management industry analyst with Boston-based Aite Group, said the combined company provides a long-term business model few competitors can match.

"The company, with the bank, has essentially a mass-market feeder into Merrill's wealth segment," said Dannemiller. "You can find clients earlier, sooner and less expensively than your competitors. That's a big advantage."

Q3 RESULTS NOT ALL GLOWING

Bank of America CEO Kenneth Lewis heralded Merrill's brokerage as the bank's "crown jewel" when he announced the takeover shortly after Lehman Brothers filed for bankruptcy in September 2008.

But soon after, the largest U.S. bank was hit with billions of Merrill trading losses that forced Bank of America to seek a second government bailout. Its decision to pay out bonuses to Merrill executives despite that poor performance triggered regulatory and congressional investigations.

Lewis announced earlier this month he was stepping down, and outcry over the Merrill deal is believed to have been a major factor in that decision.

Even the third-quarter results were not all positive for Bank of America's latest, and arguably biggest, acquisition.

The global wealth division's net income was down $158 million from the second quarter, although it did increase $191 million from the year-earlier period.

The unit also reported a $277 million reserve against a fraud-related item with one of the division's clients during the quarter.

The global wealth and investment management unit reported the highest noninterest expense both during the quarter, $3.1 billion, and year-to-date, $9.7 billion, of any major Bank of America division.

And the number of the company's financial advisors has dipped just below 15,000, according to the quarterly numbers, although the bank says that figure is stabilizing with increased retention efforts. There were about 16,000 brokers at the time of the Bank of America takeover.

Krawcheck, head of the global wealth management unit, said at an October 5 press conference that those numbers were beginning to slowly increase, after an exodus of advisors and high-level executives following completion of the buyout earlier this year.

Dannemiller said the quarter-over-quarter drop in financial advisors -- 800 in the first quarter, 29 in the second -- shows "the bank is stemming the tide."

Still, with reports that former prominent Merrill wealth management head Robert McCann is headed to archrival UBS, Krawcheck may have her hands full keeping the "herd" from thundering for the exits.

"The Merrill advisors feel like they're being left alone, but that attitude may change with the market," said Anthony Riotto, president of wealth management search firm Riotto-Jones & Co.

(Reporting by Joe Rauch; Editing by Lisa Von Ahn, Phil Berlowitz)