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Merrill slashes revenue and earnings forecasts By Robert Orr and Doug Cameron in London and Rebecca Knight and Joshua Chaffin in New York Published: June 26 2001 11:48GMT | Last Updated: June 26 2001 22:05GMT

Merrill Lynch, the US investment bank and asset manager, on Tuesday slashed its revenue and earnings forecasts for the second quarter and offered the bleakest outlook to date for a sector recovery.

Second-quarter earnings per share are forecast to come in between 52 cents and 57 cents, below the 82-cent analysts' consensus and the 87 cents earned in the first quarter.

The New York-based bank relies more than its rivals on income from the retail equity business, which has been hit harder than institutional trading by the fall in global equity markets.

Merrill shares were trading 12 per cent down at $58.60 in New York by early afternoon.

Analysts were largely surprised by the announcement. "It goes to debt and equity trading," said Ken Worthington, an analyst at CIBC World Markets Corp. "Merrill doesn't have a presence in commodities and energy and mortgages."

Merrill said second-quarter revenues would be 15 per cent lower than the first quarter's $6.4bn, adding that there had been a further deterioration of market conditions since March, with the last four weeks being the weakest of the quarter.

Merrill, which is due to report its results on July 17, blamed the drop in revenues on falls in equity trading volumes, lower debt trading revenue and the continuing lag in fees from merger and acquisitions activity.

"While we are disappointed with the quarter's results to date, they are set against the backdrop of very difficult market conditions, particularly in our secondary equity business," said David Komansky, chairman and chief executive.

Mr Komansky also said the outlook for the third quarter remained weak, though he said the bank is confident of achieving its 2003 financial goals.

Analysts, however, are cautious. "It's really all about what happens after Labour Day," said said Mr Worthington referring to the US holiday on September 3. "Do the markets come back? Do retailers start trading again? Is consumer confidence higher?"

"There has been a great game of chicken on Wall Street in terms of banks not wanting to cut capacity too deeply, but realising that their earnings will suffer if they do not," said Diane Glossman, bank and brokeage analyst at UBS Warburg.

Earlier this month rivals Morgan Stanley and Goldman Sachs reported a drop in second-quarter earnings of 36 per cent and 18 per cent respectively, while Lehman Brothers bucked the trend with a 14 per cent increase, lifted by its strong fixed income business which has buoyed the whole sector.

Merrill, which has reduced its global headcount by 3,300 or five per cent this year, had suffered year-on-year falls across its business lines in the first quarter, with group revenues also 15 per cent lower than in the previous quarter.

However, it had met lowered market expectations and is credited with analysts with imposing stricter cost controls which have helped to keep profitability at the top of is sector, with a return on equity of 18.4 per cent in the last quarter.

It has also continued to attract net inflows to its asset management business, which remains in the global top 10.

-- suzy (itssuzy2@aol.com), June 27, 2001