Bank of America makes hay from wealth management

NEW YORK Wed Jul 17, 2013 3:17pm EDT

Customers are seen outside of a Bank of America in Tucson, Arizona January 21, 2011. REUTERS/Joshua Lott

Customers are seen outside of a Bank of America in Tucson, Arizona January 21, 2011.

Credit: Reuters/Joshua Lott

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NEW YORK (Reuters) - Hidden in the numbers released in Bank of America's second-quarter earnings report on Wednesday was a single figure - 27.6 percent - that should delight the wealth management industry.

It represents the fat pretax profit margin squeezed from $4.5 billion of revenue at the bank's Global Wealth and Investment Management division. Both the revenue and profit margins were quarterly records and, in a conference call with analysts, Chief Financial Officer Bruce Thompson said that profit margin from wealth management could eventually reach 30 percent.

At a time when some investors and analysts are skeptical about Morgan Stanley's goal of realizing a 20 percent profit margin from its wealth business, Bank of America's results raised appreciative eyebrows. Morgan Stanley, which operates the world's biggest retail brokerage unit with about 17,000 financial advisers, reports second-quarter results on Thursday.

Michael Mayo, an analyst at CLSA Securities and a notorious critic of financial conglomerates, asked Bank of America executives if they had bulked up their wealth unit's profitability by folding other revenue sources besides traditional brokerage services into the calculation. If not, he said, it could represent the strongest profit ever in the history of Merrill Lynch.

Bank of America bought Merrill Lynch in early 2009 during the depths of the financial crisis. Merrill was then the world's biggest broker.

It's primarily "the traditional wealth management business of Merrill Lynch," BofA Chief Executive Brian Moynihan replied, though he would not comment on the pre-merger profit history. Profitability in the quarter was helped by a $15 million release of a loan-loss reserve as credit quality in the global wealth unit improved.

Wealthy clients are showing a greater hunger to draw down lines of credit and make riskier investments than in recent years, Moynihan said on the conference call.

The bank does not disclose profit margins for its four other principal business lines, a spokesman said. But the wealth unit, which includes about 15,700 Merrill brokers and 1,000 U.S. Trust Co. private bankers, generated margins of 25.9 percent in this year's first quarter and 21.3 percent in last year's second quarter.

Revenue at the Merrill businesses climbed 10.5 percent from a year ago to $3.5 billion, while U.S. Trust posted an 8.3 percent jump to $750 million, its highest total in five years.

Merrill U.S. Wealth Management head John Thiel and his boss David Darnell "have done a good job" managing expenses and generating revenue but they also "benefited dramatically" from the rising U.S. stock market, Moynihan said.

Moynihan also tempered his view of investor optimism, noting that "there is still a lot cash" in high net worth investors' bank and brokerage accounts.

Revenue of $4.5 billion in the global wealth division was the second highest of Bank of America's five major businesses last quarter, though its profit of $758 million ranked fourth, trailing the $1.4 billion net income reported by its consumer and business bank.

Client balances and deposits in the wealth division fell from the first quarter, reflecting tax payments and other seasonal factors. Advisers, however, more than doubled assets that clients gave them for long-term investments of more than a year to $7.7 billion.

Like Wells Fargo & Co. and other big banks that have absorbed broker-dealers in recent years, Bank of America has been pushing hard to cross-sell loans and investment services to wealthy clients, an effort sometimes resisted by traditional brokers. But the bank said that brokers referrals to its business and commercial banking unit rose 144 percent over the past year while the commercial bank's referrals to wealth management were up 69 percent.

Merrill, once the world's largest broker, ended the first quarter with 15,759 financial advisers - down 6 percent from 16,764 one year earlier. The "vast majority" of those that left were trainees, a spokesman said. The bank had about 4,300 advisers in its training program at the beginning of the year.

Bank of America overall reported a 70 percent jump in quarterly earnings, driving its shares up Wednesday by almost 3 percent in late afternoon trading.

(Reporting By Jed Horowitz; editing by Andrew Hay)

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