NEW YORK – Merrill Lynch & Co. Inc. (MER) said Tuesday second-quarter net earnings surged 31 percent on strong investment banking results, helping the company shrug off concerns that subprime mortgage-related activities would be a spoiler.
The company easily beat earnings and revenue estimates. Merrill Lynch shares are down 6 percent this year. They rose more than 2 percent immediately after the company released its results, but the stock eased slightly in midday trading.
Merrill Lynch Chief Financial Officer Jeff Edwards said the company is diversified enough that it can overcome a still-shaky market for subprime mortgages and collateralized debt obligations. The company is a leading collateralized debt obligation underwriter and participates in subprime lending through its First Franklin Financial franchise.
The world's largest brokerage said net earnings were $2.1 billion, or $2.24 a diluted share, compared with $1.6 billion, or $1.63, in the year-earlier period.
Analysts, on average, looked for Merrill Lynch to earn $2.02 a share, according to Reuters Estimates.
Subprime and CDO-related activities account for less than 2 percent of Merrill Lynch's overall revenue, the company said.
"While we have seen some positive signals, such as improving first payment default levels for First Franklin, the environment for U.S. subprime mortgages and related CDOs has yet to fully stabilize," Edwards said.
Two hedge funds run by Bear Stearns Cos. Inc. spooked Wall Street recently when they buckled from bad bets on CDOs linked to subprime mortgages. Merrill Lynch was a creditor, but then seized assets to protect itself.
Edwards sought to reassure investors and analysts on a conference call, saying Merrill Lynch has limited exposure to the Bear Stearns hedge funds.
"We expect to resolve this in a reasonable way and in a reasonable amount of time," Edwards said.
Meanwhile, net revenue in the quarter rose 19 percent to $9.7 billion from $8.2 billion in the year-earlier period. That easily topped the average revenue estimate of analysts who looked for $9.26 billion.
Revenue from investment banking soared 41 percent to $1.4 billion on debt offerings and fees from mergers and acquisitions. Cheap debt has fueled a global M&A frenzy as private equity funds and others snap up companies.
Most of the company's global markets and investment banking business happens outside the United States. Non-U.S. net revenue in that segment accounted for 61 percent of GMI's net revenue in the quarter, and grew much faster than U.S. revenue.
Merrill's fixed-income, currencies and commodities business saw revenue climb 55 percent to $2.6 billion. The company said those results benefited from the trading of credit and interest-rate products. There was a decline in net revenue from structured finance and investments business, which includes mortgage-related activities.
"We had thought we might be approaching the end of the road in commodities and currencies, but that doesn't appear to be the case," said Bill Fitzpatrick, an analyst of the $1.8 billion JohnsonFamily Funds in Racine, Wisconsin. The fund does not own Merrill shares.
Merrill's global wealth management business ended the second quarter with $1.7 trillion in total client assets. Total new money in the quarter was $9 billion.
Merrill Lynch shares were down 54 cents to $86.55 on New York Stock Exchange trade.