Brokers Report Higher Profits

Merrill Lynch and PaineWebber Group on Tuesday raced passed estimates for first-quarter profits, proving if there were any doubt left that the trading boom in the first three months of the year delivered for Wall Street.

PaineWebber rose 3 7/16 to 47. Financial stocks were 2 percent higher as the broader market lost some initial gains.

Merrill's stock slipped 2 1/2 to 97 7/16 after nearing its 52-week high of 109 1/8 earlier. Analysts said Merrill's management said little in a post-earnings conference call that could have triggered selling, but noted that Merrill's 24 percent decline in investment banking revenue spooked some investors.

Merrill "had a very strong trading quarter," said Salomon Smith Barney analyst Guy Moszkowski, who called the investment banking shortfall "a temporary blip."

"I've seen their backlog. They'll come back," he added.

The two firms' results were boosted by the inclusion of March, when volumes were heavy. Yet even before the March numbers, Morgan Stanley Dean Witter set the tone for Wall Street firms last month by besting estimates by a long shot.

Merrill posted an 18 percent increase in net income of $609 million, or $1.44 per share against $1.26 in the same quarter last year. Analysts had expected Merrill's profits at $1.23, according to First Call. Merrill's net revenue rose 11 percent to a record $5.3 billion.

Per share, PaineWebber posted profits of $1.01 against 77 cents in the same quarter last year. Analysts had expected profits of 73 cents a share, according to First Call. Net revenues at PaineWebber rose 17.9 percent to $1.3 billion.

Brokerage stocks have trending higher on expectations of stronger-than-expected profits growth.

"The rumors of the demise of the full-service brokerage have have been greatly exaggerated," said Michael Flanagan of Financial Services Analytics.

Bear Stearns also posted a better-than-expected profits surprise on Monday.

"The tide is rising," said Flanagan. "The segment of the industry that had been hard hit, especially underwriting have shown a convincing recovery and investment banking revenue while not at record levels have apparently been bolstered by strong M & A business, waiting for equity underwriting to return."

Merrill's revenue from investment banking declined 24 percent to $633 million in the quarter. Merrill said the decline in investment banking revenue was related to an industrywide decline in global equity issuance volume.

"The weak investment banking had been foreseen," said analyst Raphael Soifer at Brown Brothers Harriman. "The point to bear in mind is that a lot of the IPO business this quarter was Internet related and Merrill is not strong in that area."

Overall, U.S. equity underwriting proceeds were higher in the quarter, totaling $31.99 billion, up from $28.5 billion a year ago. But the number of deals fell sharply to 188 compared to 322, said Securitie Data's Richard Peterson.

Merrill said it remained the leading debt and equity underwriter during the quarter.

Full service firms were hard hit by the global economic downturn in the third and fourth quarters last year. But judging by the overseas revenue for Merrill, it appears that Wall Street is rebounding from the crisis triggered by Russia's devaluation and default in August and the near collapse of hedge fund Long-Term Capital Management.

Merrill said revenue from non-U.S. bond and stock trading represented 69 percent of total principal transactions revenue. Overall, principal transaction revenue grew 23 percent to $1.4 billion "as both debt and equity trading revenues set records in the quarter." Commissions revenue were a record $1.6 billion, up 7 percent.

Asset management and portfolio service fees reached a record $1.1 billion, up 8 percent.

Communications and technology expenses rose 22 percent to $480 million due to Year 2000 spending "and higher technology-related depreciation," Merrill said.

Written By Emily Church, CBS MarketWatch